Newsletter: Puerto Rico Economic Pulse©

Once the Mecca of the world automobile industry, a bustling city with nearly two million people, Detroit is now the symbol of decadence, exodus and shrinking population in the US. The latest Census 2010 added bad news to Puerto Rico. It seems the Detroit illness has crossed the sea and spread to the largest cities in the Island. San Juan, Ponce, Mayagüez, once the iconic cities Puerto Rico, are rapidly turning into ghost towns, filled with abandoned, distressed and dilapidated buildings. Hence, they have the dubious honor of leading the demographic contraction in Puerto Rico. In this issue, we review the disheartening figures from the latest Census 2010 and attempt to identify the reasons behind the Detroitization of PR’s largest cities.

For the first time in modern Puerto Rico, its total population declined from 3.8 million in 2000 to 3.7 million in 2010. The ageing population of 65 and over accounted for 15% of the total population in 2010 compared with 11% in 2000. By 2020, it could rise to 17%. This process is not unique to the island. The global population is going thru the same graying process but the consequences may be different among countries. The impact of this demographic transformation poses questions regarding the fiscal ability of each country to accommodate its aging population. Given that 45% of the population in 2010 was below poverty level, it is fair to ask if PR will need to raise taxes, cut spending, or borrow? What is the trade-off between fiscal sustainability and income adequacy? These changes will impact housing, education, entertainment, social services, health, trade, and more. Is PR ready?

Today, millions of people around the world are unemployed. Economic policies have changed the face of the workforce and demographic trends are shaping its future. Puerto Rico is also facing high unemployment with 16.4% as of August 2011. The transformation of our economy has taken its toll on the labor market and recent economic policies have not stumped the rise of the jobless, particularly among the youth. Jobs have been sacrificed in the name of fiscal austerity, especially in the public sector. If globalization and technological innovation are altering the structure of the labor market, then long-term, it is likely that unemployment will remain high. Is Puerto Rico prepared for these challenges? How is our economy changing to supply jobs to the young graduates of our universities and retain the jobs of our baby boomers, who need to stay longer in the workforce? Broadly speaking, we need a reform of our educational system and adjustments to our tax system and welfare safety net.

Over the past 10 years, the US federal public debt has increased by $9.7 trillion reaching the $14.3 trillion debt ceiling in 2011. That is “trillion” with a “T.” The US has borrowed from: the Social Security trust fund; China and Japan; and other investors. After a long and unprecedented congressional debate with political overtones, in August 2011 the debt ceiling increase was finally approved. The deal was approved together with $2.2 trillion in spending cuts over the next 10 years. The debate demonstrated the inability of US Congress and the Executive Branch to reach a consensus agreement. The end result harmed the prestige of the US economy and its financial system. Proposed spending cuts will impact almost all federal services and will hit Puerto Rico. This issue analyzes the causes of the US high debt, its consequences, and the impact in PR.

Many questions still remain about the biggest financial meltdown since the Great Depression three years ago. Unfortunately, few transparent answers have been provided. What triggered the credit crunch of October 2008? Have safety mechanisms been adopted to avoid a repetition of such an event? More importantly, why has the economic recovery taken so long?  Many risks to the US economic outlook remain even after the trillions of dollars spent to stabilize markets, reign in risk, and bring back consumer and business confidence. The economic fundamentals in most markets have not yet recovered from the almost 700,000 jobs lost per month at the beginning of 2009. Ironically enough, the same financial system that took the crisis to a new level will also hold the key to any long-term sustainable recovery, both in the US and Puerto Rico. A new economic order could be emerging. Are we prepared for it? Find out if we are any closer to leaving behind the darkest economic period in recent memory.

It is not a secret that Puerto Rico has experienced economic troubles since the past decade. The construction sector is one of the most beaten, with investments at a standstill, job losses, and few housing sales. A housing bubble is one of the causes and is part of the current recession. This current issue examines the formation of wrong expectations in the PR housing market without relying on real housing demand determinants. We discuss how these expectations caused a housing boom from 2003 to 2006 when housing prices and sales escalated rapidly. When the bubble burst, banks and developers were beaten and government has strived to solve the problem but not quickly enough. As always, it is the taxpayer who ends up paying for the excesses of others. 

Soaring oil prices and six years of economic recession are prompting the government to take swift actions to reduce the country’s dependency on oil-fueled electricity. At the center of its strategy lies the construction of the highly controversial “Via Verde”, a 92 mile gas pipeline running northbound across the Island to supply natural gas to power plants in the north region. The government argues that the pipeline is the best short-term solution to reduce the cost of electricity. Opponents are concerned about the safety hazards; permanent environmental impact and many are skeptic about the savings that could actually be accomplished and whether it is the best alternative available. As the different groups debate, in this issue we provide an objective evaluation of Via Verde and the government’s energy policy.

Much has occurred since our last issue of March wherein we analyzed the PR economy in 2010 and forecast for 2011 through 2013. Since then, we have seen the escalating price of gasoline as oil prices and wars have escalated; the heated debate in US Congress on account of the federal budget deficit and the rapidly approaching ceiling of the trillionaire public debt of the US. And if these events were not enough, Japan, the third largest economy in the world experienced a major earthquake followed by a tsunami and the fear of radioactive fallout from some of its atomic plants. Puerto Rico is not isolated from the adverse effects of these international threats. What could potentially be the most pessimistic economic outlook for the island? How can you as a businessperson and consumer be ready? The key to your success lies in the use of this information to identify risks and opportunities.

In FY2010, PR experienced its 4th straight year of negative economic growth. This is the worst recession in PR history since the beginning of the national accounts in 1947. In fact, the only period when PR has experienced consecutive years of negative growth in the past was between 1981 and 1983 when GNP shrank annually at 0.6%, 2.6% and 2.6%, respectively. Besides this three-year recession, PR has only had negative growth for single years in 1975 (-3.3%) and again in 2002 (-0.3%). The current recession officially started in FY2007 when real GNP grew at –1.2% and worsened in subsequent years with annual rates of –2.8%, -4.0% (revised) and –3.8% (estimated) between FYs 2007-2010. The hit on the economy has been so hard that real GNP in FY2010 is now 3% below its FY2000 level. This issue reviews the contributions of consumption, investment, government and net exports to the past and future growth of the PR economy.

Trade is increasingly important for the continued growth of the PR economy. Extensive and efficient infrastructure is also critical for the effective functioning of the economy. In addition, the quality and extent of infrastructure networks significantly impact economic growth. Puerto Rico needs both. Ports of entry are PR’s gateways to the world, enabling international commerce, immigration, and tourism. Ports provide a crucial link between land and sea transport. They also have an important social function, through the provision of jobs both directly and indirectly. As a supplier of jobs, ports do not only serve an economic but also a social function. However, since cargo nowadays is loaded and unloaded mechanically, the effects of changes in the amount of goods handled on local employment or the demand for port services is difficult to ascertain. Consequences of inaction or delay in improving trade-related infrastructure will have real costs to the economy. In this context, it is important to review why the Port of the Americas in Ponce has not taken off. Did we miss an opportunity?