u The PuerTo rico economy . . .1-2

u PuerTo rico economic indicaTors . . . . . . . 3-4

u uniTed sTaTes economy . . . . .5-6 u u .s . economic indicaTors . . . . . . . . . 7 Econews

ISSUE 2 VOLUME 32 MARCH 2010ISSUE 4 VOLUME 35 DECEMBER 2013

Puerto Rico The Economy MARCH 2010

• Notmuchchanged in the lastquarterof 2013. It was a continuation ofthe economic and financial issuesof the previous quarters: increasingconcerns about thepublic debt, thefinancial capacityof thegovernment,an economy that showed signs ofcontinueddeterioration.US investorsinmunicipal bondsweredemandinghigherreturnsandtheratingagenciesmaintainedpressureonPuertoRico.ByearlyDecember,theS&PMunicipalBond Puerto Rico Index had fallen22.0%.1

• The goverment continued to facedifficulties in accessing the bondmarkets, having to postpone untilearly 2014a fresh issueofdebt.2 Thisis an scenario of a continuation ofthe volatility that characterized themunicipalbondmarketin2013.3Duringthefirsthalfof2014,PRhascomingdueonneartermdebtmaturitiesofatleast$2,000million.4

• Thecredit ratingswarnings issuedbyMoody’sandFitchinlateNovemberandearlyDecember,puttingP.R.’sbondsonreviewfordowngrades,haveaddedmorepressuretoanalreadyuncertainpanorama.Theyalsodowngradedtheratingsofaseriesofgovernmentandpublic corporation bonds, some tospeculativegrades.

• A newmeasure, proposed in earlyDecember,will introduceamunicipalversion of the COFINA bond. Thiswill allow themunicipalities to issue

sales tax-backedbonds, togetherwitha “temporary” diversion to COFINAofthepartoftheSalesTaxthatgoestothemunicipalitiesandwillbeconsideredinthenewlegislativesessionstartinginJanuary.Theyareexpectedto increasethecreditmarginofthegovernmentasitgoestothebondmarket.

• As to the economy, maybe with theexception of the net revenues to theGeneralFund,whichhave increasedduelargely to the new tax on gross salesof companies (the so-called PatenteNacional),andinflation,theperformanceduringthefourthquarterisstilllackluster.

MANUFACTURING ThemonthsofOctoberandNovemberof

thefourthquartersawariseinthePMIIndexof8.2%fromthepreviousquarter,and7.7%year-to-year.TheIndexaveraged52.6from48.6 in the thirdquarter, thus,pointing toanexpansioninactivityduringthequarter.

Theindexrose1.9%inNovember,from2.4% inOctober, and 14.9% year-to-year.That increasewas ledbya significant riseintheProductionIndexof51.0%,andintheEmployment Indexof 24.0% year-to-year.5TheNewOrders indexrose13.0%,andwas

above the expanson level of 50 (51.7),suggestingacontinuationofexpansion inactivityinthecomingmonths.

EMPLOYMENTNonfa rm sa l a r i ed emp loyment

continuedtodeclineduringthetwomonthsofthefourthquarter,butthepaceslowedinNovember. Employment declined 5.1%year-to-year, as private employment fell3.7%, translating intoa lossof48,400 jobs,ofwhich52.5%camefromtheprivatesector.InNovember, though, nonfarm salariedemployment increased0.1% ledbya rise inprivateemploymentof0.6%,thefirstmonth-to-month increase sinceAugust. Still, onan accumulatedbasis (up toNovember),nonfarm salaried employmentwas 3.5%belowitslevelinthesameperiodin2012.

The unemployment rate remainedunchanged in thefirst twomonthsof thefourthquarter,14.7%,slightlyupfrom14.0%in the thirdquarter, andhigher than theaverage formostof 2013.The labor forceparticipaton ratemovedslightlyupduringthe period, to 41.2%, but stilway belowthepre-contraction levelof48.9% in2006.

ECONEWS is a quarterly publication of the Puerto Rico Manufacturers Association. It is prepared by Estudios Técnicos, Inc.

The views herein do not necessarily represent the Association’s official position.

Purchasing Managers Manufacturing Index (Monthly,NSA)

Nonfarm Salaried Employment(Inth’s)

ECONEWSPuerto Rico EconomyPage | 2

December 2013

Theemployment-to-population ratio (theproportionof theworking-agepopulation16+years),was35.2%,upfrom34.0%inthethirdquarter.

