If Wall Street Starts Layoffs, Everyone Should Worry

The Wall Street job market is beginning to sour, according to a report from the Wall Street Journal. Although the article is a little anecdotal, its authors appear to have gathered some evidence that the aggressive period of hiring may be coming to an end. In fact, layoffs might be ramping up. If that happens, Main Street should also begin to worry.

Here's the WSJ:

Barclays Capital, the investment-banking unit of Barclays PLC, has eliminated about 400 jobs, most of them back-office positions. Credit Suisse Group AG has warned its staff that the Swiss bank might trim 75 positions from its London office.

And other firms are contemplating cuts as they look at their bonus pools for 2010 amid sluggish securities sales and trading. The outlook for merger activity also remains cloudy despite last week's surge in deal making to its highest level since December 2009.

The back office losses could be more structural than cyclical, so they aren't necessarily a dire signal. And if front office jobs are shed due to regulatory changes, then this also doesn't say much about the state of the economy. But if Wall Street is convinced that its workforce is larger than the demand for their products and services will be over the next several quarters and begins layoffs in response, then we'll likely see unemployment rise more broadly.

Wall Street tends to be ahead of the curve when it comes to firing. For example, bankers and traders began to lose their jobs way back in 2007. Layoffs continued after 2008, mostly because the financial crisis specifically struck the financial industry. But private sector jobs didn't begin to fall much until 2008, as the national unemployment rate rose was still at 5.0% at the beginning of the year. Here's a chart showing private sector employment versus the financial sector:

private vs finance jobs 2010-07.png

You can see that the finance jobs (red line) began to dip in the beginning of 2007, but the rest of the private sector (blue line) takes almost a year to catch up. Although I couldn't find any numbers that were Wall Street specific, my knowledge of the industry suggests such data would likely show this trend even more clearly.

As mentioned, however, the evidence that Wall Street is starting to lay off workers isn't conclusive. Indeed, a day earlier the WSJ's Real Time Economics blog even had a separate post about how great banker compensation is right now. But if the article's thesis is right, and Wall Street really does start layoffs again, then this could mean it's convinced that a double dip is approaching.