New York City’s economy will face dwindling job growth, rising labor costs, and a projected $3.1 billion budget gap next year, according to a report published yesterday by the city’s Independent Budget Office.

“While there seems little reason to think our assumptions are too pessimistic,” the report said, “there is a reasonable chance that they are overly optimistic.”

Although the report stops short of predicting a recession, it warns that the subprime mortgage situation is hurting credit markets and would likely affect the city disproportionately due to its reliance on the stock market to drive tax revenue.

“Problems in the U.S. housing market have spilled over into financial services — the industry that drives the New York City economy,” the report said, adding that Wall Street firms reported $3.8 billion in losses in the third quarter of 2007.

“Financial institutions have written off billions of dollars of assets and sharply reined in lending and other activities,” it said, “making it difficult even for credit-worthy individuals and businesses to borrow.”

While the city gained 41,100 jobs in 2007, only 500 are expected to be created in 2008, and 20,800 jobs in 2009.

The resulting loss of jobs and Wall Street earnings is expected to contribute to a growing budget gap, which the IBO said would amount to $3.1 billion in 2009, $4.6 billion in 2010, and $6.3 billion in 2011. The report suggests measures to raise tax revenue, including forgoing a scheduled 7% property tax reduction.