Notwithstanding the slightmonth-to-month improvement in October andNovember, the number of salaried jobslostasaresultofthecontractionremainedhigh.Between2007andNovemberof2013,thenumberofnet job losseswas140,980,ofwhich 62.0% corresponded to privateemployment.

Employment in manufactur ingcontinuedonadownwardtrend,althoughitregisteredanimprovementinOctoberandNovember.DuringOctoberandNovemberemploymentdeclined4.4% year-to-year, alossof3,500jobs.InNovember,employmentincreased0.9%month-to-month,from1.1%inOctober,butdeclined3.2%year-to-year.ThatimprovementinOctoberandNovemberdidnotchangemuchthecontinuingpanoramaofjoblossesinthesector.Onanaccumulatedbasis, employmentdeclined6.5% year-to-year,translatingintoanetlossof7,000jobs.

FISCAL REVENUESLedbytheintroductionofthenewgross

receiptstax(thePatenteNacional),aspartofthemeasuresenactedinJunetoreducethestructuraldeficit,netrevenuestotheGeneralFundregisteredtheirbiggestincreaseduringthefourthquarter,24.4%year-to-year,from1.9%inthepreviousquarter.Revenuesfromgeneraltaxes,increased1.8%.ReceiptsfromLaw154corporationsfell.

Onanaccumulatedbasis, revenues incalendar 2013were 5.1% over 2012,whilereceipts fromLaw154corporations,whichaccounted for 18.6% of total revenues,declined7.5%. For thefirsthalfof currentfiscal 2014, net revenueswere 15.3% upyear-to-year, and those from all other

corporations,underwhichreceiptsfromthe“PatenteNacional”areincludedrose92.3%fromsameperiodinfiscal2013.

INFLATIONInflationhas remainedundercontrol.

Dataforthefirsttwomonthsofthefourthquarter (OctoberandNovember), showsthatgeneral inflation(CPI) increased1.0%,from1.6%inthepreviousquarter.Thishasbeenaresultofdeclinesinthepriceindexesforelectricityandgasoline,whichfell3.1%and 6.9% respectively, following similartrends in thepreviousquarter. Foodandbeverageprices (non-alcoholic) increasedby 1.5%.Onanaccumulatedbasis, theCPIincreased1.1%from1.3%in2012.

Core inflation (which excludes foodandenergy),increased1.5%,from2.3%inthepreviousquarter,ledbyanincreaseof7.4%inthepriceofwater.UptoNovember,coreinflationroseonaverage1.5%,from1.8%theyearbefore.

OUTLOOKTheeconomy continues to confront

threebigchallenges:thatofthepublicdebt,reducingfurtherthestructuraldeficit,andachievingeconomicgrowth.Managementofthepublicdebtisofparamountimportance,given the recentwarningsof the ratingagenciesMoody’sandFitch.

Atitslatestreading(October2013),ETI’sleadingindexremainedinnegativeterritory.Onaquarterlybasis,theindexdeclined5.6%inthethirdquarterof2013,and4.6% inthefourthquarter, year-to-year,with the indexforthefourthquarterdeclining0.7%fromthepreviousquarter,afterremainingunchangedinthepreviousquarter.6

Theindexstillcontinuesonadownwardtrend, albeit at a somewhat slower pace,year-to-year,continuingtoforecastnegativegrowth for thenext sixmonths (first twoquartersof2014).

Thefirsthalfof 2014will bedecisive,in termsof increasing confidence in PR’smanagementofitsfiscalsituation.Thiswillbeachievediftherevenue-generatingmeasuresachievetheirfiscaltargets,iftheplanforanewbondissueisreceivedpositivelybyinvestors,andifthestructuraldeficitisreducedfurther,with the fiscal year 2014 closingwith analmost-balancedbudget.Theneedtoadoptaneconomicplanorstrategythatwouldsetthepathforasustainableeconomicrecoveryisessential,asaremeasuresto“jumpstart”theeconomy.

Notes:1. R.Slavin(2014).“AnalystsPositiveonPuertoRicoGovernor’s

FirstYear,”TheBondBuyer,Monday,(January6).At:http://www.bondbuyer.com/issues/123_3/analysts-positive-on-puerto-rico-governors-first-year-1058674-1.html.

