Today, the Bureau of Economic Analysis (BEA) released prototype annual estimates of gross domestic product (GDP) for Puerto Rico for 2012 to 2018. This release represents another major step by the Bureau to develop comprehensive economic accounts for Puerto Rico that are consistent with international guidelines and that are directly comparable to data for other states and countries.[1] In conjunction with this release, BEA is requesting feedback to refine the data sources and methods used to prepare these statistics. 

The prototype estimates showed that the Puerto Rico economy, as measured by inflation-adjusted (or "real") GDP, expanded from 2012 to 2014, before turning down in 2015 and continuing to decrease through 2018. As shown in Chart 1, exports of goods and services was a key contributor to changes in real GDP over this period.

Within exports and imports of goods and services, much of the volatility reflected trade in intellectual property (IP) intensive goods, including pharmaceuticals and organic chemicals and medical and scientific equipment and appliances. In Puerto Rico, subsidiaries of large nonresident multinational enterprises operate within the industries engaged in the manufacturing of the goods listed above. To shed light on the impact of their activities on Puerto Rico's economy, this release includes an analysis of GDP that removes the exports, imports, and inventory investment associated with select IP-intensive industries. This analysis is described in the box on page 9. 

The statistics released today incorporate the most up-to-date methods and data available to BEA. More information on the methodologies and data sources that underlie the estimates is available in the Summary of Methodologies: Puerto Rico Gross Domestic Product file on BEA's Web site. 

Gross domestic product

GDP measures the value of goods and services produced within the geographic borders of a region in a given period, regardless of who owns the factors of production. Puerto Rico GDP therefore includes production owned by nonresidents, such as nonresident multinational enterprises, that occurs in Puerto Rico.[2]

Real GDP expanded from 2012 to 2014 before turning down in 2015 and continuing to decrease through 2018. The growth from 2012 to 2014 was more than accounted for by exports, as shown in Chart 1 above. Exports of goods grew significantly in these years, especially pharmaceuticals and organic chemicals and medical and scientific equipment and appliances. The largest decline in real GDP over the period was in 2017, reflecting the widespread impact of Hurricanes Irma and Maria on exports of goods, private inventory investment, and personal consumption expenditures (also referred to as consumer spending).

In 2018, real GDP declined 0.9 percent. Although consumer spending, private inventory investment, and construction activity grew significantly in the year after the hurricanes, these increases were offset by an increase in imports, which is a subtraction in the calculation of GDP, and a decrease in exports.

The remainder of this release discusses the components of GDP in further detail.

Personal consumption expenditures

Personal consumption expenditures (PCE), also referred to as consumer spending, measures the goods and services purchased by households who are resident in Puerto Rico.[3]

As shown in Chart 2, real consumer spending for Puerto Rico decreased in each year from 2012 to 2017. The average annual growth rate for this period was -1.9 percent, consistent with a steady decline in the resident population over this time period.

The largest decreases in real consumer spending occurred in 2014 and 2017. In 2014, as wages dropped and consumer prices continued to increase, residents reduced their spending on both goods and services. The declines within goods were widespread; the largest decreases were for motor vehicles and "other" nondurable goods, which includes items such as medicine and clothing. In 2017, Hurricanes Irma and Maria caused catastrophic damage that restricted residents' access to many goods and services.[4] The decreases in health care, housing and utilities, and "other" services (including education services) were especially large.

Despite a continued decrease in population, real consumer spending increased 3.4 percent in 2018, supported by disaster-related insurance payouts and government payments to households (see Table 2.3). The largest contributor to the growth in 2018 was durable goods, including purchases of motor vehicles.

Private fixed investment

Private fixed investment (PFI) measures spending by private businesses, nonprofit institutions, and households on fixed assets in the Puerto Rico economy. Spending is grouped into three categories: structures, equipment, and intellectual property products.

From 2012 to 2018, real PFI for Puerto Rico increased in all years (see Table 4.2.3).

Real spending on structures by the private sector increased significantly in 2018, reflecting the rebuilding of properties after Hurricanes Irma and Maria. As shown in Chart 3, the 2018 increase more than offset the combined decreases in spending from 2012 to 2017. The largest declines for these years occurred in residential construction, reflecting the continued drop in demand for homes, coupled with an even further decline in 2017. 

Real spending on equipment grew in each year over this period, except in 2015. The highest growth occurred in 2018, with an increase larger than the combined increases in equipment investment from 2012 to 2017. The growth in 2018 largely reflected business purchases to replace damaged or destroyed equipment, including industrial machinery, following the 2017 hurricanes.

Real spending on intellectual property products (IPP) increased in each year over this period. The majority of these expenditures were for software and for research and development (R&D) funded by computer services providers.[5]

Inventory investment

Change in private inventories, also referred to as inventory investment, is a measure of the value of the change in the physical volume of inventories that businesses maintain to support their production and distribution activities. In general, inventory investment is one of the most volatile components of GDP, giving it an important role in shorter-run variations in GDP growth.

