Feature Article: 

The 2009 Economic Landscape: 

How the Recession Is Unfolding across 

Four U.S. Regions 

Foreword 

With the intensification of financial market turmoil in 

the fourth quarter of 2008 came a new round of distress 

to the U.S. economy, making this not only one of the 

longest but one of the most severe U.S. recessions since 

World War II. Real gross domestic product (GDP) 

declined at an annualized rate of 6.3 percent in the 

fourth quarter, the most in any quarter since 1982. As 

of March 2009, the downturn marked its 16th month, 

making it equal to the longest period of uninterrupted 

contraction in the U.S. economy since the 1930s. 

While events in the U.S. and global financial markets 

are powerful drivers of the recession that began in 2007, 

this economic downturn is unfolding in unique ways 

across the various regional economies. For example, 

most areas of the country are experiencing housing 

market distress, but some are seeing more severe deterioration in local housing markets than indicated by 

national averages. One analysis shows that more than 

half of all residential foreclosure filings in 2008 took 

place in 35 U.S. counties where 20 percent of the U.S. 

population lives.1 Similarly, while some 41 states saw 

payroll jobs decline in 2008, the remaining 9 states 

(and the District of Columbia) continued to report 

employment growth. 

The following series of articles takes a closer look at the 

distinct way that this recession is playing out in four 

major regions of the country. The first article describes 

how the latest downturn is exacerbating long-term 

problems in the manufacturing sector of the Industrial 

Midwest. In the second article, we explore how 

formerly booming housing markets in Arizona, California, Florida, and Nevada have given way to a housing 

bust that has sharply reversed the momentum of the 

regional economy. The third article focuses on the 

impact of financial market turmoil on New York City 

and other financial centers along the East Coast, while 

the fourth article outlines why a number of states in the 

nation’s midsection have fared better than most thus far 

because of their high dependence on energy and agricultural production. 

Richard A. Brown, Chief Economist 

1 “Most foreclosures pack into a few counties,” USAToday, March 6, 

2009. 

FDIC QUARTERLY 26 2009, VOLUME 3, NO. 1 
 

 

 

 

 

 

 

 

The 2009 Economic Landscape 

Recession Adds to Long-Term Manufacturing 

Challenges in the Industrial Midwest 

The manufacturing sector has long been a primary 

economic driver of the Industrial Midwest.1 This region, 

which comprises eight states in the north-central 

United States, is known for its durable goods manufacturing, a sector that includes the production of automobiles and other types of heavy machinery. The emphasis 

on manufacturing has posed challenges for the region as 

the sector has contracted. This article discusses manufacturing trends in the Industrial Midwest, particularly 

with respect to the troubled auto sector, and the 

economic outlook for the region. 

The Industrial Midwest Has Not Recovered 

from the Last Recession 

The U.S. manufacturing sector has struggled throughout 

this decade. Historically, nationwide manufacturingrelated employment has tended to decline a few quarters 

before the U.S. economy contracts and then recover in 

tandem with the broader economy. However, job 

growth in the U.S. manufacturing sector did not 

1 In this article, the Industrial Midwest is defined as the region encompassing Indiana, Wisconsin, Michigan, Ohio, Iowa, Kentucky, Minnesota, and Illinois. 

Chart 1 

rebound after the 2001 recession, even while overall 

U.S. economic growth was strong (see Chart 1).2 

These manufacturing weaknesses have had a disproportionate effect on the Industrial Midwest economy. In 

each state in the region, manufacturing employment as 

a percentage of total employment is higher than the 

nation’s. Moreover, Indiana, Wisconsin, Michigan, and 

Ohio have the highest concentrations of manufacturing 

employment in the country.3 Because of its reliance on 

manufacturing during a period of weakness in this 

sector, total employment in the region has yet to return 

to pre-2001 levels (see Chart 2). 

Two long-term issues are adversely affecting manufacturing in the Industrial Midwest. First, over the past two 

decades, much of the region’s manufacturing base has 

2 The trend of outsourcing may contribute to overcounting of manufacturing job losses. As manufacturers “purchase” a growing number 

of services, the value of which is ultimately embedded in product 

value, manufacturing employment levels may have simply shifted to 

service industry sectors. See “Is Manufacturing at a Crossroads?” 

Chicago Fed Letter, Number 204a, July 2004. 3 Bureau of Labor Statistics, December 31, 2008. Manufacturing 

concentrations are defined as durable goods manufacturing and 

wholesale trade jobs as a percentage of total nonfarm payrolls. 

-10 

-5 

0 

5 

10 

Q1-79 Q1-83 Q1-87 Q1-91 Q1-95 Q1-99 Q1-03 Q1-07 

-10 

-5 

0 

5 

10 

Sources: Bureau of Economic Analysis; Bureau of Labor Statistics (Haver Analytics). 

Note: Data are seasonally adjusted. Shaded areas denote U.S. recessions. 

Manufacturing Employment 

Year-to-Year Percent Change 

U.S. Manufacturing Employment Did Not Rebound following the 2001 Recession 

Real GDP 

Quarterly Percent Change at an Annual Rate 

FDIC QUARTERLY 27 2009, VOLUME 3, NO. 1 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Chart 2 Chart 3 

States in the Industrial Midwest Began Contracting 

before the Current National Recession 

90 

95 

100 

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 

Recent Cyclical Job Losses in the Industrial Midwest 

Have Proven to Be Long-Lived 

Indexed Total Employment, Seasonally Adjusted 

Prior Peak=100 

Source: Bureau of Labor Statistics (Haver Analytics). 

Quarters since Peak 

2007-08 1990-92 

2000-07 

1979-86 

been lost to competition, both foreign and domestic. 

Second, technological improvements in U.S. factories 

have led to much higher productivity levels.4 These 

productivity advances have been brought about by capital investments that require fewer low-skilled workers. 

