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County Economic Forecast:
Zero Growth Expected Statewide

To varying degrees, each of the four counties has shared in the state’s broad pattern of slowing over the past several years, a process that becamemore pronounced in 2007. This synchronized slowing is nomistake, reflecting broad statewide—and even global—slowing trends in construction, visitor spending and overall economic activity. There are similarly common adverse developments that will influence the county economies over the next several years. These include the failures of Aloha Airlines and ATA, the loss of two NCL cruise ships, a weak external environment for tourism, and the turning of the statewide construction cycle. This year, job and real income growth will fall in a fairly tight range around 0% in each of the four county economies. Our expectation is that it will be several years before the islands return to a moderate pace of economic expansion.

forecast Summary


Annual Hawaii Economic Forecast:
Economy Grinds to a Halt

The Hawai‘i economy that powered its way through much of this decade slowed to a standstill in 2007. The drag from a weakening visitor industry and an unwinding construction cycle spread to the broader economy. A U.S. recession is now underway. The mainland slump, national credit market problems, and soft local fundamentals mean there will be little growth in Hawai‘i for the next two years. Some sectors will see net job losses. Moderate growth is not expected to resume until 2010.

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Hawaii Construction Forecast Update:
Slow Decline But No Contracting Crunch

While the external environment has become decidedly more risky since last fall, this forecast makes only a small downward revision to the forecast path. The declines that have occurred since 2006–2007 in residential and nonresidential permits signaled the turn of the Hawai‘i building cycle, and real construction spending will decline slightly this year.  Construction employment and income will slow to very small positive gains this year, before turning negative in 2009. Some downward drift in home prices will occur, but Hawai‘i will avoid the largescale contraction that is occurring in many mainland cities that must work off home price bubbles. The overall construction cycle will continue to be stabilized by relative strength in nonresidential segments of the industry.

forecast Summary


Hawaii Economic Forecast Update:
Cooling Economy Faces U.S. Headwinds

The weakening U.S. economy and the persistence of high energy prices lead us to mark down a bit our Hawai‘i growth estimates for the end of this year and 2008. However, we do not yet see an end to the current long economic expansion. Moderate job growth will continue next year, and real income will recover to nearly 2% growth. The visitor industry, which saw modest declines in arrivals and sluggish spending this year, will be essentially flat in 2008 before strengthening U.S. and Japanese economies begins to resuscitate travel in 2009. As we noted in our recent global outlook report, risks to the world economy have risen, and this leaves Hawai‘i more exposed should a broad mainland downturn occur.

forecast Summary


Global Economic Forecast:
Faltering American Economy Will Cause Global Slowing

The world economy began to slow in 2007, after peaking at nearly 4% growth in real gross world product in 2006. Slowing has been centered in the developed world, particularly in North America, where contraction in U.S. residential investment and fallout from the sub-prime mortgage collapse is taking a substantial toll. So far this weakness has not spread significantly to other countries. Prospects are for further global slowing in 2008. Now the question is how soft or hard the landing will be. While no sharp downswing is yet in evidence, the configuration of risks appears heavily weighted toward the negative.

forecast Summary


Hawaii Economic Forecast Update:
Mainland Woes Pose Risks for Visitor Sector

Moderate economic expansion is expected to continue in Hawai‘i for the remainder of the year, with further slowing into 2008 and 2009. The visitor industry will continue to be challenged by a weak American mainland economy. Despite recent financial market turmoil, Hawai‘i’s construction industry continues to settle toward a soft landing. Fallout from mainland housing and mortgage markets poses a risk, primarily to the visitor industry.

forecast Summary


Annual Hawaii Construction Forecast:
Despite Credit Concerns, Soft Landing Expected

Despite concerns related to recent financial market turmoil, Hawai‘i’s construction industry still appears to be poised for a soft landing. Growth in real contracting receipts will slow in 2007 and turn negative in 2008–09, with hotel renovation and industrial and commercial construction providing a stabilizing influence in the face of a steadily weakening residential sector. The construction job count is expected to peak in 2008 and decline only slightly in 2009. While real construction spending will turn downward, the nominal tax base will continue to rise as construction costs push up nominal values. While there are currently no signs of a significant and prolonged downturn in Hawai‘i’s construction sector, any further worsening in the availability or cost of credit will adversely impact this forecast. 