As shown in Chart 1 on page 1, inventory investment significantly affected the real GDP growth rate, particularly in 2017 and 2018.

The largest decrease in real inventory investment occurred in 2017 when inventories were negatively affected by Hurricanes Irma and Maria. The main contributor to the drawdown in inventories was the chemical manufacturing industry, which includes pharmaceutical manufacturers. The largest increase occurred in 2018 as the economy began to recover from the 2017 hurricanes. 

Net exports of goods and services

Net exports of goods and services is the difference between Puerto Rico exports of goods and services and Puerto Rico imports of goods and services. Exports measures the portion of Puerto Rico's total production of goods and services that is provided to the rest of the world, including the rest of the United States.[6] Imports measures the portion of total Puerto Rico expenditures that is accounted for by goods and services provided by the rest of the world. Together, the two measures reflect the extent to which Puerto Rico participates in the global marketplace.

For Puerto Rico, net exports of goods and services is a critical component of GDP, due to its size relative to total GDP and its volatility. Over the period 2012 to 2018, the ratio of net exports to GDP was 24 percent.

As shown in Chart 4, over the period 2012 to 2018, net exports was positive in all years. The majority of Puerto Rico's trade surplus was in goods. The surplus on pharmaceuticals and organic chemicals ranged from $21.8 billion to $34.1 billion each year.

Real exports of goods and services was a key contributor to the changes in real GDP over this period, as shown in Chart 1 on page 1. The components of real exports are described in more detail below. The trends in real imports, which is a subtraction in the calculation of GDP, are also explained. 

Exports

Real exports of goods grew from 2012 to 2015; the highest growth was in 2014 (see Table 3.3). The increase in 2014 reflected growth of over 40 percent in medical and scientific equipment and appliances. Real exports of goods turned down in 2016 and then decreased 13.5 percent in 2017, reflecting the effects of Hurricanes Irma and Maria on the manufacturing sector. Real exports of goods continued to decline in 2018. The largest contributor to the decline was a 74.3 percent decrease in exports of foods, feeds, and beverages (see Table 3.4).

Real exports of services increased in each year over this period, at an average annual growth rate of 3.0 percent. The increase largely reflected growth in "all other" exports of services, which includes computer services such as software licenses and downloads. Spending by nonresidents on travel and tourism increased between 2012 and 2016, before declining in 2017 and 2018.

Imports

Puerto Rico depends heavily on imported goods and services for production by businesses and consumption by households. From 2012 to 2018, the ratio of imported goods and services to GDP for Puerto Rico was 46 percent.

The pattern of change in real imports was driven by goods. The largest decrease was in 2017 and was more than accounted for by a decline in imports of pharmaceuticals and organic chemicals. The decrease reflected the effects of the hurricanes, which disrupted manufacturing activity on the island.

The largest increase in real imports was in 2018. Real imports of goods increased 21.9 percent, reflecting growth in pharmaceuticals and organic chemicals and in "all other" imports, which includes equipment and construction materials associated with post-hurricane recovery activity.

Real imports of services increased in most years from 2012 to 2018. The increases reflected growth in imports of R&D services and freight costs on imported goods.

Government spending

Government consumption expenditures and gross investment—or government spending—in Puerto Rico measures final expenditures accounted for by the central government (including the Commonwealth Government of Puerto Rico and its component units), the municipal governments, and the U.S. federal government. Government consumption expenditures consists of spending by government agencies, except government enterprises, to provide goods and services to the public. Gross investment consists of spending by all government agencies, including government enterprises, for structures, equipment, and intellectual property products used in producing those goods and services.

Chart 5 shows the year-by-year pattern of growth in real government spending, for total government and for each type of government. Real government spending decreased from 2012 to 2016, reflecting declines in government employment and construction spending by the central government. Over this period, the central government accounted for approximately two-thirds of total government spending (see Table 1.1).

In 2017 and 2018, real government spending increased, reflecting spending on hurricane response and recovery activities. Many of these activities were funded by grants and direct federal assistance through the Federal Emergency Management Agency (FEMA).

After decreasing each year from 2013 to 2016, real government gross investment increased 23.2 percent in 2017 and 87.2 percent in 2018 (see Table 4.1.3). These increases reflected post-disaster rebuilding, particularly by the central government.[7] Structures investment by the central government increased 39.8 percent in 2017 and 117.7 percent in 2018, largely due to spending to restore the power grid.

Looking ahead

The public is invited to submit comments on the prototype statistics by emailing territories@bea.gov. Feedback will be used to help improve the data sources and methodologies used in preparing these statistics.

