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Will Finance Go the Way of Manufacturing?

Is the financial services share of the U.S. economy - and labor market - in a secular decline that will persist even after the current downturn ends?

In Monday's Outlook column, The Wall Street Journal contends a nearly three-decade boom in corporate profits and employment derived from financial activities turned into a bubble over the past several years, and it's now bursting. As a result, NYU economist Thomas Philippon predicts that total employment in finance and insurance must shed another 10 percent, or 700,000 jobs, "to get back to historical norms."

Ominously, several industry experts said the predicted finance-sector shrinkage won't be reversed once overall employment picks up again.

"For finance workers, this shift could resemble the 1980s, when manufacturing lost its pole position in the U.S. labor market and thousands found that skills they had honed over the years were less marketable," writes the Journal's Justin Lahart.

"I think you're seeing a clear inflection point," ISI Group's Tom Gallagher told the Journal. "Whether it's financials as a share of the stock market or financials as a share of GDP, we've peaked."

Citi Global Wealth Management chief investment officer Jeffrey Applegate said the damage to the financial sector is likely to be more lasting than after the 1987 stock-market crash, but the innovations that fueled the finance boom, such as globalization and securitization, won't vanish. He does expect reforms in ratings and regulation, which could lead to narrower profit margins from lending and investing. For instance, the Journal notes governments are moving to require both commercial banks and investment firms to hold bigger capital cushions, which "inevitably, means lower profits for finance."

If that's not enough doom and gloom for you, Saturday's WSJ carried a Q& A with celebrated finance author and long-time money manager Peter Bernstein, who predicts an "L-shaped" recovery.

"When you think about how all of this will work out in the long run, we are going to have an extremely risk-averse economy for a long time," Bernstein told the Journal. "You don't have a high-growth exit from this, as you've had from other kinds of crises. We won't have a powerful start, where the business cycle looks like a V. Here, the shape of the business cycle is like an L, where it goes down and doesn't turn up. Or like a U, a flat U."

Bernstein, now 89 years old, wrote several highly regarded finance books for the general public, including "Against the Gods: The Remarkable Story of Risk."

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AUTHORJon Jacobs Insider Comment

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