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Kaua‘i Economic Outlook Summary:
Kaua‘i Slowing to Moderate Growth Path

Kaua‘i’s economy has been on a path of gradual deceleration for the past two years, following a period of strong growth. Over the next two years, the construction cycle will close in on the peak for the current cycle and visitor industry gains will taper off. Conditions both locally and in the U.S. economy will support a continuation of growth, but at a more measured pace than that of recent years.

forecast Summary


County Economic Forecast:
County Economies Steadily Slowing

Economic conditions were buoyant in each of Hawai‘i’s four counties in 2005, but with some evidence that tight labor markets are beginning to act as a brake. The county economies will experience moderate growth in jobs and income this year, followed by further deceleration over the next year.

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Hawaii Economic Forecast Update:
Another Year With No Visitor Growth

The visitor industry has gotten off to a poor start in 2007. The outlook for the rest of the year is tempered by weak conditions in the U.S. economy. Japanese arrivals will gradually stabilize, declining 3.6% for the year a whole, before strengthening to about 1% growth in 2008 and 2009. U.S. arrivals are expected to grow by less than 1% this year, strengthening a little to 1.4% by 2009.

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Construction Forecast:
Surge in Nonresidential Building Sustains Cycle

Hawai‘i’s construction cycle is near or past its peak, depending on which sector you look at. While the homebuilding peak occurred in 2005-06, the peak in nonresidential construction is likely in 2007 or 2008. The end of this cycle will be characterized by a slow decline in total real construction spending, but continued increase in the nominal tax base as construction costs rise between 4% and 5% each year. With home price appreciation over and affordability at recent lows, real residential construction will continue to recede gradually. At the same time, nonresidential elements of construction will be relatively stronger, and the overall outlook continues to be one of gradual slowing. Despite a slow decline from their expected peak in 2007, construction employment and earnings will remain above 2006 levels for the next several years.

forecast Summary


Annual Hawaii Economic Forecast:
Tourism Pause Means Further Slowing Ahead

There was a pause in Hawai‘i tourism growth last year, held back by capacity constraints and relatively soft visitor demand. It will be several years before additions to the accommodation inventory permit a resumption of moderate growth in arrivals and expenditure. Together with the residential construction slowdown, the weak near-term visitor outlook means that two pillars of Hawai‘i’s economic expansion have been sidelined, at least for now.

At the same time, there are no warning signs on the horizon of an outright end to Hawai‘i’s economic expansion. Job and income growth will slow further, but not cease, and the unemployment rate will gradually ease upward from recent record-low levels. As home price appreciation continues to feed through to shelter costs, we will have to contend with higher-than-normal inflation for the next several years.

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Global Economic Forecast:
U.S. a Drag on Global Growth

Despite high oil prices, the global economy has had a very good year, and combined real gross world product is expected to end the year 3.8%higher than 2005. Next year will be considerably weaker, primarily because of slowing in the United States, where the end of the housing boom now represents a substantial drag on the economy. World output will expand by about 3.3% in 2007. The housing slowdown and the possibility of rapid adjustment of global trade imbalances are the primary downside risks.

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Hawaii Economic Forecast Update:
Nationwide Housing Slowdown Poses Risk for Hawai‘i Growth

Hawai‘i’s general cooling trend continues to deepen. Job growth next year is expected to be more than a percentage point weaker than in 2006. The visitor arrivals forecast for 2007 has been reduced somewhat, partly because of now-familiar Japanese market weakness. A new factor is the marked slowing that has occurred in the mainland U.S. economy, and the possibility of a deeper U.S. slowdown represents an emerging downside risk. With housing turning down, the construction sector will no longer be a contributor to growth in the Islands.

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Construction Forecast:
Housing-Driven Expansion Reaches Turning Point

 Hawai‘i’s construction cycle is at a turning point. Residential construction, which has largely driven the recent expansion, will soften as rising costs meet flattening demand. With home appreciation largely over and affordability much eroded, the real volume of residential construction activity will begin to recede gradually. Nonresidential elements of construction will be relatively stronger. The outlook is for gradual slowing; construction employment and earnings are expected to remain near recent peaks for the next several years.

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