More recently, the erosion of market share and structural cost problems at General Motors (GM), Chrysler, 

and Ford have led to large-scale restructurings and job 

losses. These challenges at U.S. automakers have 

contributed to the loss of more than 140,000 manufacturing jobs since 2005.5 Hundreds of thousands of additional workers at auto assembly plants and auto parts 

suppliers could potentially lose their jobs during the 

current downturn.6 

Auto sector layoffs have disproportionately affected 

Michigan, Ohio, and Indiana, the states most exposed 

to the troubled auto sector. These states were essentially 

in recession before the nation as a whole, with Michigan preceding the national downturn by more than 

three years (see Chart 3). Michigan is the state most 

heavily concentrated in auto manufacturing, with the 

most motor vehicle manufacturing jobs and the highest 

4 Bureau of Labor Statistics. From 2002 to 2006, U.S. manufacturing 

multifactor productivity growth—the increase in the ratio of goods 

output to labor, capital, and other inputs—averaged 2.2 percent, well 

above the 30-year average of 1.4 percent. 

5 The figure cited refers to job losses in the transportation manufacturing sector of the Industrial Midwest through 2008. These job losses 

have occurred mostly at auto parts suppliers and automakers. 

6 See CAR Research Memorandum: The Impact on the U.S. Economy 

of a Major Contraction of the Detroit Three Automakers, Center for 

Automotive Research, November 4, 2008. 

Minnesota, 

+4 months 

Illinois,

+1 month 

Iowa, 

+1 month 

Kentucky, -1 month 

Indiana, -3 months 

Wisconsin, -6 months 

Ohio, -6 months Michigan, -37 months 

-40 -30 -20 -10 0 10 

Number of Months Selected States Entered Recession 

before (-) or after (+) the Nation 

Source: Moody’s Economy.com. 

number and proportion of direct and indirect jobs 

connected to motor vehicle parts production.7 

Employment Weakness Has Also Spilled into the 

Region’s Housing Markets 

Although the Industrial Midwest did not experience 

the significant home price appreciation of the post2001 housing boom to the same degree as other regions, 

its residential real estate markets have still suffered. 

Existing home sales in the Industrial Midwest declined 

33 percent from their second quarter 2005 peak, 

roughly in line with the nationwide decline.8 In 2008, 

home prices fell in all of the region’s states, led by 

Michigan, where prices declined by more than 

10 percent.9 Further, in half of the Industrial Midwest 

states, foreclosure rates are at or slightly higher than the 

national rate.10 

Weak housing markets have, in turn, adversely affected 

the region’s construction industry. Construction 

employment was virtually unchanged across the Industrial Midwest from 2003 through 2006, while it grew 

more than 10 percent nationwide. Since 2006, the 

construction sector in the Industrial Midwest has 

declined by 7.7 percent, or 96,000 jobs. 

7 Contribution of the Motor Vehicle Supplier Sector to the Economies 

of the United States and Its 50 States, Center for Automotive 

Research, January 2007. 

8 National Association of Realtors, data available as of fourth quarter 

2008. 

9 Based on the Federal Housing Finance Agency Purchase-Only House 

Price Index. 

10 Mortgage Bankers Association, fourth quarter 2008. 

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2009 Economic Landscape 

The Industrial Midwest Faces a Potentially 

Long Road to Recovery 

Employment in the Industrial Midwest has declined 

substantially during the current downturn, and the 

near-term outlook for Detroit’s auto industry remains 

unclear. Automakers have been shrinking their businesses to match reduced market share. In addition, 

financial press reports and analytical studies indicate 

that hundreds of thousands of jobs are potentially at 

stake as Chrysler and GM continue to negotiate 

restructuring plans with the Obama administration’s 

auto task force. Though foreign-based automakers with 

production facilities in the region might increase output 

to partially offset this gap, their new hiring likely would 

not fully absorb jobs shed by Detroit automakers. 

Two other economic indicators also point to a 

prolonged path to recovery. First, the outlook for the 

metal fabrication and machinery manufacturing industries has diminished. These industries, which include 

companies involved in the transformation of metal into 

intermediate or final products and the production of 

machines used in industrial applications, provided some 

economic stability to the Industrial Midwest following 

the last recession. However, the weakening national 

economy has softened demand for their products. 

Nationally, investment in machinery and other fixed 

assets has slowed consistently since mid-2007, and fell 

21 percent during fourth quarter 2008.11 As a result, 

employment in fabrication and machinery manufacturing in the region declined 1.4 percent, or about 13,000 

jobs, in 2008. 

Second, contraction or slowing growth in the economies of U.S. trading partners will likely limit future 

export opportunities that had provided a counterbalance to the weakened auto sector over the past few 

years. Exports rose 13 percent and 11 percent, respectively, in 2006 and 2007, benefiting from strong foreign 

demand and a decline in the value of the dollar. 

However, the economies of foreign trading partners are 

now slowing or contracting and the decline in the 

dollar has reversed direction, returning to tradeweighted levels not seen since 2006.12 

A more positive outlook for the region hinges in no 

small part on the success of federal government initiatives directed at stimulating the economy in general and 

the auto sector in particular. Spending on infrastructure 

projects should generate new jobs, while other provisions of the $787 billion American Recovery and Reinvestment Act are intended to maintain existing jobs. 

However, most of the affected jobs will be outside of the 

manufacturing sector. While employment will likely 

continue to decline in the automotive sector, it is likely 

that fewer jobs would be lost under a governmentassisted restructuring than would occur otherwise. Over 

the long term, job growth is likely to become more 

dependent on emerging and expanding industries, such 

as those found in the energy, education, and health care 

sectors. 