2. R. Slavin (2014). “PuertoRico Plans to Sell by EndofFebruary,”TheBondBuyer,(Thursday,January2).At:http://www.bondbuyer.com/issues/123_2/puerto-rico-plans-to-sell-by-end-of-february-1058655-1.html.

3. C.Albano(2013).“Outlook:MuniAnalystsSeeMoreVolatilityin2014,”TheBondBuyer,(Tuesday,December24).At:http://www.bondbuyer.com/issues/122_245/outlook-muni-analysts-see-more-volatility-in-2014-1058470-1.html.

4. L.McDonald(2014).“CouldaPuertoRicoDefaultHammerthe$3.7TrillionU.S.MuniBondMarket in2014?,”Forbes(January3).At:http://www.forbes.com.

5. According to theEstablishmentSurvey,manufacturingemployment (seasonally adjusted) declined 3.2% inNovember,year-to-year.

6. Theindex(1990=100)isdesignedtopredictgrowthoverthenextsixmonths.Itdoesnotadjustforinflationorpopulationgrowth, and isnot final for severalmonthsafterbeingpublished. Itconsistsofthefollowingmonthly indicators:manufacturinghours,numberofproductionworkers inmanufacturing,U.S. interest ratespread,U.S. consumersentiment(UniversityofMichigan),unemploymentinsuranceclaims,cementsales,totalconsumptionofelectricity,andexportsofmerchandise.Anautoregressivemodelisusedtoestimateanindicatornotavailableatthetimeofpublication.

Net Revenues to the General Fund

Inflation in Puerto Rico(December2006=100)

Employment in Manufacturing Industries(Monthlyinthousands)

ETI Index of Leading Indicators, 1991-2013

ECONEWSPuerto Rico Economy

Page | 3

December 2013

Puerto Rico Economic Indicators

Total Employment and Unemployment Rate(December2006=100)

Consumer Price Index

Net Revenues to the General Fund

Employment

Consumer Price Index

Fiscal Revenues

ECONEWSPuerto Rico EconomyPage | 4

December 2013

Puerto Rico Economic Indicators

Cement Production

Retail Sales

Construction

Retail Sales

Exports and Imports

Manufacturing

Exports and Imports

Average Hourly Wage ($)

December 2013

ECONEWSUnited States Economy

Page | 5

United StatesThe Economy

Slower Q4-2013, due to the partial federal government shutdown, and little change for 2014 outlook.

• Finalnumbersarenotavailableyetforthefourthquarter,buttheconsensusestimates that real GDPwill grow1.9%,fromarevised4.1%inthethirdquarter,placing2013atanestimated1.7%.Growthinthefourthquarterisestimatedtobeduetoanincreaseinpersonalconsumptionexpenditures,at2.3%,abovethe1.4%inthepreviousquarter.

• Theoutlook forgrowth in the firstquarter of 2014 and during theyear is estimated at 2.5% in bothcases, accelerating to 2.7% in thesecondquarter.According tootherforecasters, realGDPgrowth in thefourthquarterisexpectedat1.8%,and2.6%for2014,thesameasthreemonthsago.1Growth in thefirstquarterof2014couldbehamperedifCongressdoes not extend the EmergencyUnemployment Compensat ionprogramthatexpiredonJanuary1st.

• Aftertwomonthsofpessimism,asaresultofthepartialshutdowninthefederal government lastOctober,and the deadlock on the budgetnegotiations, consumer confidencerebounded inDecember,with theindex increasing to 78.1 from72 inNovember. Their appraisal of theircurrentconditions improved,andso

EMPLOYMENT During the twomonthsof the fourth

quarter, nonfarmemployment continuedto rise, increasing 1.7% year-to-year. Thenumber of jobs created during the twomonthswas403,000, slightly less than inthesameperiodin2012,butmaintiningtheupward trend in thepreviousmonths.OnanaccumulatedbasissincetheendoftheGreatRecession,when8.7millionjobswerelost, a totalof 7.4 jobshavebeenadded,anditisexpectedthatduring2014over2.0millionjobswillbecreated,compensatingforthelossofjobs.

Growth in employment ocurred inhealth care, retail trade, transportationandwarehousing,andfoodservices,whileemployment in information declined.Manufacturingalsoregisteredan increasein employmentof 43,000during the twomonthsofthequarter,mostlycomingfromfoodandmotorvehiclesmanufacturing.

