Puerto Rico & the US Virgin Islands in the

Aftermath of Hurricanes Irma and Maria Jason Bram, Officer Research Economist

Presentation to Community Advisory Group

June 21, 2018

The views expressed here are those of the presenter and do not necessarily represent those of

the Federal Reserve Bank of New York or the Federal Reserve System.

Overview • Economic & fiscal conditions in Puerto Rico and US Virgin

Islands (USVI) were poor even before hurricanes Irma & Maria.

• Puerto Rico’s economic downturn began in 2006; the USVI

began a few years later.

• We look at a variety of indicators to help gauge the hurricanes’

effects on these areas’ economy and outlook.

• Despite widespread devastation, the Puerto Rico economy has

shown some signs of resilience; the USVI less so.

• While the main focus here is on economic effects, it’s important

to note that the storms took a great toll in terms of loss of life,

physical destruction, health issues, and widespread suffering.

FEDERAL RESERVE BANK OF NEW YORK 1

• The economy had already been in decline for over a decade.

• Public debt in 2016 was roughly 100% of GNP.

• The Island had defaulted on debt payments and could no longer borrow.

• U.S. Congress implemented PROMESA in 2016 to restore long-term

economic growth and fiscal balance, creating a fiscal oversight board and

a bankruptcy-like process.

FEDERAL RESERVE BANK OF NEW YORK 2

Puerto Rico Economic & Fiscal Conditions Indexes of Economic Activity, Employment, and Population

80

85

90

95

100

105

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Population

Real GNP

Employment

Since 2006:

• Population down 12%

• Employment down 16%

• Real GNP down 15%

Sources: U.S. Bureau of Labor Statistics, U.S. Census Bureau, Planning Board of Puerto Rico, and Moody’s Economy.com.

Index (2006=100)

Puerto Rico Economic & Fiscal Conditions Payroll Employment, Thousands of Jobs, Seasonally Adjusted

3 Source: U.S. Bureau of Labor Statistics, Moody’s Economy.com, and FRBNY staff calculations (early benchmark).

600

620

640

660

680

700

720

740

760

180

200

220

240

260

280

300

320

340

2001 2003 2005 2007 2009 2011 2013 2015 2017

Government (right scale)

Private-Sector (left scale)

2002 2004 2006 2008 2010 2012 2014 2016 2018

Post Maria

Post Maria

Section 936

Phased out

May

Thousands (Private-Sector) Thousands (Government)

Puerto Rico Economic & Fiscal Conditions Medical Cluster Employment, 12-Month Moving Average

4 Sources: U.S. Bureau of Labor Statistics (QCEW) and Moody’s Economy.com

0

5

10

15

20

25

30

35

40

45

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Thousands

Medical Equipment and Supplies

Pharmaceuticals

Diagnostic Labs

Section 936

Phased out

USVI Also Weak Well Before Irma & Maria Indexes of Economic Activity, Employment, and Population

5 Source: U.S. Bureau of Labor Statistics, USVI Bureau of Economic Research, World Bank, and Moody’s Economy.com.

70

75

80

85

90

95

100

105

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Index (2006 = 100)

Population

Real GDP

Employment

Since 2006:

• Population down 4%

• Employment down 15%

• Real GDP down 27%

Initial Impacts of the Storms

6

Fallout on Puerto Rico

• Physical damage and loss of life - More than 1,000 deaths have been attributed to the hurricane in Puerto Rico, with

estimates ranging from roughly 1,050 to 4,600.1

- Many homes and businesses were severely damaged.

- Major damage to water, telecom, transportation, and power infrastructure.

- Widespread agricultural devastation—80% of crops destroyed in Puerto Rico.2

• Population loss - Air passenger data through March suggest that 175K residents left Puerto Rico after

Maria and had not returned, exacerbating the islands’ ongoing population decline.

- It remains to be seen how many of these migrants will return in the months ahead.

• Economic disruption - In the first few weeks, there were widespread power and telecommunications outages,

fuel shortages, and transportation blockages.

- Many areas went without electricity and running water for months.

- Economic activity fell sharply in September and October but subsequently rebounded.

