Financial Services Layoffs Hurt Nationwide

The rash of layoffs in the financial-services industry is sure to hit the New York metro area hard, but other regions across the country are also feeling the pain.

Historically, lower Manhattan, home of the New York Stock Exchange and American Stock Exchange, has been the mecca for financial services companies. But other cities like Charlotte, N.C., Boston, San Francisco and Chicago have a finance presence and are feeling the impact from job cuts.

The thousands of layoffs from the likes of Citigroup (C), Merrill Lynch (MER), Bank of America (BAC), and a host of smaller companies, also has ramifications for the national economy, even if the layoffs in the finance sector are small on a national scale.

“If you look at the big picture, much of it trickles back to what’s going on in the financial markets,’’ said Alenka Grealish, managing director of research firm Celent's banking group. The layoffs in the financial sector are “emblematic of what’s more broadly going on and a direct hit in that industry has repercussions.”

Open up a newspaper or turn on a TV these days and you're sure to here about the turmoil spreading through the financial markets, whether it has to do with the dollar's declining value, credit drying up, companies closing down or people foreclosing on their homes. Those problems have resulted in layoffs at finance companies, which have in turn caused angst among companies in sectors outside of finance.
“The uncertainty over things like the value of the dollar hits corporations and effects decision-making about layoffs and new hires. It's one big ecosystem," said Grealish.
Still, while the layoffs are headline worthy on a national level, economists said they have more of an impact on specific regions.

“Nationally it’s a small industry,’’ said Walker Todd, research fellow at the American Institute for Economic Research. “Claims for unemployment nationwide are typically 350,000 to 400,000 per week. Even if you lay off 100,000 people in financial services in New York in a single week, it would probably be a blip that passed through the system and wouldn’t be noticed.”

What’s weighing on consumers' minds and the economy, added Lawrence White, professor of economics at NYU’s Stern School of Business, is the massive decline in home prices.

Rather than layoffs, "what matters for the rest of the country is that the aggregate value of their homes has declined somewhere in the vicinity of $3 to $4 trillion and another $2 trillion to go,” White said.

Economists agree the New York metro area will feel the biggest hit from financial-services layoffs. While Wall Street is known for boom and bust cycles, it doesn’t take away from the fact that there will be less money available to spend on discretionary items.

“The New York region is the center of the earthquake,” said Todd, of the American Institute for Economic Research. “Even things that might seem remote, like house prices on Cape Cod, are strongly affected by conditions of the stock market.’’

A lot of the layoffs are coming from higher earners at financial firms who if not getting laid off have to contend with lower bonuses. And while years ago New York also had manufacturing to blunt the pain of financial services layoffs, that’s no longer the case, leaving some finance professionals without other job choices to fall back on.  

“It’s going to be geared toward the upper end. Spending on second homes are likely to suffer as fewer Wall Street types rush upstate or to the Berkshires or wherever they go to buy that second home,’’ said John Lonski, chief economist at Moody’s Analytics. “It's definitely local in its nature.”

Lonski pointed to Boston, home to a slew of mutual funds. Boston has a high rate of foreclosures, largely because the mutual fund industry never recovered from a decline in the stock market from March of 2000 to March of 2002. “Home foreclosures in the smaller state of Massachusetts are significantly greater than the much larger state of New York," said Lonski. He noted that the real estate market in New York will ultimately be adversely impacted by the financial-sector layoffs.

The high earners being laid off at financial firms will likely also rein in spending on things like limousine services and higher-end restaurants, impacting any services that are located near a larger financial services building, said economists. 

And that doesn't only apply to New York City. Charlotte, the headquarters for Bank of America and Wachovia (WB), has a big banking presence with the local economy tied to finance. California, home of Countrywide Financial (CFC), had tons of layoffs tied to the mortgage industry.  And Chicago has its fair share of financial services companies, not to mention it has the Chicago Mercantile Exchange (CME).

“Charlotte is still growing, but Bank of America may have hit a wall temporarily as it tries to absorb Countrywide and (deals with) the slowdown in its own business, too," said American Institute for Economic Research’s Todd. “The affected regions include greater New York, some extent Boston, Philadelphia, Cleveland, Charlotte, Chicago, San Francisco and Los Angeles.” Todd noted that Los Angeles isn’t as affected, given it's more economically diversified . Cleveland is taking a hit because of the capital problems at National City (NCC).

Despite the thousands of layoffs that have already taken place, more are in the offing, economists said.

“I think its really premature to state with confidence that the end is in sight as far as the loss of jobs in the financial industry is concerned,’’ said Lonski at Moody’s. “The worst may have past but there are more opportunities for cost cutting.”

Todd said the financial services sector will recover as soon as there is a perception in the markets that the dollar has hit a bottom. Once that happens there will be some profit recovery in financial services which will lift other areas like mergers and acquisitions, he said.

As for the mortgage industry, Todd isn’t as sanguine. “The mortgage market won’t turn around for at least two more years or maybe three years,’’ said Todd. “It’s just a function of the market overhang of undersold housing stock.”