Authors: Patrick M. Dervin, Regional Economist 

John M. Anderlik, Assistant Director 

12 The Blue Chip Economic Indicators consensus forecast as of 

December 2008 calls for a 0.1 percent decline in Canada’s GDP in 

2009 and only a 0.2 percent increase in Mexico’s GDP. Growth in 

China, one of the fastest growing export markets, is expected to slow 

from 9.5 percent in 2008 to 7.6 percent in 2009, well below trend. 

11 Bureau of Economic Analysis; seasonally adjusted, annualized 

growth in real private nonresidential fixed investment. 

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The 2009 Economic Landscape 

The Sand States: Anatomy of a Perfect HousingMarket Storm 

The historic boom and subsequent decline in the nation’s 

housing market has been a defining feature of the current 

recession. The housing downturn has been most acute in 

four states—Arizona, California, Florida, and Nevada— 

that had experienced some of the highest rates of home 

price appreciation in the first half of the decade. While 

these states are not all contiguously located, their similar 

housing cycles and abundance of either beaches or deserts 

have led some analysts to label them “Sand States.” This 

article discusses the factors that led to an expanding 

housing sector in these states and the market imbalances 

that culminated in a sharp correction in home prices. 

The article also explores the ripple effects that the housing downturn has had on the local economies. 

Rapid Population Growth in the Sand States 

Propelled Housing Markets 

For many years, rapid population growth in the Sand 

States spurred higher than average rates of home 

construction. Favorable weather and relatively affordable housing are two factors that attracted retirees as 

well as younger families to these states. In the 1980s 

and 1990s, population growth rates in Arizona, Florida, 

and Nevada were between two and four times the 

national rate. Certain parts of California, such as the 

Riverside–San Bernardino metropolitan area, experienced similarly high rates of population growth. Rapid 

population growth continued into the early years of this 

decade. From 2004 to 2007, Arizona and Nevada 

ranked as the two fastest growing states in the nation, 

followed closely by Florida, which ranked ninth.1 

The influx of new residents into Arizona, Florida, and 

Nevada also contributed to strong employment growth. 

Job creation in these states frequently outpaced the rest of 

the nation during the past few decades. From 2000 to 

2006, these states repeatedly ranked among the top ten 

for job growth, far exceeding the national average. 

California generally reported job growth similar to the 

national average during this period, although the state was 

hit hard by the dot-com recession from mid-2001 to 2003. 

1 U.S. Census Bureau. 

Affordability Mortgages Contributed to 

Housing Imbalances 

During this decade, strong demand for housing, 

supported by a growing population and an expanding 

economy, contributed to growing housing market 

imbalances across the Sand States. Perhaps the best 

measure of the imbalances that accumulated in booming housing markets during this decade was the relationship between home prices and incomes. In the years 

leading up to the housing downturn, escalating home 

prices far outpaced income growth. For example, in 

2003, housing in Nevada was considered relatively 

affordable, both in absolute terms and as compared to 

other states. According to one analysis, a family earning 

the median income in Nevada in 2003 could afford a 

home that was priced approximately 20 percent above 

the median house price in the state using traditional 

mortgage financing.2 However, by late 2005, home 

prices had risen so much that a family earning the 

median income could only afford a home priced at 

24 percent below the state’s median price. 

A combination of factors drove the housing sector 

imbalances in the Sand States to unprecedented levels. 

Under normal market conditions, strained affordability 

tends to limit housing demand because fewer households can purchase a home using traditional mortgage 

financing. However, in this cycle, new mortgage “affordability” products were commonly used to finance home 

purchases. Besides traditional adjustable-rate mortgages 

(ARMs), affordability products included hybrid ARMs, 

which have a low, fixed interest rate for several years 

followed by a market rate that is frequently much 

higher. Affordability products also comprised the 

so-called nontraditional mortgage products, which 

included interest-only loans, where amortization of principal was not required during the first few years of the 

2 Moody’s Economy.com Affordability Index. The calculation assumes 

a 30-year maturity and a down payment of 20 percent. It also assumes 

that the monthly principal and interest payments do not exceed 25 

percent of the median family income. To interpret the indices, a value 

of 100 means that the family earning the median income can afford 

only 100 percent of the traditional mortgage payment of the medianpriced home, taking into consideration the 20 percent down payment. 

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2009 Economic Landscape 

loan; negative-amortization loans that offered initial 

payments well below the amount required to cover 

interest and amortize principal; and balloon payment 

loans, which typically required a large lump-sum 

payment at the end of the loan. Unlike subprime mortgage products that were designed for home buyers with 

limited or weaker credit histories, these nontraditional 

mortgages were marketed broadly and often used by 

first-time home buyers and investors who did not 

provide a down payment. In addition, originators of 

these products frequently did not require buyers to verify 

that their income could support the mortgage payments. 

By 2006, nearly half of total U.S. originations of privately 

securitized affordability mortgages were made in the four 

Sand States alone. Moreover, the proportion of these 

mortgages originated in these states, including nontraditional mortgages, rose as home prices escalated. During 

2002, these products accounted for roughly half of the 

privately securitized mortgage originations in each of the 

Sand States, comparable to the rest of the nation. By 2006, 

however, the proportion of these products had increased to 

80 percent of privately securitized mortgage originations. 

Nationwide, the percentage was about 70 percent.3 

The increased presence of speculators or investors in the 

Sand States also contributed to growing imbalances in 

the housing sector. Data from mortgage servicers indicate 

that nonowner, investor, and second-home mortgage 

originations increased noticeably in Arizona, Florida, and 

Nevada between 2000 and 2005.4 Investor and secondhome purchases tended to be more heavily concentrated 

in major metropolitan areas in these states, such as 

Las Vegas, West Palm Beach, Miami, and Phoenix. 

