As September got underway, New York City seemed to take its biggest steps yet toward normalcy. Subways are crowded again as more workers returned to the office. The United Nations General Assembly brought back a familiar pain of gridlock alert days. And across the city, bare faces have begun to outnumber the masked.

At the same time, city officials are now contending with an assortment of fiscal challenges — including the gradual drying up of federal pandemic aid and a growing recession risk — that threaten to slow or thwart the ongoing recovery.

Experts say the pandemic fostered a strange set of economic conditions and no one knows for certain where the economy is headed. But those who have analyzed the potential impact, including State Comptroller Thomas DiNapoli, have said the city could face billions of dollars in annual budget shortfalls that could start at $6 billion next year and grow to nearly $10 billion in 2026.

Mayor Eric Adams has responded by shifting into belt-tightening mode. Budget officials, he recently asserted, were saying the city was entering a “financial typhoon.”

Three months after passing a $101 billion budget that increased city spending, Adams has ordered all city agencies to plan for cuts: 3% in the coming year and 4.75% in each of the ensuing fiscal years. The administration has also called for a temporary hiring freeze, despite a shortage of city workers disrupting the delivery of some key services.

So how did we get here?

Here are five takeaways on the looming fiscal crisis and what New Yorkers can expect.

New York City’s economy is not faltering — yet.

New York City’s recovery has been sluggish and uneven. The city lags behind the country and other major cities when it comes to regaining jobs lost during the pandemic. The slowest recovery has been in sectors with lower wage jobs like hospitality and retail.

Nonetheless, jobs are steadily returning, according to James Parrott, the director of economic and fiscal policy at the New School’s Center for New York City Affairs.

In August, the city added 24,000 jobs, according to data from the city’s Office of Management and Budget. Parrott said the figure is in line with the average monthly growth so far this year.

The city’s unemployment rate rose last month. However, the uptick was driven by a rise in job seekers — a sign that people are feeling more encouraged by the job market.

City tax revenues have yet to decline, despite Wall Street’s lagging performance this year.

Data compiled by the city Independent Budget Office (IBO), a nonpartisan agency, shows that city tax revenues grew between 2019 and 2021.

The IBO is projecting that combined tax revenues will increase this year as well. Money collected from property taxes, however, is expected to fall.

The threat of an economic recession is real and getting worse.

A recession is traditionally defined as a significant decline in economic activity — in areas such as jobs, income, spending — that lasts several months.

The risk of a U.S. recession is currently tied to the Federal Reserve’s battle against inflation, which hit a 40-year high this year and can hurt people’s quality of living as certain goods and services become unaffordable.

In New York City, a 9% rise in food prices this summer forced some working class families to cut back on groceries.

Since March, the Fed has been raising interest rates to trigger a series of responses that could eventually lower inflation.

Higher interest rates means borrowing money becomes more expensive. That in turn forces businesses to reduce investment and hiring, bringing about more unemployment and reducing income. Less income translates into less spending by consumers, which should prompt businesses to stop raising prices.

The question is whether the Fed can rebalance the economy in this way without triggering a recession, a premise that is appearing to be less likely.

Economists are now putting the probability of a recession within the next year at around 50/50. Some are predicting that it could come by the end of 2022.

“I think it is fair to say that while forecasts of economic growth vary among economists, as high levels of inflation persist, more economists are predicting either slower growth or negative growth,” said Michael Jacobs, assistant director for economics at the IBO.

...[A]s as high levels of inflation persist, more economists are predicting either slower growth or negative growth.
Michael Jacobs, assistant director for economics at the city Independent Budget Office

A recession would disproportionately hurt New York City and its poorest residents.

During four recessions going back to 1990, New York City experienced higher unemployment than the nation as a whole, according to data from the U.S. Bureau of Labor Statistics.

And it’s poor New Yorkers and those who have less access to resources who are likely to bear the brunt of an economic downturn.

