Newsletter: Puerto Rico Economic Pulse©

Auto retail sales during the past ten years have closely followed prevailing financial conditions and the economy’s cycle. During the first half of the decade, credit conditions were relaxed, the PR economy and new auto sales expanded, reaching a record 140,401 units in 2005. Since then, the economy began to, first, decelerate and, then, contract since mid 2006. With the onset of the US financial crisis, credit conditions grew progressively tighter. Consumers became increasingly aware of risk, a gloomy job outlook, and the car market began its downward trend. Four years after posting record sales, the market forecast is half its sales in 2005. Find out what happened and what auto dealers are facing.

Housing has always been at the forefront of the PR economy. Together with the public sector, housing became a powerful engine that kept the economic machine working over the past fifteen years.  Now, with housing trapped in one of its worst slumps ever, the story is quite different. Construction is shedding more and more jobs and the bleeding has not stopped. Thousands of housing units remain empty across the island. The affliction of the housing sector has spread to the rest of the economy, including banks, mortgage bankers, realtors, and many other companies. This is not the first time housing goes astray in Puerto Rico. Past lessons were forgotten and there is still a lot to learn from this crisis. This issue analyzes some of the causes and draws valuable lessons for the future.

An era of fiscal deficits and oversized government may be ending but how long will it take the PR economy to regain healthy growth without the help of the US? With the world economy in its worst crisis in 70 years, every country needs to do its bit to rekindle global demand. President Barack Obama and his economic team are already racing against the clock to try and fix the US economy with trillion-dollar programs. The forecast for the US economy is recession in fiscal 2009 and 2010. Locally, Governor Fortuño is implementing a $500 million Criollo Plan, but trying to eliminate a $3.2 billion deficit in the short term may deepen the island’s recession. Under these conditions, PR’s recovery is like running into a 40-mile-an-hour headwind. Hard choices are still ahead.

The Puerto Rico economy, once again, finds itself at a crossroad. This time, however, the decisions adopted could have deep and lasting consequences and will depend on four issues.  First, how much of Puerto Rico’s appropriated funds under the $787 billion federal economic stimulus package, an estimated $5.0 billion, can be spent under local discretion. Secondly, the government’s fiscal accounts continue to be in an extremely delicate situation.  The cash-flow deficit in fiscal 2009 is staggering. The third issue is the government’s willingness, and political clout, to significantly cut fiscal spending, particularly to reduce the government payroll. Finally, no long-term economic development initiative has yet been put forward. Find out how these policy questions will determine output growth in Puerto Rico in the short and medium term.

The economic downturn in the US is halting growth in the rest of the world. This negative shock has affected adversely consumption and retail sales in the US mainland. PR is in its 3rd year of recession but retail sales appear not to have performed as negatively as in the US. Consumers in the island appear to be resilient and some retailers have expanded while other new retailers have started operations in the island. Credit tightening adversely affects consumer spending so this must be resolved if retail sales and consumption are to resume growth in the short run. Find out what happened to retail sales during fiscal 2008 and what is forecasted for fiscal 2009 and 2010. The presence of certain megatrends provides important insights about the changing Puerto Rican marketplace.

As reported previously, the two main problems of the current financial crisis are mortgage-backed securities and credit default swaps. This triggered a massive and coordinated worldwide response. By mid-October, central banks throughout the world had implemented different measures to counter the ongoing situation including loan guarantees, bank nationalization, interest rate reductions, foreign currency sell-offs, and direct liquidity injections. The US Emergency Economic Stabilization Act (EESA), signed into law on October 3rd, designed several programs to be financed with taxpayers’ money.  In principle, the total value of the rescue package is $700 billion although the overall rescue effort could easily topple more than $2 trillion. Some banking institutions in PR could benefit directly from some of these programs. Find out what these plans are and how the crisis could affect us in 2009.

The world is going through its worst economic crisis in seventy years. The burst of the real estate bubble has already become a volcano eruption that is cracking the foundations of top financial institutions across the world. Even those who predicted the crisis have been baffled by its magnitude. Financial packages, bailouts, and rescue efforts have all failed to halt the lava that is mercilessly engulfing banks, investment companies, and even entire countries. This month’s newsletter reviews the economic events that led to the outbreak of this crisis, an event that is already a milestone in world’s economic history. This is a necessary step to understand what Puerto Rico should expect next year. Don’t miss Part II next month.

The winds of globalization are blowing harder and carving a new world. Foreign trade, formerly dominated by goods, is now featuring an unstoppable boom of services. Emerging and developing countries are fiercely fighting to excel as services exporters whether as R&D and financial centers, tourist destinations, or maritime ports, among others. The challenge has reached the shores of Puerto Rico and the island cannot dismiss it. With manufacturing faltering and agriculture on the brink of extinction, exporting services is a must for Puerto Rico. It is time to assess how the island can pull off this test and join the club of successful service exporters. Find out what is happening with services around the world and in Puerto Rico.

An important decision will take place next month in Puerto Rico. The upcoming general election could end gridlock between the legislative and executive powers. But will this be enough to restore growth in a weak economy? A US economic downturn is also affecting our economy. The island faces a saturated housing market, high unemployment, and low levels of growth. The principal challenge for the next 4 years will be the recovery of the island economy. Are all contenders’ proposals strong enough to restore growth in the long run? Or are they just proposing weak policies to mitigate short run problems while they are elected? This issue reviews the economic platforms of the four political parties in this election. Find out if their proposals address growth of our economy.

After a stormy and protracted debate, Puerto Rico finally unveiled a new industrial incentives law, effective July 1st, 2008. This was particularly important not only for the extension of industrial tax and other incentives for local and non-local businesses on the island but because it provided some certainty in a business environment pressed by recession and gridlock politics. The Puerto Rico economy achieved high rates of real economic growth from 1948 to 1973. Since then, it has been searching for growth. Will the new law be enough to compete globally? Will it boost local companies into exports? Find out whether the new law is a small step in the right direction to promote sector-specific activities where Puerto Rico could become competitive by world standards.