Strong housing demand coupled with escalating home 

prices served as a dual incentive for builders to increase 

the supply of homes, arguably at a rate that exceeded 

short-term demand. New home construction started to 

accelerate in 2002, and, over the next three years, 

housing starts in these four states increased an average 

of 11 percent annually, or about twice the rate of 

increase elsewhere in the nation. Housing construction 

in the Sand States far outpaced annual growth in the 

number of households, which peaked at 1.6 percent in 

2004 and 2005. 

3 Data are from Loan Performance. Affordability mortgage products 

include ARM loans, interest-only loans, negative amortization mortgages, 

balloon loans, and hybrid ARMs. Affordability originations are measured 

as a percentage of privately securitized origination, first liens only. 

4 In contrast, California had less investor activity during the period, 

likely because the median home price in the state was relatively high, 

resulting in a less attractive rate of return for potential investors. 

Labor market imbalances also arose as job growth became 

skewed toward the housing sector. During the height of 

the boom, construction employment grew 10 percent per 

year in these states, far outpacing growth in other industry sectors. During this time, construction jobs accounted 

for a disproportionate 25 percent share of new jobs, while 

representing less than 10 percent of total employment. 

Tipping Point: Imbalances Lead to Housing Collapse 

Ultimately, the housing boom in the Sand States 

proved to be mostly a mirage. The first signs of trouble 

came in the form of sharply decelerating rates of home 

price appreciation. Between 2003 and 2006, annual 

home price appreciation rates in these states had consistently exceeded the national average. Year-over-year 

house price appreciation in Nevada peaked in 2004 at 

37 percent. In Arizona and Florida, appreciation peaked 

in 2005 at rates more than twice the national average. 

Since then, average home prices in the four states have 

declined between 27 and 38 percent from their peak.5 

Price declines have been most severe in metropolitan 

markets such as Phoenix and Las Vegas, which registered the largest percentage declines in the nation at 

34 percent and 33 percent, respectively, during 2008.6 

As home prices slumped, foreclosure activity rose at a 

startling pace. While this phenomenon was occurring 

across the nation, it was most pronounced in the Sand 

States. According to the Mortgage Bankers Association, the Sand States accounted for more than 40 

percent of all mortgage foreclosures started in 2008, 

which is nearly double the share of mortgages held by 

borrowers in these four states (see Table 1). This 

disproportionate share of troubled mortgages in the 

Sand States was most acute among ARMs. In 2008, 

these states held 46 percent of the prime ARMs 

outstanding nationwide and 64 percent of foreclosures 

started within this mortgage category. 

In fourth quarter 2008, foreclosure resales accounted for 

more than 55 percent of all California resale activity, 

almost three times the level of a year ago. Foreclosure 

resales were also prevalent in Las Vegas and Phoenix, 

where this type of transaction accounted for about 71 

and 65 percent, respectively, of house and condominium 

resales.7 

5 Federal Housing Finance Agency, purchase-only index data through 

fourth quarter 2008. 

6 S&P/Case-Shiller Home Price Index, data as of December 2008. 

7 Data Quick Information Systems through www.dqnews.com. 

Las Vegas and Phoenix data are for February 2009. 

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Table 1 Chart 1 

The Sand States Account for a 

Disproportionately High Share of 

Foreclosure Activity 

National Share of 

Foreclosures 

Started 

National Share of 

Mortgages 

Serviced 

California 

Florida 

Arizona 

Nevada 

19.2% 

16.2% 

4.4% 

2.7% 

12.9% 

7.8% 

2.7% 

1.2% 

Sand States Total: 42.5% 24.6% 

Source: Mortgage Bankers Association. 

Note: Data from first quarter 2008 through fourth quarter 2008. “Sand States” is the 

aggregate of California, Florida, Arizona, and Nevada. 

-20 

-15 

-10 

-5 

0 

5 

10 

15 

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 

Year-over-Year Change in Sand State Nonfarm Employment 

Percent 

The Construction Sector in the Sand States 

Has Been an Important Driver of Job Growth 

Source: Bureau of Labor Statistics (Haver Analytics). 

Note: “Sand States” is the aggregate of California, Florida, Arizona, and Nevada. “All Other 

Sectors” is the state aggregate nonfarm employment minus the construction sector. 

All Other Sectors 

Job Growth 

Construction Sector 

Job Growth 

Economic Conditions Remain Fragile as the Effects 

of the Housing Collapse Spread 

Compounding the housing-sector problems in the Sand 

States, and elsewhere, has been the virtual shutdown of 

private mortgage-backed securities (MBS) issuance 

since 2007. MBS issuance had largely financed the 

subprime and nontraditional lending that fueled the 

boom. Total issuance of private MBS, which had 

topped $1 trillion annually in both 2005 and 2006, fell 

precipitously thereafter, totaling just over $50 billion in 

2008. Meanwhile, the difficulties that market participants have had in valuing complex mortgage securities 

and the derivatives based on them have contributed to 

wider risk aversion in financial markets, which has 

reached historic proportions. For housing markets, 

particularly in the credit-fueled boom markets of these 

four states, these financial market disruptions are 

compounding what would in any case have been a steep 

and extended housing market downturn. 

The housing market downturn in the Sand States is 

now having serious ripple effects on other parts of the 

local economy. Each of the Sand States lost jobs in 

2008. The losses have been most pronounced in the 

construction sector, which has shed more than 450,000 

jobs, or about 24 percent, between fourth quarter 2006 

and fourth quarter 2008 (see Chart 1). In addition, job 

losses have spread to the financial services and retail 

trade sectors. Retail sales also have declined, particularly for home improvement, furniture, and electronics 

store sales, contributing to additional layoffs. 