“That would definitely be a consequence of any recession,” said George Sweeting, the acting director of the IBO. “Lower-income people have fewer reserves of their own, they've usually got fewer options in the labor market.”

The state comptroller has examined the city’s fiscal cliff — the shortfall resulting from drops in funding to recurring initiatives. The expansion of 3-K, rental assistance for low-income New Yorkers, and mental health services are just a few programs that are facing looming deficits.

The pain may be felt more broadly. Adams has called for across-the-board cuts on city agencies, which could translate into fewer services in areas from sanitation to public safety.

One option is to offset the cuts by raising property taxes, something that last happened under Mayor Michael Bloomberg after the 2008 Great Recession.

But Adams, who has promised to look out for small landlords, has already said he does not want to raise property taxes.

The administration’s final plan is expected to be issued in November.

The budget shortfalls may be overstated.

Some budget experts have cautioned against making sky-is-falling predictions about the city’s fiscal future, saying the recent shortfall projections represent worst-case scenarios and that the economic conditions are still fluid.

Two factors driving the multi-billion dollar deficits are inflation and the struggling stock market. Both could cause the city’s labor costs to skyrocket, via upcoming contract negotiations with unions and pension investments.

The state comptroller’s office has said increases in union wages would cost taxpayers an additional $3.6 billion in 2026 under the projected inflation rate. That’s in addition to the $10 billion shortfall.

However, George Sweeting, the acting director of the IBO, said union raises have not always matched the inflation rate.

“So the assumption that it would be the same as the inflation rate may not hold,” he said.

The projected $10 billion budget hole assumes that Wall Street’s recent slide will force the city to contribute billions of dollars into its pension funds to meet the level of payments promised to municipal retirees.

But the stock market could recover some of its losses, blunting the impact on the city coffers.

Parrott stressed that the state comptroller is obligated to take a cautious approach in its fiscal forecast, one that uses conservative revenue estimates and assumes conditions for the city will not improve.

“That’s the nature of the reports they do,” he said. “It’s a risk-assessment approach to financial management.”

Others say that’s wishful thinking.

Ana Champeny, vice president for research at the Citizens Budget Commission, a fiscal watchdog group, said that the country is due for a recession based on historic trends.

Since 1945, U.S. economic expansions have lasted an average of roughly five years. More recently, however, the post-Great Recession expansion beginning in 2009 lasted more than 10 years — the longest in history.

Champeny argued that the mayor needs to make strategic cuts now given the pain a recession could impose on the neediest New Yorkers.

“You don't want to wait until you're in the midst of a recession and you suddenly need to cut $2 billion in spending next month,” she said.

What experts do agree on is that forecasting the city’s budget is more challenging now than ever before. The pandemic, which is still a specter on the economy, has brought about an unusual moment by disrupting the supply chain as well as people’s buying and working habits.

“I think everyone involved in trying to do these kinds of projections has to admit that there's much more uncertainty than there typically is,” Sweeting said. “Maybe we've shifted to a new normal, but we haven't learned how to project that new normal forward.”

I think everyone involved in trying to do these kinds of projections has to admit that there's much more uncertainty than there typically is.
George Sweeting, acting director of the city Independent Budget Office

What else are experts watching on the horizon?

In a global economy, there are a myriad of factors that have cascading effects on the U.S. and New York City. The evolving war in Ukraine has created jitters over energy prices and Europe’s economy, which can lead to higher gas prices at home and potentially, fewer European tourists in New York City.

Howard Cure, the director of municipal bond research at Evercore Wealth Management in New York, said he’s increasingly paying attention to political headwinds. In the near-term, the midterms will determine whether Democrats keep control of the U.S. House of Representatives. Past that, there is the presidential election.

“You can see under different administrations and controls of Congress more or less money going to urban areas,” Cure said.

The city’s relationship with Albany, its most crucial funding source, will be something else to keep a close eye on. Gov. Kathy Hochul, the heavily favored winner of the gubernatorial election, has so far been a steady ally to Adams.

Whether that stays true in the coming years remains to be seen.