NEW YORK — Hurricane-induced economic turmoil in Puerto Rico and the U.S. Virgin Islands is not likely to be as severe or long-lasting as the financial damage New Orleans suffered after Hurricane Katrina, even though tens of thousands of residents have fled the islands, creating uncertainty about their financial future, economists at the Federal Reserve Bank of New York said Thursday.
With the economies of Puerto Rico and the Virgin Islands in tatters even before the September storms, William C. Dudley, president of the Federal Reserve Bank of New York, said local recovery efforts have been “severely hampered” by their governments’ inability to access additional debt.
But about five months after Hurricane Irma skirted the Virgin Islands and Hurricane Maria devastated Puerto Rico, Dudley said there are signs that the local labor market is stabilizing.
“As repair and rebuilding efforts get underway in both Puerto Rico and the U.S. Virgin Islands, jobs are being created in sectors such as construction,” Dudley said. “These job gains are expected to continue for some time to come.”
Since September, Puerto Rico has lost 4.2 percent of its jobs while employment in the Virgin Islands has dipped 9.4 percent, according to data presented by Jason Bram, a Federal Reserve Bank research economist.
After Hurricane Katrina flooded 80 percent of New Orleans in 2005, that metropolitan area suffered a 29.7 percent reduction in the job market, Bram noted.
The losses in Puerto Rico and the Virgin Islands “are considerably steeper than after most major hurricanes that have hit the United States,” Dudley said. “However, they are not as devastating as Katrina’s impact on the New Orleans economy more than a decade ago, which was and remains unprecedented.”
Federal Reserve economists noted that in Puerto Rico, overall post-storm job loss remains just slightly higher than the 3.3 percent job loss rate experienced in New York after the 2008 financial crisis and recession. They caution that Federal Reserve data does not take into account the so-called “informal economy,” which is believed to be significant on both islands.
Despite continued widespread job losses in the hospitality industry, both Puerto Rico and the Virgin Islands already are seeing small gains in construction jobs compared with August, Bram noted. Puerto Rico has regained 1,000 jobs related to professional and business services.
Another key recovery indicator being closely tracked by Federal Reserve economists — nighttime light usage — also is showing signs of rebounding.
Using satellite imagery from the National Oceanic and Atmospheric Administration, Bram estimates that Puerto Rico had recouped three-fourths of its nighttime brightness by January, four months after the storm. The brightness of the Virgin Islands nighttime sky was about 56 percent of pre-storm levels, he said.
The big unknown on both islands is whether the residents who left after the hurricanes will return and, if they don’t, how that will impact recovery efforts. The population of both islands was steadily falling in the years leading up to the hurricanes; Puerto Rico’s population, for example, had declined 12 percent since 2006.
On top of that, citing Department of Transportation airport passenger data, Bram said Puerto Rico experienced a net outflow of 220,000 people in the 12 months leading up to November. That was about 160,000 more people than had been leaving the island each year prior.
In the Virgin Islands, which had a population of about 103,000 before the storm, the net annual outflow through November totaled about 10 percent of the population.
“It still is unclear how many will return once circumstances improve,” Dudley said.
If residents do not return in large numbers, Dudley said the ability of both islands to pay off debt and pay for reconstruction could be severely constricted.
Puerto Rico, saddled with $73 billion in debt, declared a form of bankruptcy in May that has left creditors wondering whether they ever will be able to recoup their loans. The fiscal crisis follows a decade-long recession, including a 15 percent drop in the territory’s gross domestic product since 2006.
In 2016, President Barack Obama and Congress approved the Puerto Rican Oversight, Management and Economic Stability Act, which included the creation of an independent financial oversight board.
The Virgin Islands has about $2 billion in debt. On Jan. 31, Moody’s Investor Service said that the territory is likely to default and that its employee pension system will be insolvent by 2023.
Dudley said both islands will have to face “painful” financial adjustments that “will undoubtedly be unpopular” with residents. But Dudley cited two cities — New York City and Washington, D.C. — as examples for how reforms and fiscal control boards can help distressed localities rebound relatively quickly once tough decisions are made.
“While Puerto Rico’s path to prosperity will not look exactly like that of New York or other cities, history can provide valuable lessons, as well as hope for a better future,” Dudley said.