Although the Sand States entered this downturn with 

relatively low rates of unemployment, joblessness 

increased during 2008 to levels not seen since the 2001 

recession. The unemployment rates for California, 

Florida, and Nevada ranked among the top ten in the 

nation as of fourth quarter 2008. While Arizona’s 

unemployment rate remained slightly below the 

national average as of fourth quarter 2008, it too rose 

markedly during the year. These rising unemployment 

rates are due primarily to widespread job losses and, to a 

lesser degree, to additional people entering the labor 

force in search of employment, including college graduates and retirees.8 Also, rising unemployment claims are 

putting more pressure on already strained state budgets. 

Nonetheless, a few positive, albeit very preliminary, 

signs may be emerging. The volume of home sales in 

Arizona, California, and Nevada improved during 

2008 relative to year-ago levels. The increase in foreclosures sales is likely contributing to some renewal in 

sales activity. In addition, while a sharp decline in 

housing starts is eliminating construction jobs in the 

near term, it should eventually facilitate the return to 

a more stable housing landscape. Seasonally adjusted 

housing starts in the Sand States dropped 40 percent 

in 2007 and again in 2008. Also, despite the weakened 

housing and labor markets, population growth in 

Arizona, California, and Nevada was estimated to be 

above the national rate in 2008.9 This continued 

growth will be an important source of long-term housing demand that will eventually help bring a measure 

of stability to these troubled housing markets. 

Authors: Shayna M. Olesiuk, Regional Manager 

Kathy R. Kalser, Assistant Director 

8 California Employment Development Department. 9 U.S. Census estimates of state-level population growth between 

July 1, 2007, and July 1, 2008, the latest data available. 

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The 2009 Economic Landscape 

Financial Sector Woes Pressure the Northeast 

The downturn in U.S. housing markets that began in 

2006 was arguably the catalyst for the nation’s ongoing 

recession. However, turmoil in the financial sector has 

contributed to further deterioration in the U.S. and 

global economies. Since 2007, a succession of financial 

market disturbances has heightened risk aversion and 

credit spreads, and has severely limited the availability 

of credit across certain sectors of the economy. These 

developments have placed enormous pressure on some 

classes of financial companies, particularly those that 

exist outside of the regulatory umbrella and those that 

depend on the ability to sell loans or issue debt on the 

open market. 

The severity and duration of the recent distress has 

resulted in considerable job losses in the financial 

sector. Initially, job cuts were centered in residentialrelated financial employment, such as mortgage brokers, 

consistent with the nation’s housing downturn. 

However, as financial stress permeated the capital 

markets, job losses became widespread across the financial industry. By fourth quarter 2008, employment in 

the U.S. financial sector had declined by 2.4 percent 

from a year earlier, the sharpest decline since World 

War II.1 

Retrenchment in the Nation’s Financial Sector 

Is Centered in New York 

Contraction in the nation’s financial sector is magnified 

in New York State and particularly New York City— 

the nation’s financial center (see text box at right for 

the effects of financial sector contraction on other 

Northeast economies). Statewide, the contribution of 

financial jobs to total wages has increased in recent 

years. At its peak in 2007, wages from financial jobs 

accounted for 25 percent of statewide wages, considerably more than their contribution at the national level 

(see Chart 1). 

In New York City, the economy ebbs and flows with 

fluctuations in the financial sector because the city has 

a large share of financial jobs. Indeed, the proportion of 

financial jobs to total employment in New York City is 

Contraction in the Financial 

Sector Is Weighing on Other 

Northeast Economies 

Financial employment is a major economic driver in 

other parts of the Northeast, including some cities in 

New England and metropolitan areas along the East 

Coast. Like New York, these markets are vulnerable 

to contraction in financial employment. 

New Jersey, particularly the metropolitan areas 

around New York City, has a slightly higher concentration of financial employment than the nation. In 

fourth quarter 2008, New Jersey lost 12,500 financial 

jobs, about 4.6 percent, from one year ago. This rate 

of decline was nearly double the national rate and was 

the largest percentage decline for the state since first 

quarter 1991. 

Boston, Massachusetts, and Hartford, Connecticut, 

also had high concentrations of financial sector 

employment at 7.2 percent and 11.7 percent, respectively, at year-end 2008. Employment in Boston’s 

financial sector fell by 4.0 percent in fourth quarter 

2008, the largest decline since fourth quarter 1991. 

Much of the decline was centered in commercial 

banks and securities firms, although real estate employment also reported job losses. Employment in Hartford’s financial sector also continues to contract. 

During the fourth quarter, the area’s financial employment declined 0.8 percent from one year ago. 

The financial sector in Charlotte, North Carolina, is 

also contracting. This sector, which accounted for 8.5 

percent of the metro area’s total jobs in fourth quarter 

2008 and 40.5 percent of the area’s economic output in 

2006 (the most recent data available), has been losing 

jobs since mid-2007. The rate of decline rose during 

2008, reaching 5.4 percent in the fourth quarter. 

Wilmington, Delaware, also shed financial sector jobs 

in the fourth quarter, although the rate of loss was less 

than that of the nation. Employment associated with 

credit card banking, which has a substantial presence 

in Wilmington, has been relatively steady over the 

past year. 

1 Bureau of Labor Statistics. 

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Chart 1 Chart 2 

5% 

10% 

15% 

20% 

25% 

30% 

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 

Source: Bureau of Economic Analysis (Haver Analytics). 

Note: Financial wages are those earned in the banking, insurance, real estate, and 

securities industries. 

Data are through fourth quarter 2008 (most recent available) and are seasonally adjusted 

at annual rates. 

New York State 

United States 

Ratio of Financial Wages to Total Wages 

New York’s Economy Has Grown More Dependent on 

Financial Wages 

Recessions 

-20% 

-15% 

-10% 

-5% 

0% 

5% 

10% 

15% 

20% 

00 01 02 03 04 05 06 07 08 

Source: Bureau of Labor Statistics (Haver Analytics). 

