Pricey Oil One More Burden for Struggling Economy
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First we had the U.S. mortgage meltdown and the news that Norwegian Cruise Lines was pulling out two of its three Hawaii cruise ships. Then, this spring brought the failures of ATA and Aloha airlines and a dramatic surge in oil prices. Visitor industry prospects have gone from bad to worse, pulling the local economy toward its first contraction since 2001. A significant recovery will not begin until 2010. A deeper slowdown could occur if oil prices remain at their current record levels.
By most measures, the state economy actually began this year in fairly good shape. Aggregate non-farm payroll job growth rose to 0.8 percent in the first quarter, after expanding by only 0.4 percent in the fourth quarter of 2007. Of course, this is still very anemic growth compared to the 3.1 percent pace experienced at the peak of the last expansion in 2005. Year-on-year employment growth, which had turned negative in the third quarter of 2007, was down just 0.3 percent in the first quarter of 2008.
The visitor industry, which had a particularly weak year in 2007, saw arrivals rebound to 2.7 percent growth in the first quarter of 2008, setting a record for first-quarter visitors. Visitor days — including the effect of changes in the length of stay — declined by 1.6 percent last year, but recovered 5 percent in the first quarter of this year. This relatively healthy performance ended abruptly with the airline failures that occurred at the end of the first quarter. April and May saw significant declines in airline passengers, down 11 percent and 8 percent, respectively, compared with the same period of 2007.
Contributing to the drop-off in arrivals has been the sharp drop in interisland cruise visitors with the departure of the Pride of Hawaii and the Pride of Aloha. This has particularly pronounced effects on Neighbor Island markets where cruise arrivals represent a larger share of total arrivals. The effect on visitor days is smaller.
The airline losses have resulted in a significant drop in jobs in the transportation and utilities sector, and jobs in accommodations and food services have also turned negative. Wholesale and retail trade show only small job gains. Softening of the housing market and turmoil in financial markets have caused the finance, insurance and real estate sector to contract for the fourth quarter in a row.
The construction sector has continued to provide job growth as the general economy has slowed. But we are seeing steady slowing here as well. Construction jobs were up 4.4 percent in the first quarter of the year, far below the consistent gains of more than 8 percent experienced in 2006 and in the first half of 2007. The services sectors, which have been the most reliably strong sectors in recent years, weakened in 2007, and this process is continuing.
Employment weakness led to an additional uptick in the rate of unemployment to 3.3 percent in April, on a seasonally adjusted basis. This compares with the record low 2.2 percent experienced in December 2006. While we still have a fairly healthy labor market, further softening is expected in coming months.
Inflation receded slightly to 4.9 percent in 2007 after a surge to 5.8 percent in 2006, but it continues to be high relative to the nation and to recent experience. Housing has been the biggest contributor to local inflation, but the recent surge in oil prices means that fuel costs are likely to play a bigger role this year.
Hawaii real (inflation-adjusted) personal income is perhaps the best single measure of overall economic conditions in Hawaii. Real income grew at a 1.5 percent pace in 2007.
The residential housing situation continues to show evidence of a fairly soft landing. On Oahu, the May median home price of $649,500 was roughly the same as a year earlier, although resale volume continues to languish, dropping nearly 30 percent from the May 2007 level. Market adjustments have been considerably larger on the Neighbor Islands.
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