UHERO Annual Hawai'i Forecast Update:
After Sharp Drop, Recovery Will Take Time

March 20, 2009

Carl Bonham and Byron Gangnes

University of Hawai'i Economic Research Organization

Subscribe to the UHERO EIS

UHERO's Economic Information Service provides complete analysis and detailed industry-level forecasts for up to five years. The EIS is a research program of the University of Hawaii at Manoa and depends on financial support from report subscribers and program sponsors. The complete versions of this and other EIS reports are also available for individual purchase. For more information, visit our EIS information page.

For previous forecast reports, visit UHERO Forecast Reports Archive.

EXECUTIVE SUMMARY

download pdf file

The next several years will be difficult ones for Hawai'i businesses and households. The visitor industry will languish, as the deepest global recession in decades continues to undermine travel demand. Local construction activity will weaken further, because of the unwinding residential cycle, a poor business outlook and persistent problems in national credit markets. Like their counterparts on the mainland, Hawai'i residents have become more cautious in their spending, which is contributing to local economic weakness. Deteriorating labor market conditions over the next two years will prevent a quick rebound of their purchasing power and confidence. Add in a looming state government fiscal crisis, and the result will be a long and deep Hawai'i recession.

• Last year's credit crisis and the attendant collapse in consumer confidence turned a mild US downturn into a deep contraction. Financial and trade linkages spread the crisis internationally. The U.S. and global economies are now in the most severe recession since the end of World War II. US economic growth will not return until the end of this year, and we expect a rather anemic recovery thereafter. Global exports and production have collapsed, plunging Japan and other trade-dependent Asian economies into a deep downturn. Japan's economy will see a sharp contraction this year before returning to moderate growth.

• Hawai'i tourism was battered in 2008 by cruise ship departures, airline bankruptcies, record-high oil prices, and the global recession. There have been sharp losses in visitor arrivals and spending, and significant job losses have occurred in tourism-related areas. Recent months provide some hope that the US market may have bottomed out. However, prospects for the Japanese and other Asian markets continue to worsen. Because of the severity of the global downturn and constraints to consumer spending, we expect tourism activity to remain at a low level through 2010, with only a gradual recovery thereafter. On an annual basis, arrivals will fall about 5% this year and will be flat in 2010. Visitor spending will decline both this year and next.

• Construction has become a bigger drag on the local economy. There has been a marked falloff in commercial building activity as the business outlook has deteriorated and credit conditions have tightened. The residential market has also weakened further. The number of construction jobs has fallen by 3,400 and we expect a further 16% decline over the next two years. Overall construction spending, measured by the inflation-adjusted contracting excise tax base, will decline roughly 30% over the 2009-2010 period.

• Hawai'i labor market conditions deteriorated broadly in 2008 and further job losses are expected this year and next. Aggregate non-farm payrolls will shrink by 2.4% in 2009 and another 0.3% in 2010. This is a severe and lengthy jobs drought by historical standards. The state's unemployment rate will peak at at 7.7% in the third quarter of 2010 and will remain remain above 6% for several years thereafter.

• Job shedding will be widespread, but the largest losses will be seen in construction and in the accommodation and food services sector. Transportation and utilities jobs will also drop significantly, adding to last year's losses. Retail trade, which experienced only mild losses in 2008, will see a further decline this year, both from the visitor industry downturn and a weaker local sales environment. The finance, insurance and real estate sector will continue to shrink in size for several years, fallout from stagnant real estate and the financial downsizing taking place nationwide. The State's fiscal crisis is likely to result in government job cuts as well.

• The outlook for inflation has improved markedly since the middle of last year. In 2008, gains from cooling home prices were offset by high food costs and the huge oil price spike, and for the year Honolulu inflation averaged 4.3%, down just a bit from the previous year's 4.9% rate. The collapse of oil prices since mid-year is bringing down U.S. and local inflation fast. Honolulu inflation will average about a half percent this year and next.

• Personal income will decline, drawn downward by job losses, stagnant wages, and investment income losses. Real (inflation-adjusted) income will drop 2.5% this year and another 0.2% in 2010. Personal income growth will not return to a moderate 2% range for several years.

• Federal fiscal stimulus will provide a substantial boost to the national economy, although actions to date are probably not large enough to return the economy rapidly to full employment. The effect of Federal stimulus on the local economy will likely be smaller. In the medium-term the State's Highway Modernization Plan and O'ahu Rail Mass Transit are likely to provide a substantial boost to the construction industry.

• We are now approaching the point where the balance of risks is more evenly weighted between positive and negative. The cycle of job and income destruction is still ongoing, and certainly deeper near-term losses are possible. But recovery will come, and economic forecasters are notorious for their inability to predict when the economy will turn. Considering the size of the economic drop, it is possible that we may see a somewhat bigger bounce during recovery than currently anticipated.

*Source is UHERO. Figures for 2009-2010 are forecasts. Full macro and industry detail are available to subscribers and sponsors.

Copyright © 2009 UHERO. All Rights Reserved.  

Upcoming UHERO Forecast Reports

The following are reports scheduled for delivery to sponsors in the coming months. Brief executive summaries will be released to the public.

2nd Quarter: County Economic Forecast. Review of economic conditions and detailed three-year
forecasts for the four counties.

2nd Quarter: Next Hawai'i Forecast Update.