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The Stench of '89

The last great New York recession was prolonged and deep. And it’s eerily familiar.

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The New York Stock Exchange, Black Monday, 1987.  

The news keeps coming, each item worse than the one before. New-home sales fall 26 percent nationwide; the U.S. economy loses 17,000 jobs in January; Wall Street write-downs cross the $100 billion mark. Sure, the technical definition of a recession is two or more consecutive quarters of negative growth, but with headlines like that, and last week’s word that fourth-quarter GDP was up an anemic 0.6 percent (in other words, all but down), does anyone really believe that the U.S. economy is not on the precipice, or already over the edge? The prospect of a national economic downturn raises all sorts of troubling issues, of course. But from an entirely parochial point of view, one question stands out: What’s going to happen to New York?

Perhaps the best way to answer that is to look at what happened the last time the city went into a prolonged funk. Not the 2000 NASDAQ crash and the post-9/11 malaise, both of which, bad as they were, came and went comparatively quickly. We’re talking about an all-out, multiyear five-borough slump, one which your average 30-year-old Wall Street analyst, say, is unlikely to even remember: the sad stretch from 1989 to 1992, when the median home price in Manhattan dropped by more than a quarter, construction declined by a third, and the city lost one-tenth of its jobs.

It all started, of course, on Wall Street. On Black Monday, October 19, 1987, the Dow Jones index, for reasons still being debated, fell 508 points, almost a quarter of its total. (The current equivalent, for comparison’s sake, would be a 3,200-point loss on one day.) The drop turned out to be a black swan event, a weirdly poetic economist’s term meaning, basically, a fluke (though few people remember it, the Dow still eked out a positive finish for the year). Still, the hiccup seemed to foretell the instability to come. Over the next two years, with the economy perceived to be overheating, the Fed repeatedly jacked up interest rates, which made bonds and T-bills sexier than stocks, which triggered an epidemic of unscrupulous bond peddling, which further destabilized the marketleading to a slowdown. (If that all sounds disturbingly like the recent subprime-debt mess, well, that’s because it is. But more on that later.) And a slowdown on Wall Street, which provides over 20 percent of the city’s cash income, spells a slowdown for New York.

The city’s economy, meanwhile, was already primed for problems. In the mid-eighties, the vogue for mergers, acquisitions, and leveraged buyouts meant that companies began relentlessly shedding redundant employees to spruce up the bottom line. New York is a bit uniquely affected by trends in management-consulting practices, says James Parrott, chief economist at the Fiscal Policy Institute. CEOs were easy prey for consultants who sold them on the easiest way to the profits: Get rid of middle management. We have a lot of corporate HQs, so it hit us hard. At the same time, the personal computer was revolutionizing the way companies do businessprocessing, which used to require a clerk and often a courier, was now done with the push of a button. Soon enough, legions of back-office staff were being let go as well. Wall Street alone saw 16,000 layoffs in the two years before the recession even began.

Just as Wall Street and other firms were trimming personnel, another problem was taking shape: A glut of new office space, mostly in midtown, was coming onto the market, forming a bubble in commercial real estate. Thanks to a tweak in regulations allowing savings-and-loan companies to finance commercial construction, banks nationwide got into the business of underwriting skyscrapers. Earlier, City Hall had fanned the developers’ enthusiasm by temporarily throwing certain high-rise zoning restrictions out the window. New York’s skyline was changing like it hadn’t since the twenties. By the time the construction spurt was over, demand couldn’t keep up with supply: Lower Manhattan’s office vacancies climbed to 17.8 percent, among the worst rate in the nation. Stuck with empty towers, the developers began defaulting, taking underwriters down with them. Employment in the architectural industry dropped 23 percent, from 8,424 jobs in 1989 to 6,482 in 1991; the vaunted skyscraper design firm Skidmore, Owings & Merrill halved its staff. The mood in the trade was nothing short of apocalyptic. The high-rise building, wailed one despondent architect to the Times. It’s vanished It has disappeared. Construction, which employs far more people, dried up correspondingly.

The residential sector, meanwhile, suffered a parallel glut of co-ops newly converted from rentals. There were some tax-law changes in the mid-eighties that made it very profitable for landlords to convert their buildings, says Fred Peters, the president of Warburg Realty. Profitable, that is, until the supply reached saturation point just as leaner times on Wall Street began to drain the demand. The shock was sudden and painful. It just stopped, remembers Peters. The first half of the year was just like ’88, a banner year, and then it just stopped. The Japanese kept buying for another year. But then it just ran aground. In a swift reversal of the conversion boom, people who couldn’t sell their apartments started trying to rent them out, often to no avail.


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