Note: Data are through fourth quarter 2008 and are not seasonally adjusted. 

Securities Industry - New York City 

Securities Industry - Rest of the U.S. 

Employment Losses in the Securities Industry 

Are Centered in New York City 

Year-over-Year Change 

12 percent, or double the national share. Perhaps more 

important, wages in the securities industry, a key 

component of the city’s financial sector, account for a 

disproportionate share of total wages paid in the city. 

Wages in the securities industry accounted for more 

than 25 percent of total wages paid in the city, but the 

industry itself accounted for only 5 percent of total jobs. 

Securities industry wages increased almost four times 

faster than wages in the rest of New York City between 

2003 and 2007.2 

As the disruption in financial markets persisted during 

2008, job losses in New York City’s financial sector 

continued to mount. The securities industry was 

particularly hard hit. During fourth quarter 2008, the 

city’s securities industry lost more than 9,000 jobs, a 

4.8 percent decline compared with one year earlier and 

the worst percentage decline since second quarter 2003 

(see Chart 2). 

Job losses in the city’s securities industry will be amplified across other sectors of the economy. According to 

the New York State Comptroller, for every new job in 

the securities industry, three additional jobs are created 

in New York City and its suburbs. Conversely, losses in 

the securities industry will have a ripple effect across 

the area’s economy. Estimates suggest that during the 

2001 recession, this sector directly and indirectly 

2 New York State Comptroller, The Securities Industry in New York 

City, November 2008. Data are as of 2007. The securities industry—a 

component of the broader financial industry—is composed of jobs 

classified as securities and commodities brokers, portfolio managers, 

and investment advisors. This sector accounted for more than onethird of financial jobs in New York City in fourth quarter 2008. 

contributed to more than half of the private sector jobs 

lost in the city.3 

In addition, the sharp downturn in New York’s financial sector is negatively affecting state and local tax 

budgets. In fiscal year 2007–2008, tax collections from 

the securities industry accounted for almost 20 percent 

of total tax collections in New York State. The New 

York State Comptroller estimated that state tax collections from the securities industry, including business 

and personal filings, could drop by 38 percent in fiscal 

2010.4 

Job losses and reduced compensation in New York 

City’s financial sector are also having a detrimental 

effect across real estate markets. Home prices in the 

New York City metro area declined by 9.2 percent on 

average in 2008. This year-over-year decline in home 

prices was the largest in the 22-year history of these 

data, slightly exceeding the previous high recorded in 

March 1991.5 Still, New York City home prices fell 

much less during 2008 than in some other major cities, 

which saw double-digit declines. 

New York City’s commercial real estate market is also 

showing signs of weakness, particularly in Manhattan. 

3 Ibid. 

4 Ibid. 

5 S&P/Case-Shiller Home Price Index. This index defines the New York 

metro area as the New York City metropolitan statistical area plus 

other counties in New York State, Connecticut, New Jersey, and Pennsylvania that are within commuting distance of New York City. 

Declines are calculated based on the year-over-year percentage change 

in home prices. 

FDIC QUARTERLY 34 2009, VOLUME 3, NO. 1 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2009 Economic Landscape 

The financial sector occupies as much as 30 percent of 

Manhattan’s office space.6 With intensifying pressure in 

the financial sector, office rents are dropping. The area’s 

vacancy rates are also on the rise but remained below 

the national average at year-end 2008.7 However, a sizeable amount of office space is estimated to return to the 

market, which may further pressure rental and vacancy 

rates. Some estimates suggest that the percentage of 

available office space in Manhattan may soon rise to its 

highest level since 1996.8 

New York City’s Financial Industry Has Been 

Resilient in Past Cycles 

Forecasts suggest that job losses in New York City’s 

financial industry will get worse before they get better. 

A March 2009 report by the New York City Independent Budget Office states that the city could lose 

51,000 securities industry jobs through third quarter 

2011, which would be a decline of about 27 percent 

from the 2008 peak.9 Job losses of this magnitude would 

6 Grubb and Ellis Research, Office Market Trends: New York City, 

second quarter 2008. 

7 Torto Wheaton Research, fourth quarter 2008. 

8 David M. Levitt, “Banks Vacate Towers Pushing Empty NYC Space to 

Record,” Bloomberg.com, February 26, 2008, www.bloomberg.com/ 

apps/news?pid=newsarchive&sid=aSYcApYsh.Dw (accessed on March 

2, 2009). 

9 New York City Independent Budget Office, Analysis of the Mayor’s 

Preliminary Budget for 2010: IBO’s Reestimate of the Mayor’s Preliminary Budget for 2010 and the Financial Plan through 2013, March 

2009. 

exceed the number of securities jobs lost in the city 

during either the 1990–91 or 2001 recession.10 In addition, job losses in New York City’s overall financial 

sector are projected to reach 89,800.11 According to the 

March report, job growth in the financial sector is forecast to resume in 2012 and 2013, but at a slow pace. 

Although the near-term outlook for the financial 

services industry in New York City remains tenuous, 

the city’s financial sector should recover as it has 

following every recession since World War II. During 

its long history, New York’s financial sector has proven 

resilient and resurgent following periods of adversity. 

Authors: Robert M. DiChiara, Regional Manager 

Kathy R. Kalser, Assistant Director 

The authors would like to thank Norman Gertner, Regional 

Economist, Division of Insurance and Research, for his 

contributions to this article. 

10 FDIC analysis, quarterly data from the Bureau of Labor Statistics, 

and annual data from the Securities Industry and Financial Markets 

Association. 

11 David Belkin (senior economist, New York City Independent Budget 

Office), in discussion with FDIC staff, April 2009, regarding the Analysis of the Mayor’s Preliminary Budget for 2010 dated March 2009. 

