Economist: Island recession not consumption-driven
The recession that has affected Puerto Rico’s economy for the better part of the last eight years has not been consumption-driven, but has been the worst in terms of consumption deceleration, especially in the area of durable consumption, an analysis by economist firm H. Calero Consulting Group Inc. concluded.
“Federal transfers and presumably the informal economy have maintained consumption levels in recent years. The trends that are foreseeable today will very probably have an impact on consumer behavior. Due to this, retailers need to take a ‘more global’ view in competing for disposable spending power,” according to the findings exposed in the firm’s “Economic Pulse” newsletter.
Consumer spending is a fundamental determining factor in business cycles and downturns can undermine and economy and its prospects for recovery.
Consumption is also a measure of the set of socioeconomic conditions that underlie consumer behavior, such as job opportunities, migration, price fluctuations, access to credit, and financial stability.
“The level of uncertainty in the Puerto Rico economy and society is currently high. There is nothing to indicate that the current crisis will change quickly,” the firm noted.
In its analysis, H. Calero Consulting plotted real consumption during the current recession next to the past three recessions that have occurred in Puerto Rico since the early 1970s. Unlike the 1975 busts when consumption fell dramatically at the start of the recession, during the current recession, it did not fall during the first years, followed by a fall in the third year, recovery from the sixth year. Finally, the recession of 1982-1983 had the best recovery in terms of consumption, the firm noted.
“Trends in total consumption mask considerable heterogeneity in the behavior of its three components of consumption: durable goods, non-durable goods, and services. Spending on durables falls substantially, while the fall in nondurable spending is more moderate, and spending on services remains flat,” the economist firm stated.
Compared with the recession of 1982-1983, the falloff in consumption was unusually broad, affecting not just the consumption of durable goods but also that of non-durable and services. The decline has also proven to be remarkably long lasting in comparison to declines in prior recessions. Among durables, from 2006 to 2013, car sales dropped 23 percent and new house sales plunged 76 percent.
“In the U.S., the associated drop-off in consumer confidence was serious. There is no consumer confidence index in Puerto Rico but a reduction in durable consumption and the ongoing migration constitute proof of consumers’ lack of confidence in the Puerto Rican recovery,” the firm found.
“Worse yet, individual perceptions of economic deterioration in Puerto Rico were widespread, with no income, age, or racial group spared, even though each was affected in different ways,” the study noted. “Consumers have to learn how to handle their limited resources economically. They have to constantly reset their priorities, and must increasingly coordinate their longer-term commitments.”
Meanwhile, personal disposable income and consumption in the U.S. declined during the 2008-09 recession, it maintained a steady growth in the island, due to increases in federal transfers and the informal economy. Federal transfers coming from Medicaid, Social Security, scholarships, housing and nutritional assistance, as well as unemployment insurance all reflected increases between 2006 and 2013.
“Contrary to the U.S. where these transfers benefit a small share of the households at the lower end of the income distribution, in Puerto Rico more than 50 percent of the population receives some type of public assistance,” the study noted, adding that the dependence on federal transfers has maintained consumption in recent years.