The job losses experienced in the financial services sector in New York City through the summer of 2008 have been relatively moderate, but considering that the current downturn is similar to the one in the late 1980s, more deterioration may be yet to come.

“The sharp losses that accompanied the finance sector weakness in the late 1980s might indicate that the city’s finance sector stands on the verge of a significant multiyear downturn in employment and in real earnings,” according to an employment outlook report from the Federal Reserve Bank of New York released today.

The report, however, forecasts that job losses in the current downturn could be tempered by two features. One is that the downturn coincides more closely with a weakening in the national economy than the downturn of the late 1980s. During that downturn, when about 95,000 jobs were lost over a five-year period, the effect of the U.S. recession kicked in only after mid-1990. Secondly, there has been a pattern of moving many employees to lower-cost locations outside of New York, which means that the financial services sector is now made up of a larger share of relatively high-paid employees, particularly in the securities sector.

“Therefore compared with the pattern of the late 1980s downturn, the current weakness in the financial sector may be more likely to manifest itself in severe declines in income rather than in employment,” according to the report.

Private sector employment in New York City expanded 2.4% from 2006 to 2007, although the pace tapered off toward the end of 2007. Employment was gaining through the summer of 2008 and was still 1% above the national average in August 2008 of 6.1%, according to the Federal Reserve Bank of New York report.

Employment in the financial services industry gained 3% in 2006 and more than 2% in 2007, with the number of jobs peaking in March 2008. Between March and August 2008, however, employment in the sector declined about 2%, a loss of about 10,000 jobs.

Looking just at the securities industry, or Wall Street jobs, employment peaked in September 2007, shortly after the financial market turmoil began. From September 2007 through August 2008, 9,000 securities industry jobs were lost, which accounts for the bulk of the 10,000 financial job losses so far.

In 2007, finance jobs accounted for about 13% of employment in New York City and 36% of earnings, so when the financial services sector sneezes, the New York office market catches a cold.

So how bad is the hit on the New York office market likely to be? Marc Miller, an executive vice president with New York brokerage Winoker Realty, says that the saving grace is that there has not been any major overbuilding in this cycle, whereas in the late 1980s, overbuilding was the issue.

At the peak of the late 1980s downturn, office vacancy reached a peak of 14% in Midtown, according to Miller. Considering that the development community has been conservative, he expects vacancies in this downturn to climb from the current 6.5% to as much as 10%. Rents are also likely to drop 10% from current rates of between $55 to $65 per sq. ft. on a Class-B building in Midtown Manhattan.

“The greatest impact will be on the sublease market,” according to Miller. “Sublease space is going from a trickle to a stream and becoming a river.” Sublease space is likely to be available at significant discounts on the direct tenant’s rent.

The financial services turmoil, besides affecting financial services sector employment, also has had a ripple effect in terms of employment in the professional and business services sector.

This grouping includes jobs in corporate headquarters management, legal services, advertising, and accounting. By August 2008, jobs in the professional and business services sector were up just 0.2% from a year earlier, after growing 3.5% in 2007.