Economy of Puerto Rico in Fiscal Year 2008-09

September 25, 2009
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The fiscal year ending in June 2009 saw a sharp decline in economic activity. Several factors have brought about the prolonged downturn in the economy, which has been felt in all economic sectors. Of these factors, two of the most important are the contraction of the U.S. economy and structural problems in local production, both exacerbated by the recessionary cycle. The behavior of key indicators in the second quarter of 2009 suggests that the decline in economic activity that has been going on for more than three years is now actually worsening, in a clear manifestation of the fragility of the local economy. The lack of forward progress experienced over the last fiscal year is consistent with estimates from the Planning Board, which point to a decline in the Gross National Product of approximately 5.5%.

These numbers indicate that the island’s economy is going through what is perhaps the worst moment in its history, affected mainly by the collapse of the job market and a weakening of consumer confidence, which are in turn manifested by a drop in aggregate demand and government income. These declines all point to even greater problems over the next few months. All indicators, without exception, reflect a notable decline in economic activity. Of particular importance is the rapid decline of competitiveness in the industrial sector, a development that has limited the island’s ability to create new jobs and to keep those already in existence. Unemployment has reached levels not seen since the early nineties (16.5%), with the manufacturing sector, having lost 17,000 jobs over the past fiscal year, apparently the hardest hit. The year also saw substantial job losses in construction (14,000), trade (13,000), and services (6,000). In all, there were some 50,000 fewer jobs in fiscal year 2008-09 than a year earlier, according to the Labor Department’s Survey of Households.

The length, depth, and breadth of this contraction in economic activity do not pertain only to the industrial sector. All economic sectors have performed poorly, especially construction, trade, banking activity, tourism and government finances. These sectors have been confronting serious difficulties for some time, but during the last year the difficulties worsened. The decline in government income from taxes and other assessments, which in 2008-09 was close to $500 million, has increased the deficit, thereby limiting the possibility of investments in stimulus projects that might stabilize economic activity, give some spur to production, and lead the recovery.

The probability of a short-term rebound is also adversely affected by outside factors. The deterioration within the island’s productive sectors is influenced by the behavior of the U.S. economy, which, though now showing signs of recovery after a pronounced dip earlier in the year, is still facing difficulties associated with the financial crisis. In addition, although the price of oil and petroleum products seems to have stabilized at the close of the fiscal year, prices have raised again recently, a fact which might make goods and services more expensive and thereby further depress aggregate demand.

The Planning Board has said that the decline has hit bottom and that the rebound will become evident over the course of the next fiscal year. The mechanism for short-term recovery is the American Recovery and Reinvestment Act (ARRA), which promises to inject some $6 billion into the local economy. However, since this stimulus will be driven by non-recurring funds, once this money runs out there still exists the danger of another decline, unless a contingency plan is adopted. Better yet, planners and government leaders should take advantage of this critical juncture to articulate local policies and programs that will more effectively address the economy’s structural shortcomings and generate a decisive stimulus to the island’s competitiveness and productivity.

It must be remembered that even with $1.2 billion in federal stimulus funds during the last fiscal year, the economy was not reactivated; on the contrary, the most profound decline in productivity in the island’s history took place. Over the short term, the “ARRA” funds may mitigate the adverse effects associated with the prolonged recessionary cycle, but no options for the medium and long term have yet been presented.

Electric Energy Consumption

Production and consumption of electric energy are indicators of economic activity. Generally speaking, both these indicators move in the same direction as the economy. Since the recession began in early 2006, consumption of electric energy has declined sharply, leading to a cutback in energy production in order to adapt to decreasing demand. From 2005 to 2006, the consumption or sale of energy in kilowatt hours (KWH) grew 0.6%, a small enough number to begin with, but from 2006 on, this number began to decline, finally reaching 18,515 KWH, or a loss of 10.4% over the last three years. The most significant drop was recorded between 2008 and 2009 (-5.5%), the first time in history that this indicator has fallen so sharply.

All categories of consumption show a decline, especially industrial consumption, in a clear manifestation of the manufacturing sector’s fragility. Industrial factories and plants consumed a total of 3,289 Kw-H in 2008-09, which reflects a drop-off of 12.1% in a single year. The sale of energy to manufacturing industries over the last fiscal year is the lowest recorded for at least twenty years. In 1989-1990, energy consumption by manufacturing plants represented 27% of total sales, but this percentage has gradually fallen until today it stands at just 17%.

The pattern of decline in the consumption of electric energy can also be observed in homes and businesses, which have been finding it difficult to pay their rising electric bills. Residential consumption has fallen some 5.8% over the last fiscal year, while commercial consumption has fallen almost 3%.

Indexes of Economic Activity

The Banco Popular de Puerto Rico’s Indexes of Economic Activity (BPPR-IEAs) reflect the deterioration the economy is undergoing. The Index of Real Economic Activity (IREA) registered a value of 116.5 points during the second quarter of 2009, which is 2.2% less than the second quarter of 2008, when it stood at 119.2. The average value of the IREA from April to June of 2009 is the lowest since the second quarter of 2002, when, after the events of September 11, an average value of 115.7 points was recorded.

The monthly values of the IREA also suggest that the month-to-month and year-to-year decline is continuing. The value for June 2009 (116.3) reflects a contraction of 0.5% in comparison to a month earlier, and of 2.3% in comparison to June 2008. The Index of Nominal Economic Activity (INEA) fell to 210.3 points in April 2009, which is 0.3% lower than a month earlier and 1% lower than its value in April 2008. The INEA has registered year-to-year contractions for seven consecutive months, affected mainly by a decline in imports, jewelry store sales, and manufacturing payroll, along with stagnation in bank deposits.

The average value of the BPPR-IEAs in fiscal year 2008-09 show that real and nominal economic activity had their sharpest decline in the history of these indexes, which include data and estimates since January 1990. Examining the annual performance of the IREA, we see that its value fell from 119.8 points in fiscal year 2007-08 to 117.5 points in 2008-09, for a decline of 2%. This contraction is consistent with estimates from the Planning Board of Puerto Rico for the recently ended fiscal year, considering that the BPPR-IREA measures the direction but not necessarily the magnitude of change in the economy.

The INEA also registered a decline in fiscal year 2008-09. Although the decline was just 0.3%, this is only the second time in history that the INEA has fallen in comparison with a year earlier. The first time was in 2007, when it fell 0.2%. This finding causes special concern because it indicates that even taking into account the effect of prices on production, the economy seems unable to demonstrate any positive growth. Thus far, neither of the BPPR-IEAs give any indication that the recession is coming to its close.

Snapshots

17,000: Jobs lost in manufacturing in fiscal year 2008-09.

$500 million: Decrease in government Net Income in fiscal year 2008-09

10.4%: Decline in consumption of electric energy from 2006 to 2009.

2%: Decline in the value of the Index of Real Economic Activity in fiscal year 2008-09, the sharpest drop in the history of the BPPR-IREA.

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