[Editor's Note: The following post is excerpted from remarks made by William C. Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York on April 1, 2011.]
Remarks at E-3 Summit of the Americas: Export Trade Basics Forum 101, San Juan,Puerto Rico (Excerpt details the economic conditions in Puerto Rico.)
Now let me turn to economic conditions in Puerto Rico. In contrast to the situation during my last visit, I am pleased to see signs that the Commonwealth may finally be emerging from this painful recession. Nevertheless, conditions remain difficult for many families.
The recession here has been deeper than the downturn on the mainland. By mid-2010, total employment in Puerto Rico had fallen by 13 percent or 138,000 jobs from its peak in 2005. This is almost double the 7 percent job loss on the mainland from the employment peak to its trough. Furthermore, the recession in Puerto Rico has lasted about five years—three times as long as the mainland downturn. The recovery has also lagged that of the mainland. While the mainland’s economy began to recover in mid-2009, Puerto Rico’s economy continued to decline for another year.
But, since mid-2010 there have been promising signs: Recently released revisions suggest that job growth on the island, while still very weak, improved modestly since last summer. And most of the weakness since then has not been broad-based, but instead concentrated in construction and manufacturing. The unemployment rate has come down by a full percentage point since its peak. However, at just over 16 percent, it remains unacceptably high.
Inflation generally remains subdued on the Commonwealth—although there has been some recent volatility. After a period of falling prices in 2009, inflation picked up in December 2009 with annualized rates of around 4 percent for a few months—with medical care a key driver for these increases. Since June 2010, reported inflation rates have reverted to a range between 1 percent and 2 percent. However, the rise in food and energy prices is likely to push inflation somewhat higher over the next few months.
To help keep track of conditions in Puerto Rico, we can now look at the Institute of Statistics’ new Manufacturing Purchasing Managers Index (PR-PMI), which is conducted in conjunction with the Puerto Rico Manufacturers Association and Scotiabank. The survey shows that business conditions on the island were steady in January, following improvement at the end of 2010. The PR-PMI has signaled growth for seven of the past nine months. It will take some time before this new index has a clear track record, but we welcome this source of timely information on economic activity in Puerto Rico.
Now, what about credit conditions in Puerto Rico: how much debt do families have and how have they been doing in terms of meeting their obligations? I needn’t tell you how important it has been to monitor these trends over the course of the Great Recession. Using a new source of information—the New York Fed’s Consumer Credit Panel—we can now track how families in the mainland and Puerto Rico have managed their credit in recent years.
Overall, compared with the mainland, Puerto Ricans avoided much of the recent boom and bust in the use of household credit. Yet, signs of distress are readily apparent, owing to the long and deep recession here. Unlike the mainland, households on the island did not raise their borrowing much in the run-up to the recession. Thus, it is not surprising that Puerto Rico did not see the sharp spike in loan delinquencies that many areas saw from late 2007 to early 2009. Instead, Puerto Rico’s delinquencies on household debt—that is, the proportion of debt where payments are 90 or more days late—have risen gradually as the recession has persisted. In 2005, households were behind on about 5 percent of the total debt. As of 2010, they were delinquent on about 9 percent of the debt, about the same as the national average—reflecting the stress imposed on many families by the deep and long recession.
The Outlook and ExportsLooking ahead to the rest of 2011, I see grounds for cautious optimism. In particular, exports, which have been so important to the economic recovery on the mainland, have the potential to contribute to growth here in Puerto Rico as well.
Currently, Puerto Rico runs a sizable, trade surplus, selling more products to the world than it buys. In 2009, the latest year for which full-year data are reported, the value of exports was roughly $60 billion compared with roughly $40 billion of imports. Based on data through November, exports grew briskly, by about 10 percent, in 2010.
What does Puerto Rico export? Pharmaceuticals are by far the island’s largest export. In addition, Puerto Rico is a successful exporter of medical equipment, computer and electronic products, and electrical equipment.
