By Sarah Foster
This is the continuation of a multi-part series on the Federal Reserve System Beige Book. Read the previous article: “Fed’s Beige Book draws skepticism from economists, academics”
Antonio Fernos, associate professor at the Interamerican University of Puerto Rico, has grappled with the same question for more than a decade: Why does the Federal Reserve Bank of New York not include Puerto Rico in its section of the Beige Book?
Answering the question has been so important that Fernos has approached multiple members of the mainland reserve bank’s research and statistics group over the years in an attempt to get an answer. The 12 reserve banks nationwide need to keep up-to-date information on the regions they manage, he said, to properly fulfill the Fed’s dual mandate: stable prices and maximum employment.
“I’m not putting the Fed on checkmate for saying this, but if you don’t know what’s going on here, how are you to explain that you’re doing your job well?” said Fernos, who teaches courses in finance and economic theory and previously served as a portfolio manager at Banco Santander Puerto Rico, one of the island’s main banks. “If you can’t measure it, you can’t manage it.”
The responsibility of gathering the anecdotal research for the report known as the Beige Book, which summarizes economic trends by industry across the U.S., belongs to the Fed’s 12 reserve banks. These banks gather information from the 50 states and the five inhabited U.S. territories and commonwealths. The U.S. Virgin Islands and the Commonwealth of Puerto Rico fall under the New York Fed’s purview, while Guam, American Samoa and the Commonwealth of the Northern Mariana Islands are under the realm of the San Francisco Fed.
Although interest rates set by the Federal Reserve extend to these territories, their economic data aren’t incorporated within the Beige Book, said Andrea Priest, vice president and head of public relations for the New York Fed.
Fernos blamed the Fed’s budget for the exclusions, while Antonio Rosado, a securities broker at financial firm RD Capital and former president of Santander Overseas Bank, a subsidiary of Banco Santander, pointed to lags in data collection.
Officials at the San Francisco Fed and the New York Fed declined to comment.
The five territories have plenty of their own economic issues. Puerto Rico, the largest of the territories with about 3.3 million residents, faces a crippling debt of more than $70 billion and unfunded pensions of $50 billion, forcing the island to file for the equivalency of bankruptcy protection in federal court in May 2017. Hurricane Maria, whose destruction caused damage in the billions in September, exacerbated the financial crisis from the loss of key infrastructure and businesses, as well as the mass exodus of residents moving to the mainland.
Employment in the U.S. Virgin Islands declined about 15 percent between 2011 and 2014 after a major refinery on St. Croix shut down in 2012, according to a New York Fed blog post published in July.
American Samoa’s economy contracted 5.3 percent in 2017, according to the Bureau of Economic Analysis, a U.S. governmental research agency that publishes macroeconomic indicators.
Guam’s economy grew 0.4 percent in 2016, the most recent period for which information is available, according to the BEA. That same year, the Northern Mariana Islands posted significant economic growth — more than 28 percent — largely thanks to more tourists spending money at casinos, according to the BEA. The number of tourists, mostly from Korea and China, to the Northern Mariana Islands grew more than 10 percent in 2016.
Tourism is the main industry for Guam, American Samoa and the Northern Mariana Islands, but it has been relatively flat for Guam in recent years, said Joe Bradley, chief economist and business continuity officer at the Bank of Guam. Given its proximity of 1,600 miles, Guam’s economy is closely tied to Japan and most of its tourists come from Japan. The collapse of the Japanese economy in the 1990s left several hotels in Guam unfinished for years, and the number of Japanese visitors declined, he said. Though the empty hotels are now completed, the island still hasn’t seen a lot of investments from other major countries in East Asia, Bradley said.
Still, the economies of the five territories and commonwealths are significantly smaller than those of individual states, one of the reasons why the New York and San Francisco Fed banks don’t include them in their Beige Book sections, Bradley said. California, Washington and Idaho, for example, all have larger economies than any of the Pacific territories, he said.
“The Beige Book is a brief document, and it doesn’t go into a lot of detail,” Bradley said. “They really just look at the high points on their different regions.”
Statistics for the territories aren’t updated as frequently as figures for the individual states, which makes it difficult to collect timely data from the territories, Rosado said. Puerto Rico’s consumption spending reports, for example, aren’t released every three months like they are for states, he said. In June, data was collected for the island’s total value of goods and services, but the island won’t learn what those figures are until January, he said.
“We are doing blind economic policy,” Rosado said.
Six years ago, the New York Fed published an anecdotal report similar to the Beige Book for Puerto Rico. After visiting the island in March 2011, William Dudley, former president of the New York Fed, asked a team of research economists to speak with local, national and international experts about what Puerto Rico could do to promote productivity and competitiveness.
It’s not known when the New York Fed will update that report, said Melba Acosta, an attorney at the law firm McConnell Valdes LLC, and the former president of the Government Development Bank for Puerto Rico, which advises the Puerto Rican government.
Even if the territories were reflected in the Beige Book, they wouldn’t influence monetary policy in their favor, said Doug Holtz-Eakin, an economist and president of the nonprofit issue advocacy group American Action Forum. The Fed doesn’t create multiple policies that are state or commonwealth specific, he said, adding that the territories will either benefit or suffer.
“Interest rates are what they are,” Holtz-Eakin said. “While the Fed does oversee the banking system, they’re not saying, ‘Geez, this economy is in bad shape. Maybe we have to take that into account.’”
Still, the exclusion of the territories symbolizes the broader issue of how their residents are treated as a whole, Holtz-Eakin said. Many residents, especially in Puerto Rico, feel they are second-class citizens and do not receive the same benefits as those living in a state, he said.
Over time, Fernos has grown accustomed to the insufficient data on Puerto Rico’s economic performance, whether from the Fed, government agencies or private firms. He hopes that will change at some point, he said.
“The loss is on us if the Fed doesn’t have a clear view of what’s going on and what’s functioning well, what needs treatment and what’s urgent,” Fernos said. “I hope someone is bringing this issue in order for us to raise our hand and be counted.”