Theunemploymentrateaveraged7.1%duringthetwomonths,remainingatalmostthesame level fromthepreviousquarter.Theparticipationrateedgedupslightlytoanaverageof62.9%,from63.0%inthethirdquarter, but still remaining at its lowestlevel in over 30 years. The employment-to-populationratio (theproportionof theworking-age populationwith a job) hasremainedpracticallyunchanged(58.0%)forthepastseveralmonths.

did their expectations. Their favorableviewoneconomicandlabormarketcondi-tions,andagreaterdegreeofconfidencein futureeconomic conditions, contrib-utedtoamoreupbeatmood.Still,forthefourthquarterthelevelofconfidencewasbelowthatinthepreviousquarter,asthepessimisminOctoberweightedheavilyinoverallconfidence.

PRODUCTIONManufacturing grew inDecember at

the second-fastestpace inmore than twoyears,fueledbyagaininorders,increasing13.5%year-to-year,from15.8%inNovember.The Institute for SupplyManagement’smanufacturing index eased slightly to 57fromthepriormonth’sreadingof57.3,butstillabovethelevelof50indicatinggrowth.NeworderswerethestrongestsinceApril2010.During the fourthquarter the indexaveraged 56.9, up from55.8 in the thirdquarter,maintainingasteadyincreasesincethesecondquarteroftheyear.

SinceOctoberindustrialproductionhasincreased,withtheindexrisinganaverageof 3.2% year-to-year duringOctober andNovember.Industrialproductionsurpassedfor thefirst time itsDecember 2007 level.The increasehasbeen ledbya rise in themanufacturing of consumer goods andbusinessequipment.Capacityutilizationfortheindustrialsectorroseanaverageof0.7%year-to-yearduringOctoberandNovember.

Quarterly U.S. GDP RealGrowthandExpected,2010-14(SAAR)

Monthly Changes in Employment(SeasonallyAdjusted)

U.S. Consumer Sentiment Index

ISM Index of Manufacturing Activity

U.S. Industrial Production Monthly Index(2007=100,SA)

December 2013

ECONEWSUnited States EconomyPage | 6

toshiftin2014,reversingthetrendsofthepastfiveyears.Whilenon-OECDeconomieswill still outpace thoseof theOECD, thegapwill be the smallest since theglobalfinancial crisis. In real terms, theU.S.willaddmoredollars’worthofGDPtotheglobaleconomythanChina,CanadawilladdmorethanBrazil,andFrancemorethanNigeria.8

Another important developmentglobally is that of the negotiations onthe Transatlantic Trade and InvestmentPartnership(TTIP).OnDecember20ththeU.S.andtheEUconcludedthethirdroundofnegotiations,whichstartedinJuly.TheTTIP is a bilateral free-trade agreement(FTA) that aims to eliminate trade tariffsandreducenon-tariffbarriers(NTBs)suchasarbitrarydifferences in regulationsandindustry standards, for goods, servicesandforeigndirectinvestment(FDI).Itwillcreatetheworld’s largestfreetradearea,astheU.S.andtheEUaccountforover40%ofglobaltradeandnearlyhalfoftheworldGDP.TheU.S.manufacturingsectorthatwillbenefitthemostisthatofmotorvehicles,whichcurrentlyfacesan8%EUtariff(tradeweighted)aswellashighNTBs(Non-tariffbarriers), followed bymetals andmetalproduction,andchemicals.9

Notes:1. FederalReserveBankofPhiladelphia (2013).Surveyof

ProfessionalForecasters,FourthQuarter2013(November25),p.1.At:www.philadelphiafed.org.

2. U.S.BureauofLaborStatistics,http://www.bls.gov/cpi/.3. K. Fraser (2014).MonthlyUSOutlook: January,BBVA

ResearchEconomicWatch-US(January9),p.3.At:www.bbvaresearch.com.

4. S.Papanyan,K.Fraser,andN.Karp(2013).FOMCStatement:December17-18th,BBVAResearch,FedWatch(December18).At:www.bbvaresearch.com.

5. WoltersKluwer(2014).BlueChipFinancialForecasts,Vol.33:1(January1),p.2.

6. CenteronBudgetandPolicyPriorities(January7,2014),http://www.cbpp.org/cms/index.cfm?fa=view&id=4075

7. IMF(2013).WorldEconomicOutlook–October(October),chapter1.At:www.imfg.org.

8. TheEconomistIntelligenceUnit(January4,2014),https://www.eiu.com/.

9. ShushanikPapanyan (2013).EU-US:TransatlanticTradeand InvestmentPartnership.BBVAResearch,EconomicWatchUnitedStates (December 19),pp. 1-2.At:www.bbvaresearch.com.

the first quarter of 2014, as thehousingmarketcontinuestoimprove.