The mainland is Puerto Rico’s primary trading partner, accounting for half of the island’s imports and three-quarters of its exports. There are many reasons for this. While Puerto Rico interacts with many other economies, for generations the mainland United States and Puerto Rico have had a special multifaceted economic relationship. One of the most obvious of these ties is the free flow of goods between the mainland and the island. Another link is our common use of the dollar. This means that tourists from the mainland can visit without worrying about changing currencies. In addition, businesses can make long-term investments in Puerto Rico without worrying that currency fluctuations against the dollar will undermine their competitiveness.
The island runs a surplus with the mainland that accounts for much of the island’s overall surplus. So the signs of a further pickup in economic growth on the mainland bode well for the island.
Puerto Rico’s export markets also extend overseas. Aside from the U.S. mainland, the top export markets for the Island are Germany, Netherlands, Belgium and Spain. Exports to these four countries combined exceeded $11 billion in 2009 and have grown by more than 30 percent since 2007.
The success that Puerto Rico has in selling its goods and services to industrialized countries bodes well for the island’s future. As more emerging economies narrow the gap between themselves and the more developed countries, the market for Puerto Rico’s goods could well expand accordingly. Going forward, I would not be surprised to see Puerto Rico’s exports rise further as your companies take advantage of the opportunities presented by the rapidly emerging economies.
At your upcoming forum and summit, you’ll learn more about how to develop export markets for your products. I applaud your efforts to do so, as an important component of sustaining the vigor of the economic recovery in Puerto Rico.
The Long View and the New York Fed’s Role Although the signs I’ve mentioned suggest that the recession is over, the road to sustained economic growth is likely to be challenging in the near term.
In its favor, Puerto Rico has some important intrinsic advantages. These include natural beauty, a hospitable climate and unique status as a major U.S. economic and population center in the Caribbean. Perhaps just as important, the island has a relatively well-educated workforce. Research shows quite convincingly that abundant human capital is an important ingredient for a thriving economy.
We at the New York Fed aim to do our part to help sustain growth in the Commonwealth. For example, we co-sponsor a financial awareness video competition for college students here and the Community Reinvestment Act Week activities with the Puerto Rico Bankers Association. And, as a member of the Alliance for Economic and Financial Education we promote economic and financial education via teacher training, a high school economic competition, and a speaker series. The New York Fed also has several ongoing programs of technical assistance in Puerto Rico. We partnered with other organizations throughout the year to help provide technical training for community development professionals. We cover the costs of two to three professors who are engaged in macroeconomic and monetary policy research to attend our annual symposium on current economic conditions held at the New York Fed.
We also recognize that a healthy banking system and accurate economic statistics are both important components of a favorable business climate. To improve our understanding of the Puerto Rican economy, the New York Fed joined a group of local businesses to sponsor and fund a household survey, undertaken by the Center for the New Economy to benchmark Puerto Rican consumer finances. To help businesses and government in Puerto Rico, we have also been providing technical assistance to Puerto Rico’s new Institute for Statistics in launching the new monthly manufacturing survey I mentioned earlier. We applaud this and other efforts to improve the measurement of economic conditions in Puerto Rico.
As a financial regulator, the New York Fed works to help the financial system run smoothly so that it can support economic growth. We are working hard to prevent the type of financial crisis that we recently experienced from recurring in the future, in a way that does not inhibit businesses from growing and prospering.
We are working closely with all of the banking supervisors and other key parties to facilitate an effective resolution to the problems facing the island’s banking sector. Last year, some of Puerto Rico’s banks were consolidated and many improved their balance sheets by selling underperforming assets. Both of these steps are likely to produce stronger, healthier institutions more able to make the sound lending decisions that support economic growth.
All of these activities, ranging from effective monetary policy and prudent financial regulation to fostering economic literacy and measurement, complement and reinforce each other to help support a strong economy in Puerto Rico.
To sum up, the mainland economy experienced a pick-up in activity during the second half of 2010 that shows signs of continuing in 2011. The recovery in Puerto Rico has taken longer to get off the ground, but now shows signs of firming. On the mainland and in Puerto Rico, unemployment remains stubbornly high, but many indicators suggest that conditions are in place for stronger employment growth in the coming months.
With government and business leaders like yourselves working together to build a better future for Puerto Rico, I am hopeful that we will soon be able to look back at 2010 and see not only the end of the island’s long recession but also the beginning of an era of growth and prosperity for Puerto Rico.