The CNMI’s Econometric Model Presented By: The Marianas EB5 Regional Center For The: CNMI Department of Commerce Paid By: The US Department of Interior Office of Insular Affairs
Feb 25, 2016
The CNMI’s Econometric Model
Presented By:The Marianas EB5 Regional Center
For The:CNMI Department of Commerce
Paid By:The US Department of Interior
Office of Insular Affairs
Model BackgroundWho, What, Why & How
Background• The CNMI’s Economic Modeling
• Outdated and inconsistent with current economic realties• Doesn’t reflect impact of loss of manufacturing & tourism changes
• Current Economic Measures • 2007 & 2010 Gross Domestic Products
• Produced by the US Bureau of Economic Analysis• Provides a true measure of economic health
• Estimates are hindered by data gaps and the need to extrapolate data made available
• Economic Indicators• State-level collection of economic markers which provide a sense of economic condition• Not consistently collected and reported
• Consumer Price Index• State-level collection of prices in specific “market baskets” which gauge inflationary changes to
general consumer commodities• Historically only collected on Saipan, which didn’t reflect nature of inter-island price fluctuations
for the specific time collected• Recently developed Tinian & Rota CPI’s to account for actual changes in those specific economies
Need for a Model• To forecast impacts of specific projects, proposals and/or policy decisions• Useful in understanding multiplier impacts of specific economic
activity• Example: How many jobs a specific development will create (Direct,
Indirect & Induced)• Useful in forecasting impacts of policy implementation specific to the
economic condition• Example: How will changes to tax laws or structure impact revenues
• Useful in the application/evaluation of economic development programs• The CNMI’s Qualifying Certificate Program • Free Trade Zone Incentives
CNMI Steps
• CNMI Department of Commerce• Primary government entity for reporting economic condition through
its Central Statistics Division• Applied for a Technical Assistance Grant from the US Department of
Interior, Office of Insular Affairs• Placed RFP12-DOC-064• Contract awarded to the Marianas EB5 Regional Center
• Economist: Dr. Michael K. Evans of Evans, Carroll & Associates• Contractor report to Governor Inos in June 2013
• Identified data gaps and discussed impact to the economic model
CNMI’s Economic Model• Model Summary
• Model was developed without specific time series data points (2003-2010)• Wages & employment: Impacts the wage/employment sections of the model• Attempts to extrapolate data utilizing from the BEA, Economic Census & CNMI
data, however too many inconsistencies existed to make extrapolation useful• Availability of 2011 GDP estimates from BEA
• Anticipated release of 2011 GDP estimates will include revisions to 2009 & 2010 data
• CNMI’s model will be recalculated once the revisions are made available• Tourist spending data
• MVA data provide tourist arrivals, however spending patterns per market are not available
• If data collection occurs specific to tourist spending, model can accommodate changes to include these data points
Model Elements
Equations & elements of the CNMI Model
Model FrameworkCategories Utilized In Model Framework
Consumption Gross Domestic ProductFixed Investments EmploymentExport of goods WagesExport of services Consumer Price IndexImport of goods Implicit GDP DeflatorImport of services Domestic personal disposable incomeFederal government consumption & investment
Foreign measures of personal income
Territorial government consumption & investment
Exogenous variables*Foreign variables for Japan, China & Korea and includes values of the currencies & real GDP for those countries.
Key variable: Number of VisitorsImpacts: Total Demand
Consumption Charts: Consumer Durables
-8
-4
0
4
8
12
100
110
120
130
140
150
160
2003 2004 2005 2006 2007 2008 2009 2010
Residual Actual Fitted
• Excludes spending patterns of Japanese visitors
• Represents shopping patters in which consumers purchase genuine products vs. counterfeit products in their home country
Consumption Charts: Consumer Non-Durables
• Consumption closely tied to current conditions
-20
-10
0
10
20180
200
220
240
260
280
2002 2003 2004 2005 2006 2007 2008 2009 2010
Residual Actual Fitted
Consumption Charts: Consumer Services
-12
-8
-4
0
4
8
280
320
360
400
440
480
2003 2004 2005 2006 2007 2008 2009 2010
Residual Actual Fitted
• When housing expenditures rise, purchases of fuel & household non-durables (utilities, etc.) rise
• Increases in non-durables may serve as the cause of housing expenditure increases.
