For example, higher oil prices cut into household purchasing power, and the tragedy in Japan is leading to supply disruptions that may dampen growth somewhat in the near-term. Also, conditions in  BIS central bankers’ speeches  3  Japan, the Middle East and North Africa remain uncertain and could worsen, with negative implications for global economic growth. Furthermore, we cannot ignore the risks stemming from the longer-term fiscal challenges that we face in the United States. But in the near-term, the most immediate domestic problems may recede rather than become more prevalent. On the housing side, stronger job growth should lead to more household formation. For example, more young people will be able to move out of their parents’ homes when they get jobs. This trend should provide more support to housing demand. On the state and local side, a rising economy would boost sales and income tax revenue, and help narrow near-term fiscal shortfalls. We also need to remain watchful to ensure that low interest rates do not foster a buildup of financial excesses or bubbles that might pose a medium-term risk to both full employment and price stability. In this regard we monitor interest rates on risky and safer assets. An unusual narrowing of these differences could signal that risk is not being appropriately assessed. These differentials for risk on U.S. assets in general do not seem obviously compressed today. On the inflation side of the ledger, the risk of deflation is greatly diminished.
The mainland is Puerto Rico’s primary trading partner, accounting for half of the island’s imports and three-quarters of its exports. There are many reasons for this. While Puerto Rico interacts with many other economies, for generations the mainland United States and Puerto Rico have had a special multifaceted economic relationship. One of the most obvious of these ties is the free flow of goods between the mainland and the island. Another link is our common use of the dollar. This means that tourists from the mainland can visit without worrying about changing currencies. In addition, businesses can make long-term investments in Puerto Rico without worrying that currency fluctuations against the dollar will undermine their competitiveness. The island runs a surplus with the mainland that accounts for much of the island’s overall surplus. So the signs of a further pickup in economic growth on the mainland bode well for the island. Puerto Rico’s export markets also extend overseas. Aside from the U.S. mainland, the top export markets for the Island are Germany, Netherlands, Belgium and Spain. Exports to  BIS central bankers’ speeches  5  these four countries combined exceeded $ billion in 2009 and have grown by more than 30 percent since 2007. The success that Puerto Rico has in selling its goods and services to industrialized countries bodes well for the island’s future. As more emerging economies narrow the gap between themselves and the more developed countries, the market for Puerto Rico’s goods could well expand accordingly.