FDIC QUARTERLY 35 2009, VOLUME 3, NO. 1 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The 2009 Economic Landscape 

How Long Can Energy and Agriculture Boost the 

Nation’s Midsection? 

The energy and agricultural sectors are important 

economic drivers for states in the center of the country. 

Extending from the oil patch of Texas, Louisiana, 

Arkansas, and Oklahoma, northward through the 

plains states and eastward to the Corn Belt, the states 

in the nation’s midsection are not only rich in land 

and other natural resources, but also tend to rely heavily on these resources as drivers of economic activity. 

Booming commodity prices during the middle years of 

this decade have helped buoy the economies of these 

states, even while the rest of the country was moving 

toward recession. However, recent declines in many 

of these same commodity prices raise concerns about 

wider economic repercussions for these regions as the 

U.S. recession continues. This article describes how 

commodity industries drive the economies of the 

nation’s midsection and evaluates their outlook after 

the commodity price boom. 

Energy and Agriculture Regions Do Not Always 

Follow the U.S. Business Cycle 

Energy prices can have a profound effect on the 

national economy. In fact, since World War II, nearly 

all recessions were preceded by oil price shocks. These 

shocks adversely affect businesses and consumers, causing economic growth to slow. For example, around the 

time of the Iranian revolution in 1979, oil prices 

doubled within a year, contributing to the 1980 and 

1981–82 national recessions. Similarly, the 1990–91 

recession was precipitated, in part, by another doubling 

of oil prices in the months following the invasion of 

Kuwait and leading up to the first Gulf War. 

Unlike the rest of the nation, oil-patch states tend to 

benefit from higher oil prices. In the early 1980s and 

early 1990s, higher oil prices helped these states grow 

even during national recessions. However, when prices 

collapsed during the mid-1980s, oil-patch states fell into 

their own regional recession. The lingering effects of 

the “oil bust” resulted in falling real incomes in the 

region. The subsequent loss of jobs, income, and output 

contributed to house price declines that created turmoil 

in residential real estate markets and led to hundreds of 

bank failures.1 

Like the energy sector, agriculture does not move in 

perfect tandem with the national economy, though 

influences from U.S. and global trends can be strong. 

For example, global economic conditions affect the 

demand for food, which helps drive agricultural 

commodity prices. In addition, large interest rate movements can have a profound effect on farmland prices. 

For example, in the early 1970s, strong demand for farm 

commodities caused farm incomes to rise rapidly. When 

combined with negative real interest rates, this favorable environment caused sharp increases in the value of 

farmland. In the late 1970s, however, soaring interest 

rates and changing conditions in global supply and 

demand brought the boom period to an end. The result 

was a significant decline in real farm incomes, a rapid 

and long-lasting decline in farmland values, and 

hundreds of farm bank failures in the 1980s.2 

Energy and Agriculture Boomed through 

Mid-Year 2008 

Current energy and agricultural conditions have, for 

the most part, played out independently of national 

economic trends. Despite the weakening U.S. economy, 

the health of the energy and agricultural industries has 

been very strong over the past several years. Crude oil 

prices quadrupled in dollar terms between 2003 and 

mid-2008, setting the trend for overall energy prices. 

This price inflation was an economic boon to oil-patch 

states.3 During the five-year period ending in second 

quarter 2008, inflation-adjusted economic growth in 

these four states grew at an annualized rate of 3.6 percent 

1 FDIC, History of the Eighties—Lessons for the Future (Washington, 

DC: FDIC, 1997): 291–336. 

2 Ibid., 259–290. 

3 While the energy discussion and analysis in this article focus on oilpatch states, it should be noted that Wyoming and Montana have 

characteristics similar to this region. Both states rely considerably on 

energy extraction and experienced employment growth above the 

national average during the period of high oil prices. Wyoming, in fact, 

had one of the most vibrant economies in the nation during that time. 

FDIC QUARTERLY 36 2009, VOLUME 3, NO. 1 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2009 Economic Landscape 

Chart 1 Map 1 

60 

70 

80 

90 

100 

110 

120 

130 

140 

150 

160 

Jan-80 Jan-84 Jan-88 Jan-92 Jan-96 Jan-00 Jan-04 Jan-08 

Source: U.S. Department of Agriculture 

Note: “Prices received by farmers” is a composite index of leading crop and livestock 

prices produced in the United States. The prices of these commodities are “farm-gate” or 

wholesale prices. 

Agricultural Prices Rose Steadily from Late 2002 through 

Mid-2008 but Have Settled Somewhat since Then 

Prices Received by Farmers 

Index: 1990-92=100 

compared with 2.8 percent for the nation.4 The biggest 

impact, however, was on real personal income, which 

grew at an annualized rate of 4.6 percent in the four oilpatch states compared with only 2.9 percent nationally. 

The region’s oil and gas industry not only supports a 

large number of high-paying jobs in the mining industry 

itself, but also has strong, indirect multiplier effects on 

job growth in professional and business services, wholesale and retail trade, and financial activities. 

The agricultural sector also has performed quite well 

over the past few years. A number of factors, including 

global economic growth and a weaker dollar, contributed to an extended period of rising prices for a broad 

array of agricultural products. Prices for these commodities generally began to rise in late 2002, and many 

reached new highs in the past two years before moderating in the second half of 2008 (see Chart 1). High 

commodity prices have led to record net farm incomes 

in three of the past four years and also have contributed 

to significant increases in farmland values.5 

Ethanol production has also played an important role in 

both agricultural and energy markets in recent years. As 

the price of crude oil increased from less than $26 per 

barrel in 2001 to more than $133 per barrel in July 

2008, ethanol became a viable and very profitable alter4 Growth rates used in this paragraph were calculated by the FDIC 

using data from the U.S. Bureau of Economic Analysis and Moody’s 

Economy.com. 5 For a detailed farmland analysis, see Richard D. Cofer, Jeffrey W. 

