Economy of Puerto Rico – October 2009

November 20, 2009
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During the first months of fiscal year 2009-10, the economy in Puerto Rico continued to lag. Indicators for the performance of local economic activity reflect symptoms of a deep and widespread contraction in all sectors. The principal indicators for the United States suggest that the U.S. economy is emerging from the recession, but in Puerto Rico not even the slightest improvement can yet be seen. Instead, the scenario suggests that the local economy’s ability to grow has weakened. Thus, the deep, long-lasting, and widespread contraction that we are observing is not the reflection of a typical recession, which are cyclical and of relatively short duration.

The loss of the ability to grow is associated with problems of a structural nature that we have discussed in previous editions. Some of the factors that have seriously impeded the economy’s ability to grow for some time are a competitiveness weakened by high production costs; low productivity; a base of public tax collection eroded by tax evasion and growing unemployment; and an institutional framework that does not respond to the needs of a modern economy. It appears that recessionary pressures have exacerbated these structural problems, causing even greater difficulty in kick-starting economic recovery. The profound and consistent weakening of the job market, public finances, and key economic sectors such as construction, manufacturing, tourism, and trade suggests that we will not see a rebound for some time. The injection of the ARRA (American Recovery and Reinvestment Act) funds will, however, help mitigate to some degree the damage created by the economic contraction and slow the local economy’s rate of decline.

The growing deterioration in industrial production underscores the grave difficulties associated with the loss of competitiveness. The effect has been replicated in all sectors of the economy, resulting in the loss of thousands of jobs and a notable increase in bankruptcies, which rose above one thousand (1,051) in September 2009. The average hourly wage stands unchanged at $12/hour, employment and payroll continue to show signs of decline, and in 2008-09 exports fell the most (5%) since 1992-93, when it fell 6%.

Commercial activity recorded a decline in sales of approximately $293.3 million (-1.7%) over the first six months of 2009, with a drop of $190.6 million in motor vehicle sales accounting for much of that loss. In addition to the loss of some 14,000 jobs in the private sector, the first semester of the year was also unfavorable for establishments such as hardware stores, clothing stores, furniture stores, and jewelry stores.

Of particular importance is the consistent decline in construction activity, since the multiplier effect of this sector has caused deterioration throughout the economy. The total value of construction permits continues to fall, decreasing $407 million, or 31.4%, during the first seven months of the year. Likewise, the decline in government income is contributing to the island’s economic lethargy. To deal with the projected deficit, the government of Puerto Rico has adopted a plan to lay off government workers, and the second phase of this plan could leave another 14,500 employees without jobs, of which 11,700 dismissals would take place in January of 2010. The government estimates that this measure could result in economies of some $380 million, but it is expected that the economic contraction will intensify, , at least over the short term.

Employment
The labor market survey shows that in September 2009 there were some 217,000 people unemployed and that the unemployment rate had reached 16.4%, the highest since 1993. The total number of jobs stood at 1.1 million, which is the lowest number since 1996. In total, some 97,000 jobs were lost over the last 12 months, which represents a reduction of 8% in the total number of jobs over that period. The private sector recorded a dramatic decline of 84,000 jobs associated with the contraction of aggregate demand. The loss of 13,000 jobs in the public sector represents a potential additional blow to the economy, since it may affect the availability of public services, demand for which will probably rise due to the increasing number of unemployed. And this does not take into account the multiplier effect in other sectors of the economy and the probable cutback in the central government’s payroll, which could leave another 14,521 people without jobs over the next few months.

Workers’ discouragement can be clearly seen when one examines the behavior of indicators for job-market performance. According to the most recent data from the Department of Labor and Human Resources, the civilian population able to work grew by some 18,000 over the last 12 months. But the labor pool, which is constituted by those who have jobs and those who are looking for jobs, fell by 43,000 over the same period, reaching levels not seen since January 2002. This group does not include those unemployed who are not actively looking for work. Even so, the labor participation rate reached its lowest level in history (43%), which imposes a heavy additional burden on a government whose tax base is already severely weakened.

BPPR Indexes of Economic Activity
When we examine the behavior of the BPPR-IREA and INEA, we observe that both indicators showed that the Puerto Rican economy continues to go through a period of contraction; values for both indexes continue to show month-to-month and year-to-year declines. The BPPR-IREA recorded an average value of 116.96 from January to August 2009, which represents a reduction of 2.3% when compared with the same period a year earlier. These values are preliminary, since data from the Tourism Co. are only available through July 2009.

All of the index’s components recorded declines as a consequence of the island’s weakened economic activity. The substantial decrease in cement sales, for example, reflects the deterioration of the construction sector. Likewise, the dramatic decline in electric energy sales to manufacturers underscores the difficulties being experienced in that sector. It is likely that the recession in the United States has been a determining factor in the the prolonged stagnation in tourism activity and the loss of jobs in that sector, ,since the United States is Puerto Rico’s principal market.

The behavior of the BPPR-INEA confirms the values recorded by the real index. The index that describes economic activity on the island measured in monetary flow recorded a significant decline of 3.8% in June 2009, after having fallen 4.7% in May. This contraction in monetary activity is consistent with the declines recorded in manufacturing payroll, import volumes, jewelry store sales and the stagnation of bank deposits. The BPPR–INEA also fell over the first semester of 2009 to an average value of 208.5, which represents a decline of 2.4% when compared with the average value of the first semester of 2008.

For some time, the local economy has not synchronized cyclically with the U.S. economy. The Puerto Rican economy has lagged considerably behind and performed substantially worse than the U.S. economy. Thus, it is likely that the local economy will not immediately benefit from the expected rebound in the United States, after having passed through the most severe recession in its history.
Snapshots
$293.8 million Decline in retail sales during the first semester of 2009, when compared with the first semester of 2008.
$109 million Decline in manufacturing payroll in the first nine months of 2009.
217,000 Number of people unemployed in September 2009. The unemployment rate reached 16.4%, the highest since 1993.
2.3% Contraction in the value of the BPPR’s Index of Real Economic Activity over the first eight months of 2009.

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