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Soft Landing Or Crash Landing For P.R. Economy?

by Lance Oliver

September 1, 2000
Copyright © 2000 THE PUERTO RICO HERALD. All Rights Reserved.

In the 50 states, Federal Reserve officials are trying to engineer a "soft landing" that will allow the economy to continue its unprecedented expansion without overheating and causing inflation. Signs of softness are showing up in the Puerto Rico economy as well, but since it was never flying as high as the U.S. economy, any "landing" at all may not feel all that soft.

With the end of the fiscal year behind us, indicators of the island’s economy are beginning to trickle in. While the final figure on economic growth has yet to be revealed, local economists agree it will be below last year’s 4.1%, which itself was the highest in several years and was artificially boosted by insurance payments and federal aid in the wake of Hurricane Georges.

Predictions of 2% to 3% growth are among the most optimistic projections issued by local economists.

At least some economists are pointing out that Puerto Rico is not only lagging behind the United States in economic growth, but allowing Caribbean neighbors to gain ground. The Chamber of Commerce recently noted that the Dominican Republic’s economy has grown 8.3 percent annually over the past four years, well beyond Puerto Rico’s growth. While it started out far behind, it is catching up and represents competition for services such as transshipment, telecommunications and tourism.

One potential brake on the island economy is the price of oil. Puerto Rico is dependent on oil for electricity generation and to keep its 1.6 million automobiles rolling, or at least idling while they sit in the ubiquitous San Juan rush hour "tapones."

Crude oil prices have doubled in the past year as worldwide production has lagged consistently behind demand. Puerto Rico imports approximately 75 million barrels of fuel per year, roughly equal to one day of the entire world’s output.

Analysts at Banco Popular estimated that the increase in oil adds $95 million in expenses each month for Puerto Rico consumers and businesses.

Gasoline and electric energy costs were primary causes for the increase registered in the local Consumer Price Index. The index in July showed a 5.9% increase over the same month last year. The category including electricity shot up 19.8% and transportation costs rose 11.2%, according to the Planning Board.

These higher costs must be offset somewhere. Figures show that car sales, for example, are flat this year. Though the number of vehicles on the road inched upwards, new registrations actually declined slightly in the first part of 2000, compared to previous years.

Retail spending appears to be one area where consumers are cutting back to make up for higher expenses in energy costs and also to offset the negative savings rate that existed last year. Consumer debt has stopped its growth curve of the late 1990s and even bankruptcy filings, a grim indicator of families in over their heads, showed a slight decrease earlier this year.

Another unknown factor in predicting the future course of the Puerto Rico economy is the effect (or lack of effect) of Hurricane Debby, not to mention any other storms that still could come along during the remainder of the hurricane season.

Some economists estimated that Debby’s disruption of business would cost the island about $550 million in lost production, property damage, spending by the government on emergency services and emergency spending by individuals.

Others disagree, however, saying that the storm will not have a material effect. The one lost day of production can be made up gradually over a course of a few weeks by most manufacturing operations, say some economists. While some retail outlets saw a boom in sales prior to the storm, particularly in non-perishable food, bottled water and hardware and supplies, those stores will experience a drop-off in sales as a result of people stocking up and the end results will roughly balance out. The only discrepancies may be where some people bought an electric generator, for example, and have spent less on back-to-school supplies and clothes as a result.

While inflation may be the fear in the United States, with its lowest unemployment rates in generations, Puerto Rico continues to face age-old problems of unemployment, still stubbornly in double digits, and the prospect of a shrinking rate of participation in the labor force, which means that unemployment would be even worse except that some people have just given up.

A "soft landing" may be the dream for a high-flying economy, but with far less airspeed to carry it forward, the Puerto Rico economy is more worried about a crash landing.

Lance Oliver writes The Puerto Rico Report weekly for The Puerto Rico Herald. He can be reached by email at:

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