U.S. /GLOBAL OUTLOOKOna cautiousnote thebeginningof

2014 provides grounds for beingmoreoptimisticfortheU.S.economy.RealGDPgrowthisexpectedtobebetween2.5%and2.6%,andacontinuingimprovementinthelabormarketisforeseen.Anissueforearly2014,whichwillalsoimpactoureconomy,is theproposed increaseof theminimumwage.TheU.S.Senateissoonexpectedtoconsideraproposaltoraiseitfrom$7.25to$10.10inthreeannualincrementsandthenindex it to inflation. Theproposal— theFairMinimumWageActof2013 (FMWA),introducedbySenatorTomHarkin(D-IA)—alsowouldraisethesubminimumwagepaidtothosewhoalsoreceivetips,whichhasbeenfrozenat$2.13forovertwodecades.Ifenactedsoon,theminimumwagewouldriseto$8.20earlyin2014,$9.15inearly2015,and$10.10by2016.6

Globally,accordingtotherecentWorld Economic Outlook of the InternationalMonetary Fund, “the latest indicatorspointtosomewhatbetterprospectsinthenear termbutdifferentgrowthdynamicsbetween themajor economies”.7 GlobalrealGDP is expected to growby 3.6% in2014,0.2percentagepointslowerthantheirJulyforecast,withgrowthinChinaandtheU.S.providingtheimpulse.Theeurozonewillfinallymoveintopositiveterritory,withreal growth expected at 1.0% from -0.4%in2013.Growth inemergingmarketsanddevelopingeconomieshas slowed, fromanestimated increaseof 5.5% for 2014 inJuly, theyarenowexpectedgrow5.1% in2014,ledbyChina,althoughitwillgrowataslowerpacethanin2013,7.3%.

Internationally, thebalancebetweendevelopedandemergingeconomiesisset

INFLATIONFormostof2013inflationhasremained

low,andthetrendcontinuedintothefourthquarter.DuringOctoberandNovember itaveraged1.1%,andcoreinflation(excludingfood and energy) 1.7%, practically at thesame levelsof the thirdquarter.2 In 2012theinflationratewas2.1%.Astheeconomycontinues to improve, it is expected thatinflationwill rise in the comingquarters,butnotbymuch,with theCPI increasinganaverageof2.3%in2014,onthebasisofareboundinenergyprices.3

INTEREST RATES Asexpected,atitsDecembermeeting

the Federal Open Market Committee(FOMC) of the Federal Reserve finallyannnounced the long-awaited taperingof its LargeScaleAssetPurchases (LSAP)program. Itwas adopted two years agoasaway to stimulate the recoveryof theeconomy.TheFOMCagreedtoreducethepaceofpurchasesby$10.0billionmonthlyto$75.0billionfrom$85.0billionbeginningin January, and it is expected that itwillconcludebythefourthquarterof2014.4

TheCommitteealsoreinforcedthattheFedFunds ratewill remainnear zerowellpastthe6.5%unemploymentratethreshold,with the first rise expected in the thirdquarterof2015.

ThedecisionbytheFOMCwillcontributetoincreasesinlong-terminterestrates,butnosuddenincreasesareforeseen.Duringthefourthquarter,theprimerateremainedat3.25%,andisexpectedtoincreasemarginallyto3.3%inthefirstquarterof2014,whiletheeffectivefundsrateisestimatedtoremainat0.1%.5Ontheotherhand,theaverageratefor conventional 30-yearmortgage loans,that during the fourth quarter averaged4.3%,isexpectedtoincreaseto4.6%during

Selected Interest Rates (MonthlyAverage)

World Economic GrowthForecast2011,2012and2013

Annual Percent Change in CPI(Y/y,seasonallyadjusted)

ECONEWSUnited States EconomyPage | 7

United StatesEconomic Indicators

December 2013

Gross Domestic Product(% Change From Preceding Period)

Employees on Non-Farm Payrolls (Inthousands)

GDP

Employment

Consumer Price Index

Interest Rates

Change in Consumer and Producer Prices

Selected Interest Rates