7

1) “Estimates of excess deaths in Puerto Rico following Hurricane Maria” Alexis Santos & Jeffrey T. Howard (Dec. 2017)

https://osf.io/preprints/socarxiv/s7dmu

“Mortality in Puerto Rico after Hurricane Maria” (New England Journal of Medicine, May 2018)

https://www.nejm.org/doi/full/10.1056/NEJMsa1803972

2) Attributed to Carlos Flores Ortega, Secretary of Agriculture for Puerto Rico

FEDERAL RESERVE BANK OF NEW YORK

Population Loss After the Storms Net Domestic Passengers to Puerto Rico, 12-Month Rolling Sum

8 Note: Airports are Luis Munoz Marin Intl Airport in San Juan, Mercedita Intl Airport in Ponce, and Rafael Hernandez Intl Airport in Aguadilla. Source: U.S. Bureau of Transportation Statistics and FRBNY staff calculations.

Sep

-300

-250

-200

-150

-100

-50

0

50

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Thousands

Puerto Rico Net Airline

Passengers

U.S. Census Net PR Migration 2011-2016 Annual

Dec

Mar In the 12 months ending March, a

net of 180,000 domestic air

passengers left the island (roughly 125,000 above existing trend)

Assessing Damage and Recovery:

Nighttime Lights

• Research1 shows that nighttime lights can serve as a proxy for

economic activity, though the relationship is not one-to-one—

particularly during a power outage.

• In Puerto Rico, nighttime light images can be used to gauge the

loss and subsequent restoration of power after the storms—which

localities were most affected, and how quickly they recovered.

• In the US Virgin Islands, where power was restored more quickly,

nighttime lights can provide some indication of the reduction in

economic activity.

FEDERAL RESERVE BANK OF NEW YORK 9

1) “Newer Need Not be Better: Evaluating the Penn World Tables and the World Development Indicators Using Nighttime

Lights” (Maxim Pinkovskiy and Xavier Sala-i-Martin, 2016) http://www.nber.org/papers/w22216

10 Source: Earth Observation Group; NOAA National Geophysical Data Center.

Nighttime Lights in Puerto Rico and USVI

August

San Juan

Ponce

Arecibo

Mayaguez

Caguas

St. Thomas

St. John

St. Croix

December

San Juan

Ponce

Arecibo

Mayaguez

Caguas

St. Thomas

St. John

St. Croix

October

San Juan

Ponce

Arecibo

Mayaguez

Caguas

St. Thomas

St. John

St. Croix

April

San Juan

Ponce

Arecibo

Mayaguez

Caguas

St. Thomas

St. John

St. Croix

Source: Authors’ Calculations; Earth Observation Group; NOAA National Geophysical Data Center.

11

April Nighttime Lights Brightness as a Percentage of August Baseline

BRITISH VIRGIN

ISLANDS (not calculated)

Less than 50%

50% - 60%

60% - 70%

70% - 80%

80% - 90%

More than 90%

Ponce

Mayaguez

San Juan

Caguas Aguadilla Humacao

Vieques

Culebra

Arecibo

U.S. VIRGIN ISLANDS

St. Croix

St. Thomas

St. John

As of April 2018, Puerto Rico on the whole

is 91% as bright as the August baseline. And

the U.S. Virgin Islands are 82% as bright.

PUERTO RICO

Economic Outlook

After the Storms

12

How Does This Compare to Other Disasters?

• Economic effects of natural disasters share some common

elements: - Economic disruptions tend to be severe for 1-2 months but then dissipate.

- Typically tourism-related industries are the most adversely affected.

- Subsequently, economic activity is boosted by clean-up, restoration, and

reconstruction efforts.

- Insurance payouts and federal aid further buoy spending and investment.

- In considering how Puerto Rico’s economy might be affected in the longer

run, this history can be a useful guide.

• Still, this disaster has unique features that complicate

comparisons with other natural disasters.

- The power outage has lasted much longer than after past disasters. - Puerto Rico’s dire fiscal situation before the storm is unprecedented.

- These and other issues make it harder to predict Puerto Rico’s prospects.