Walser, and Troy D. Osborne, “Do Record Farmland Prices Portend 

Another Steep Downturn for Agriculture and Farm Banks?” FDIC Quarterly 2, no. 4 (2008): 25. 

The Center of the Nation Has Avoided Significant Job Losses 

in This Recession 

Employment Growth, Percent Change 

December 2007 - January 2009 

>0% 

0% to -2% 

-2% to -4% Source: Bureau of Labor Statistics U.S. Average: -2.5% 

(Haver Analytics). <-4% 

native. Strong profitability, government mandates on 

renewable fuels that supported demand, and tariffs and 

subsidies that supported prices all led to considerable 

increases in ethanol output.6 Indeed, annual ethanol 

output in 2008 had grown by more than five times the 

levels of 2000.7 The growth in ethanol production, in 

turn, increased the demand for corn, the primary input 

in the production process, to a point where ethanol 

production is projected to use nearly 30 percent of the 

2008 crop.8 As farmers planted more corn to meet the 

higher demand from ethanol plants, they reduced plantings of soybeans, which contributed to higher prices for 

this commodity as well. The result was record incomes 

for farmers and double-digit average annual increases in 

farmland values in corn- and soybean-producing states 

between 2003 and 2007. 

The health of the energy and agricultural sectors, 

combined with relatively stable and affordable housing 

markets in the central United States, has caused the 

national recession to largely bypass the nation’s midsection so far (see Map 1). The energy-rich oil patch was 

6 Don Hofstrand, “Corn-Ethanol Profitability,” AgMRC Renewable 

Energy Newsletter, Agricultural Marketing Resource Center, November/ 

December 2008; and Bruce A. Babcock, Center for Agricultural and 

Rural Development at Iowa State University, statement before the U.S. 

Senate Committee on Homeland Security and Government Affairs, 

Hearing on Fuel Subsidies and Impact on Food Prices, 110th Cong., 

2nd sess., May 7, 2008. 

7 Renewable Fuels Association, Ethanol Industry Outlook 2009. 8 “World Agricultural Supply and Demand Estimates,” U.S. Department 

of Agriculture, January 12, 2009. 

FDIC QUARTERLY 37 2009, VOLUME 3, NO. 1 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

the only region that added jobs after the national recession began in December 2007, and Farm Belt states 

reported small job losses relative to the rest of the 

nation. 

The Outlook for Energy and Agriculture Has Dimmed 

Though the energy and agricultural sectors have 

provided insulation against recession for the central 

United States, these sectors have weakened considerably in recent months. The Energy Information 

Administration’s (EIA) short-term energy outlook is 

projecting a long, severe global economic slowdown 

that will lead to further reductions in global energy 

demand and additional declines in crude oil and other 

energy prices.9 The EIA projects oil prices in 2009 to 

average between $40 and $50 per barrel on a quarterly 

basis, but prices could plunge below $30.10 Falling 

energy prices are now putting pressure on oil-patch 

employment growth (see Chart 2). This trend alone 

should not cause a repeat of the 1980s oil bust, as the 

region’s economy has become increasingly diverse since 

that time, somewhat muting the impact of oil price 

movements.11 However, when falling energy prices are 

combined with a severe national recession and a global 

financial crisis, a significant regional downturn cannot 

be ruled out. 

Declining agricultural commodity prices are also of 

concern. A severe downward price cycle in agricultural 

commodities and land values that causes farm incomes 

and land values to fall could result in prolonged 

economic weakness among farm states. Aggravating the 

situation could be a rapid and significant consolidation 

in the ethanol industry, which was already showing 

weakness in mid-2008 because of overcapacity and low 

margins caused by high corn prices. Some of the largest 

ethanol producers delayed the startup of ethanol plants 

last year, and some analysts predicted that many small 

and medium-sized plants would shut down.12 Deteriorating conditions in the ethanol industry will not only 

9 Energy Information Administration, Short-Term Energy Outlook, 

December 2008. 

10 Several leading analysts have discussed the possibility of oil prices 

falling below $30 per barrel in 2009. One notable example is “Oil May 

Fall Below $25 Next Year, Merrill Lynch Says,” Bloomberg.com, 

December 4, 2008. 

11 Stephen P.A. Brown and Mine K. Yucel, “Energy Prices and State 

Economic Performance,” Federal Reserve Bank of Dallas, Economic 

Review, second quarter 1995. 12 “Too Much Ethanol?” Farm Industry News, November 1, 2008. 

Chart 2 

$0 

$20 

$40 

$60 

$80 

$100 

$120 

$140 

$160 

1995 1997 1999 2001 2003 2005 2007 2009 

-2% 

-1% 

0% 

1% 

2% 

3% 

4% 

5% 

The Recent Downturn in Oil Prices Appears to Spell the 

End of the Growth Period in Oil-Patch Employment 

Sources: Wall Street Journal; Bureau of Labor Statistics (Haver Analytics) FDIC. 

Year-over-Year Employment Growth, 

Oil-Patch States 

Dollars per Barrel (2008 dollars) 

weigh on crop prices, but are also likely to affect farmers 

and rural communities who have come to rely on the 

industry for high-paying jobs. 

Though the economies in the nation’s midsection 

continue to perform well relative to the nation, the 

downward trends in the energy and agricultural sectors 

may weigh on the region in the near future. Moderating 

commodity prices are likely to put a damper on the 

area’s economic conditions, and the region may not 

only cease to be a source of economic strength but also 

could enter recession at a much later stage than the 

nation. 

Authors: Adrian R. Sanchez, Regional Economist 

John M. Anderlik, Assistant Director 

FDIC QUARTERLY 38 2009, VOLUME 3, NO. 1