Leading economists in Puerto Rico agree with their professional counterparts in the U.S. mainland that warning signs are on the horizon for a slowdown in the stateside economy. The good news is that the island would be shielded by the release of some $8.2 billion in federal reconstruction funds.
“The old tried and true indicator of trouble brewing is the inversion of the yield curve that is in fact what is happening now. The problem is that in the last few years, the economy has responded to factors that have transformed the traditional way of looking at trends,” said José Joaquín Villamil, who spoke on behalf of the Puerto Rico Manufacturers Association as its in-house economist.
“Whereas one could state with a certain degree of confidence that financial markets drove the economy, it is beginning to look as if it is now the economy that drives markets and the economy responds to events such as the trade war, Brexit, etc.,” he added.
“However, the contraction would have to be substantial to offset the impact of federal reconstruction funds coming to Puerto Rico. Even if these take longer to be disbursed and come with strings attached, they will have a positive impact and offset any slowdown in the U.S. economy,” he said. Villamil was referring to the second tranche of federal reconstruction funds—$8.2 billion—that has been held up in Washington, D.C. due to concerns of corruption in Puerto Rico.
Among the warning signs on the horizon include the Trump administration’s trade war with China, a messy Brexit for the United Kingdom and the uncertainty of President Trump himself. On the positive side, retail sales in the U.S. remain strong, as are unemployment figures.
But the markets are reacting more to the negative signs and hence, the inverted yield curve has reared its ugly head. In a regular yield curve, short-term rates are lower than long-term rates.
During an inverted yield curve, the reverse occurs, short-term rates are higher than long-term rates. In economic terms, if investors think that the economy will take a downturn and the Federal Reserve will lower interest rates, investors will demand long-term bonds in order to lock-in the interest rate now. In other words, they want to lock-in interest rates on long-term bonds because they believe the rates will go down.
“A downturn is probable. Whether it becomes a recession measured as two consecutive quarters with contraction is too early to state. The main difference is that a slowdown may not be a contraction but a slowing growth,” Villamil said.
Fellow economist Juan Lara agreed. “Yes, there is a good chance of a recession in 2020. The yield curve is inverted, which almost always means a recession within the following year. In addition, [this economic] expansion is already record long and unemployment is so low that it may cause inflation to start rising again. This why the markets are so jittery,” he said.
Lara said the recessionary impact could be felt in the island’s tourism and manufacturing sectors, while the post-Hurricane Maria recovery could be slowed down. “A recession there [the U.S. mainland] would guarantee a recession here… but the silver lining could be a Trump reaction with expansionary fiscal spending, which could loosen the knot on federal reconstruction funds for us.”
“There is a risk of global recession and we are seeing financial variables very similar to what happened in [the global crisis of] 2008,” said Heriberto Martínez, the incoming president of the Puerto Rico Economists Association.
Before the crisis, Spain had an unemployment rate of less than 8 percent and experiencing growth of 4 or 5 percent, he indicated. But it was mainly due to a construction and housing bubble, and the red flags of warning were ignored until the market exploded, he noted.
Since 80 percent of the island’s exports go to the U.S. mainland, this sector could be hurt in a stateside economic downturn, Martínez said.
For José E. Ledesma, president of the Puerto Rico Chamber of Commerce, the key factor is the federal government releasing the $8.2 billion for the island. “We need that stimulus as a buffer,” he said.
Ledesma also does not foresee a downturn in the tourism sector should there be a slowdown in the U.S. economy. “Our tourism sector is stable and solid, even during the low season,” he said, noting that many visitors come from Florida, and with so many family connections on the island, he does not see a slowdown in that area.