- The US Virgin Islands’ dependence on tourism likely prolonged the slump.

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How Does This Compare to Other Disasters? Local Job Loss Following Natural Disasters, from Onset to Trough

+0.0%

-0.1%

-0.3%

-0.5%

-0.9%

-1.3%

-1.3%

-2.3%

-5.8%

-6.2%

-11.7%

-9.4%

-29.7%

Andrew-Metro Miami (Aug1992)

Blizzard-Philadelphia Metro (Jan1996)

Hugo-Puerto Rico (Sep1989)

Georges-Puerto Rico (Sep1998)

Harvey-Metro Houston (Aug2017)

Sandy - NY/NJ Coastal Counties (Oct2012)

Irma-Florida (Sep2017)

Ivan-Pensacola (Sep2004)

Maria-Puerto Rico (Sep2017)

Marilyn-US Virgin Islands (Sep1995)

Maria & Irma-US Virgin Islands (Sep2017)

Hugo-US Virgin Islands (Sep1989)

Katrina-Metro New Orleans (Aug2005)

For context, during the

Great Recession,

NYC saw a 3.3 percent

job loss over the

course of 10 months

Source: U.S. Bureau of Labor Statistics, Haver Analytics, and Moody’s Economy.com. 14

Employment Paths Post Hurricanes Index (Month Before Hurricane = 100)

Source: U.S. Bureau of Labor Statistics, Moody’s Economy.com, and FRBNY staff calculations.

15

70

80

90

100

110

-12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

New Orleans (Katrina – Aug 2005)

U.S. Virgin Islands (Hugo – Sep 1989)

U.S. Virgin Islands (Marilyn – Sep 1995)

Puerto Rico (Maria – Sep 2017)

U.S. Virgin Islands (Irma/Maria – Sep 2017)

Index (Month Before Hurricane = 100)

Months Before Hurricane Months After Hurricane

Components of Job Loss by Sector: PR Thousands of Jobs Lost Since Aug. 2018 (Before Maria)

Source: U.S. Bureau of Labor Statistics, Moody’s Economy.com, and FRBNY staff calculations.

16

-60

-50

-40

-30

-20

-10

0

Aug17 Sep17 Oct17 Nov17 Dec17 Jan18 Feb18 Mar18 Apr18 May18

Government

Restaurants & Bars

Retail

Accommodation Thousands

2.2%

Drop

Components of Job Loss by Sector: USVI Thousands of Jobs Lost Since Aug. 2018 (Before Irma & Maria)

Source: U.S. Bureau of Labor Statistics, Moody’s Economy.com, and FRBNY staff calculations.

17

-5

-4

-3

-2

-1

0

Aug17 Sep17 Oct17 Nov17 Dec17 Jan18 Feb18 Mar18 Apr18 May18

Thousands

Government

Restaurants & Bars

Retail

Accommodation

Other Private

9.8%

Drop

Assessing the Economic Fallout

• Initial job losses in Puerto Rico (6%) and especially in the USVI

(11%), though far less severe than after Katrina, were still

substantial.

• The USVI’s economy has been much slower to recover than

Puerto Rico’s, largely due to its dependence on tourism.

• Some businesses and homes had backup power, which may have

helped mitigate the economic effect somewhat.

• The job loss may understate the true economic cost because:

- At least some of those still employed likely suffered a drop-off in income.

- There may be additional unmeasured effects on the informal economy.

- We do not account for the value people place on quality-of-life issues.

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Conclusions

• Hurricanes Maria and Irma were overlaid onto already weak

economies, raising concerns about longer-term prospects for both

territories.

• Despite widespread devastation and the dire situation before the

storms, Puerto Rico’s economy has shown signs of resilience.

The Virgin Islands’ economy has been more adversely affected.

• Looking ahead, Puerto Rico’s recovery will likely be affected by

the degree of out-migration, external aid, fiscal & other reforms.

• Some redesign & investment in the electricity and water

infrastructure grid also has sizable potential benefits.

• USVI’s recovery will likely be affected by how well the tourism

infrastructure is restored and how quickly visitors return.

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