The Backyard Economy: New York

As the financial capital of the world, New York City -- and by extension, New York state -- is more connected to the global economy than most other states in the nation.

It has been a top draw for international tourists and businesses as a weaker U.S. dollar has made the United States appear to be having an enormous sale.

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Despite this positive influx of cash, economists like Douglas Lonnstrom, the founding director of the Siena Research Institute, is less than optimistic about the direction of the Empire State's economy.

The state's economy is heavily dependent on the financial sector. While Wall Street represents only 5 percent of jobs in the city, it provides more than 20 percent of the city's revenues. A slowdown there means a slowdown for the entire state economy.

Already in 2007, banking and investment firms shed significant numbers of employees as the housing market crashed along with the complex financial products that fueled the boom. Further job losses loom on the horizon.

And those losses on Wall Street come as the western part of the state continues to feel the impact of manufacturing declines.

"Upstate New York never bounced back from the 1991 recession the way the rest of the country did," Lonnstrom said. "The economy in western New York is dismal, with Binghamton, Buffalo, Rochester and Syracuse all facing problems."

New York has held up relatively well despite the disastrous housing slump in other states. Major investment firms, however, were hurt by oversized investments in subprime loans.

With expected heavy losses in business, real estate and personal-income tax collections, the state budget faces an estimated $4.4 billion gap.

"Consumer confidence in New York City was very high in the 1990s due to the booming financial industry, which spilled over into other sectors. That all changed on 9/11. The city has gradually crawled its way back, but not to the same level," Lonnstrom said.

While New York became, in the words of Moody's, a "star performer in the Northeast for the past several years," the economic research firm said because of its current problems, the state will underperform through the remainder of the year.