GOVERNMENT SAYS ECONOMY IMPROVING

Review and Outlook for the U.S. Virgin Islands' Economy
The U.S .Virgin Islands economy is emerging from the shadow of recent hurricanes, and is poised to return to a normal growth phase. Signs of recovery are evident as confirmed by an increase in jobs in recent months, continued growth in overnight visitors and record performance in cruise passenger arrivals. The construction sector, which suffered decline in employment in 1997, is beginning to show marginal increase. There are signs that both commercial and tourist-related construction activities are picking up, though this trend is unlikely to result in employment growth until 1999. The manufacturing sector, which also declined in 1997, has shown modest increase in employment in recent months, a trend expected to continue through Fiscal Year 1999. Growth in the manufacturing sector is likely to be led by Hess Oil Virgin Islands Corporation (HOVIC) and St. Croix Alumina. The other sectors of the economy also registered modest job growth in 1997, a trend that is likely to continue through FY 1999.
Labor Force Trends
The 1997 Virgin Islands Department of Labor's Current Employment Statistics Report shows that there was a total of 43,380 jobs in the territory, compared to 43,370 jobs in 1996. Of the 43,380 jobs, 29,700 were in the private sector and 13,680 were in the public sector.
The civilian labor force expanded by less than 1.0 percent over the past year, from 45,760
to 46,080. The Territory's unemployment rate increased from 5.2 in 1996 to 5.9 in 1997.
St. Croix's unemployment rate increased from 4.8 percent in 1996 to 6.7 percent in 1997.
St. Thomas and St. John, on the other hand, registered a decline in the unemployment
rate from 5.5 percent in 1996 to 5.3 percent in 1997.
Although the Territory's 1997 unemployment rate exceeded the rate for 1996, the rise in the unemployment rate did not result from job losses, since during the same period employment rose slightly. Rather, the increase in the unemployment rate reflects an increase in labor force participation. As the economy begins to recover, workers reenter the workforce and participation begins to rise. This phenomenon puts pressure on the unemployment rate causing a temporary increase. Although there was employment growth in 1997, it was not strong enough to accommodate many of the new workers.
The first four months of 1998 have shown a steady expansion in employment, resulting in lower or stable unemployment rates. In January, February and March, the Territory's unemployment rates were 6.3 percent, 6.2 percent and 6.1 percent, respectively. In April, the territory's unemployment rate grew slightly to 6.3 percent. Employment is forecast to grow during FY 1999 by 8 percent. This is adequate enough to absorb many of the new workers and reverse the increase in the unemployment rate, as long as there is no surge in labor force participation.
Tourism
The territory recorded 2.1 million visitors in 1997, an increase of 17 percent over the
1996 total of 1.8 million visitors. Air arrivals have rebounded within the past year, up
10 percent to 509,000 from 462,000 in 1996. June 1998 year-to-date air arrivals totaling
297,786 are up 6 percent over the corresponding period in 1997, and are expected to grow
by 10 percent at the end of Fiscal Year 1998. The Bureau of Economic Research (BER)
is also forecasting growth in air arrivals of 10 percent during FY 1999.
Calendar year 1997 was another record year for cruise passenger arrivals, which grew at a record pace to 1.6 million, an increase of 23 percent over 1996. June 1998 year-to date cruise passenger arrivals, totaling almost 930,851 are up 5 percent over the same period in 1997. BER expects cruise passengers arrivals to grow by as much as 11 percent in FY 1999.
The record arrivals notwithstanding, total visitor expenditures continue to drop, from
$688 million in 1996 to $601 million in 1997. Tourism-related employment grew in 1997
to 7,990 or 12 percent higher than in 1996.
The territory's hotel occupancy rate grew slightly to 53.7 percent in 1997 from 51.6 percent in 1996. St. Thomas and St. John's occupancy rate grew to 55.9 percent from 52.6 percent in 1996, while Croix's occupancy rate fell to 47.3 percent from 48.8 percent a year earlier. The territory's June year-to-date hotel occupancy rate is 60.4 percent; St. Croix' occupancy rate is 54.3 percent, while St. Thomas and St. John's occupancy rate is 62.5 percent.