Consumption Charts: Net Foreign Travel
• Equation developed to maintain consistency with BEA statistics
• Similar to export of services
-12
-8
-4
0
4
8
280
320
360
400
440
480
2003 2004 2005 2006 2007 2008 2009 2010
Residual Actual Fitted
Fixed Investment Equation
• Includes housing & capital spending• Population decline consistent with the need for housing• Capital spending primarily for tourism based investments with
the exit of the garment manufacturing industry• Visitor arrivals critical independent variable for this equation
Export Charts
-1.2
-0.8
-0.4
0.0
0.4
0.8 160
200
240
280
320
2002 2003 2004 2005 2006 2007 2008 2009 2010
Residual Actual Fitted
• Goods export is minimal and statistically insignificant
• Export of services is closely tied to tourism and visitor arrivals
• Data similar to Net Foreign Travel (Consumption)
Export: Visitor ArrivalsJapan
• Decline consistent with JAL pullout and fluctuation with Japan’s Real GDP
China/Korea
-.15
-.10
-.05
.00
.05
.10
.15
11.8
12.0
12.2
12.4
12.6
12.8
13.0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Residual Actual Fitted
-20,000
-10,000
0
10,000
20,000
120,000
160,000
200,000
240,000
280,000
02 03 04 05 06 07 08 09 10 11 12
Residual Actual Fitted
Imports
• Total demand is difficult to measure due to scarcity of data
• Employee compensation is used to measure aggregate demand
• Exports of goods are more clearly linked to imports due to the need to import raw materials
-60
-40
-20
0
20
40
200
400
600
800
1,000
2002 2003 2004 2005 2006 2007 2008 2009 2010
Residual Actual Fitted
Government Consumption Territorial
• Federal consumption is statistically insignificant
• Wages are used as a proxy for aggregate demand
Manufacturing Compensation
• Manufacturing wages are closely tied to export of goods
• Decline consistent with garment manufacturing exit
Compensation for Government Workers, Territorial
• Boosts in visitors increases the need for local services, which accounts for the rise in 2009-2010
Private Sector Wage
• Excludes manufacturing & government wages.
• Usually separated into several sectors, but due to data gaps, CNMI’s model is unable to provide sector specific information
• CNMI’s model utilizes the CPI as a correlation value versus standard output measures
Implicit GDP Deflator
• Constructed to close the gap between current & constant dollar GDP
Consumer Price Index for CNMI
• 1% increase in minimum wage= 0.3% in CPI
Final Five Equations
• Not estimated stochastically• 2010 Employment in manufacturing ,
trade, hotels, and restaurants, all other private, and government to relevant components of GDP.
• EM = XGX * 39/17• ETR = (CDX + CNX) * 3495/313• HER = XSX * 5779/180• EOTH = (CSX + IPX) * 12220/331• EG = GSLX * 5277/300• E= EM + ETR + HER + EOTH + EG
Utilizing the Model to ForecastSimulation of a $10,000,000.00 injection into the CNMI economy
Forecast Simulation & Results• Considered a forecast despite having known variables (visitor arrivals), due to pending release of GDP account figures• Current GDP for 2011 & 2012 to rise from 4.1% change from 2010 (last
known results)• Constant GDP for 2011 & 2012 to rise from 0.9% in 2011 to 6.0% in
2012• Increase in GDP for 2011 & 2012 due to increase in visitor arrivals of
20,000
• Model Simulations• Both test an impact of $10,000,000.00 into the CNMI economy
• First scenario arrives at the $10,000,000.00 via an increase in visitor arrivals of 20,000
• Second scenario arrives at the $10,000,000.00 via an increase in capital spending
Economic Impact of an Increase 20,000 Visitors
• Assumptions of model• Average visitor spends roughly $500.00 x 20,000 visitors= $10,000,000.00
• Simulation Purpose• Simulation looks at the economic impact of an additional 20,000 visitors
and its impact to overall economic impact over a three year period• Results of Simulation
• Increase of three year increase of $12 Million in first year, $17 Million in second year & $20 Million in third year of a $10,000,000.00 “shock” into the CNMI economy• Multiplier for an increase of 20,000 visitors into the CNMI economy is 2.0 over
three years
Economic Impact of an Increase in Capital Spending of $10 Million
• Multiplier is 1.2 versus 2.0 (increase in visitor arrivals)• Capital spending multiplier is lower due to the need to import goods,
whereas tourism based increase is higher due to the amount of domestic spending. • Money is remitted out of the local economy in import expenditures
• The impact of tourism spending creates and sustains higher employment numbers vs. capital spending