The estimates released today represent an important step to achieving BEA's long-term goal: to integrate the U.S. territories into the full set of U.S. National Income and Product Accounts. For Puerto Rico, a primary challenge in realizing this goal is the lack of coverage by most of the major surveys used by BEA to produce estimates of national GDP and related economic measures. The present methodology relies on currently available data. BEA appreciates the assistance and information provided by the Puerto Rico government.

Moving forward, BEA is continuing to extend and improve the estimates of GDP for Puerto Rico. BEA will finalize methodology and conduct a comprehensive update of GDP for Puerto Rico next year. Estimates of GDP will be revised to reflect methodological improvements and the availability of more complete data over time, in some cases back to 2012. Information from the Census Bureau's 2017 Economic Census of Island Areas, the most comprehensive industry data available for Puerto Rico, will be incorporated at that time.[8]

BEA is also researching the development of other related measures of economic activity for Puerto Rico, including gross national product (GNP).[9] Because of the large presence of multinational enterprises in Puerto Rico, a measure of GNP would be another valuable tool for policy makers to gauge the economic well-being of the Commonwealth's residents.

Research Focus: Exported IP-intensive Products Are Key Drivers of Puerto Rico GDP

Puerto Rico's economic activity, as measured by GDP, includes a significant amount of exported products generated by intellectual property intensive industries, particularly by pharmaceutical manufacturers, medical and scientific equipment manufacturers, and computer services providers. To assist data users in assessing the overall impact of these industries—which include several firms with global operations—on the Puerto Rico economy, BEA has conducted an analysis of GDP and its components that removes net exports of goods and services (i.e. exports less imports) and inventory investment that are closely associated with these industries.[10] 

Note that the resulting series are approximations of economic activity excluding the impact of these industries. For example, a weakness of these measures is that they do not take into account all intermediate inputs that are imported by these industries for use in production, such as petroleum and other energy products.

As shown in the charts below, BEA's analysis reveals different trends for the sectors of Puerto Rico's economy outside of the industries listed above.

As shown in Chart A, net exports of goods and services less pharmaceuticals, medical and scientific equipment, and computer services was negative for the entire period, compared with the positive trade balance shown in Chart 4 of this release.

Chart B shows GDP less pharmaceuticals, medical and scientific equipment, and computer services, compared with GDP shown in Table 1.1. Chart C shows the growth in real GDP less pharmaceuticals, medical and scientific equipment, and computer services. Although this series is not intended to be a substitute for an estimate of gross national product (GNP), by removing much of the production in Puerto Rico that is associated with nonresident firms, it may exhibit levels and trends that are similar to GNP. In contrast to real GDP shown in Chart 1 of this release, the series below was negative in 2013 and 2014, positive in 2016, and positive in 2018. The growth in 2016 reflected growth in renewable energy construction and spending by consumers and businesses on durable goods, including motor vehicles. The growth in 2018 reflected recovery and rebuilding activities following the 2017 hurricanes.

[1] This effort builds on previous work by BEA, published in October 2019, to estimate personal consumption expenditures, private fixed investment, and net exports of goods for Puerto Rico.

[2] In 1991, BEA switched from gross national product (GNP) to GDP as the primary measure of U.S. production. For an extensive discussion of the differences between GDP and GNP and the motivations for this change, see BEA, "Gross Domestic Product as a Measure of U.S. Production," Survey of Current Business 71 (August 1991): 8.

[3] PCE also includes expenses of nonprofit institutions serving households.

[4] For general information about how disasters impact GDP, see "How are the measures of production and income in the national accounts affected by a natural or man-made disaster?"

[5] A large portion of Puerto Rico business spending for R&D is on imported services. Because these purchased R&D services were not produced in Puerto Rico, they have minimal overall impact on GDP.

[6] For Puerto Rico GDP, the "rest of the world" is defined to include other countries and the rest of the United States, including the 50 states, the District of Columbia, and the other U.S. territories.

[7] Expenditures to improve and replace fixed assets are classified by ownership of that asset rather than the source of funding. As a result, grants and direct federal assistance from FEMA to improve or replace fixed assets owned by the central government, such as the power grid, are classified as central government gross investment.

[8] The data release of the 2017 Economic Census of Island Areas for Puerto Rico is scheduled for December 2020.

[9] Development of Puerto Rico GNP measures requires the estimation of factor income payments and receipts developed using methods and source data consistent with current BEA standards. For U.S. GNP, this estimation largely relies on data collected from BEA's direct investment surveys. These surveys include Puerto Rico as part of the United States and therefore do not collect data on income flows between Puerto Rico and the rest of the world separately.

[10] For this analysis, BEA excluded from GDP the exports and imports of pharmaceuticals and organic chemicals, exports and imports of medical and scientific equipment and appliances, exports of computer services including software, inventory investment by chemical manufacturers, and inventory investment by miscellaneous goods manufacturers including medical equipment and supplies manufacturers.