Due to longer hotel stays and a greater number of air visitors who mostly stay in hotels, room nights occupied increased by 15 percent in 1997. The Territory offered an average of 4,2~0 rooms in 1997, compared to an average of 4,100 rooms in 1996. On average 4,870 rooms are currently being offered territory-wide.
During the first six months of 1998, the Territory's room nights occupied increased by 22 percent; St. Croix room nights occupied decreased by 3 percent, while St. Thomas and St. John room nights occupied climbed by 32 percent. BER expects the Territory's room nights occupied to increase at an annual rate of 11 percent during FY 1999. Although the Territory's total room nights occupied is low relative to historic standards, it is approaching pre-hurricane levels.
Manufacturing
Employment in manufacturing fell by 5 percent, from 2,340 in 1996 to 2,230 in 1997. Continued losses in durable goods were accompanied by a dramatic downturn in non-durables. Jobs in the durable goods sector fell primarily because of a contraction in the watch industry. The closure of a few small businesses accounted for much of the job losses in the nondurable goods sector.
HOVIC, the Territory's largest manufacturer, continues to be the industry's strongest performer. The refinery produces an average of 430,000 barrels of oil per day. HOVIC, however, is reporting losses of $1.1 billion during the past seven years. In order to improve its competitive position and, eventually its profitability, HOVIC has agreed in principle to a joint venture with Petroleus de Venezuela, S.A. (PDVSA). The joint venture will invest $500 million to design and construct a coker. Approximately 2,000 new jobs are expected to be created at the peak of the three-year construction period, which is expected to begin in early 1999.
Manufacturing employment is projected to increase by a modest three percent in 1998. Job growth has been limited by low demand for locally produced goods, foreign competition, and the continued shift toward a more service-based economy. Moderate growth at HOVIC, and in St. Croix Alumina-formerly Alcoa-which began rehiring in December 1997 towards full scale production, will lead to more employment opportunities. However, substantial growth in the manufacturing sector may not be realized until FY 1999. BER foresees employment growth of 15 percent during the aforementioned fiscal year.
Construction
Reconstruction from hurricane Marilyn spurred construction growth in 1996 with an 84
percent increase in jobs to 2,520. Some of the job gains the construction industry
experienced in 1996 were eroded in 1997, a result of a decline in construction in general,
and post-hurricane reconstruction in particular. The industry lost an average of 600
jobs, decreasing to 1,900 which represents a decline of 24 percent over 1996.
A total of 1,270 construction permits were issued during FY 1997. The~total value of
these permits was $205.5 million, an increase of 9 percent over 1996. As of March 1998,
249 permits were issued, for a total value of $39.6 million or 4 percent less than the
corresponding quarter in 1997.
The construction sector employment is not expected to resume growth until FY 1999. Major tourist-related reconstruction and government projects (roofing program, school rehabilitation) have been completed or are near completion. Major new construction that will boost employment will not take place until FY 1999. Growth in the industry over the next few years is likely to be le
d by new hotel and tourist facility development, including the Yacht Haven Hotel, and the $500 million HOVIC/PDVSA coker construction projects. These ventures are expected to increase construction jobs by nearly 37 percent during FY 1999.
Government
The total employment in government fell slightly in 1997 to 13,680 from 14,060 in 1996. A small decline in both the territorial government and federal government jobs caused the public sector employment to decline by 2.8 percent. Reduction in territorial government staff due to retirement and resignations accounted for the drop in the public roster, while the decline in federal jobs resulted from a cutback in staff tied to hurricane relief.
The Virgin Islands government remains the largest single source of public sector jobs. Federal and local government accounted for one-third of the territory's civilian employment in 1997. The Virgin Islands government, though nearly 2 percent smaller in 1997 than in 1996, still accounts for 93 percent of the Territory's government employment.
Federal and local government employment is expected to remain stable through 1998, and may even decline primarily through the attrition of territorial government employees, particularly because of budget constraints and fiscal prudence.
Prepared by
Lauritz Hutchinson-Mills
Chief Economist
USVI Bureau of Economic Research
Updated August 7, 1998

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