Pricey Oil One More Burden for Struggling Economy
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Together with the direct disruptions from cruise ships and oil, these weak external conditions will drive a modest contraction in Hawaii this year. 2009 will also be weak, as the U.S. economy struggles to recover and we move past the peak of the local construction cycle.
While some additional flights have already been announced, a full recovery of domestic airline capacity will take many months to accomplish. Along with practical constraints, the combination of record oil prices and a slumping U.S. economy provides incentives for route contraction rather than expansion. We expect that about half of the lost capacity will be restored by Aug. 1 and about 85 percent by Nov. 1.
Because of these capacity constraints and the adverse effects of the U.S. slump and high travel costs, we now expect U.S. arrivals to decline by more than 7 percent this year.
The outlook for the Japanese market is equally poor. While Japan’s economic fundamentals are on a firmer footing than those of the United States, the trend is toward weakening. The strong yen should help, but the huge fuel surcharges imposed by Japanese airlines ($180 for JAL beginning in July) will restrain Japanese travel to the Islands. Coupled with the weak year-to-date performance, we forecast an 8 percent decline in Japanese arrivals this year and no significant recovery for the next several years.
Based on recent performance and the easing of travel restrictions from Korea and China, we expect strong performance for markets other than the United States and Japan. The number of visitors from Canada, non-Japan Asia and other markets will expand more than 12 percent this year. Overall, visitor arrivals by air to Hawaii will fall 4.6 percent this year, to 7.03 million visitors. Visitor days will decline by more than 4 percent. Visitors to Hawaii will remain relatively soft in 2009, and will remain well below 2007 levels in 2010.
Weak visitor numbers and high air-travel costs will cause a drop of several percentage points in real (inflation-adjusted) visitor spending, marking the third straight year of falling real visitor spending. Weaker demand will also mean an end to the large room-price increases that hoteliers have enjoyed. Occupancy rates will edge downward, but remain at fairly healthy levels for this stage of the tourism cycle, partly because of ongoing renovation to the room stock.
The ATA and Aloha airlines closures led to a loss of nearly 1,900 jobs in the transportation and utilities sector between March and April, and this sector will see the largest job losses this year. Tourism woes will also lead to job losses in accommodation and food services and wholesale and retail trade. Among sectors not directly linked to tourism, there will be net job losses in finance, insurance and real estate, as well as in the small and perennially shrinking agriculture and manufacturing sectors. Only healthcare and social assistance, state government and the broad “other services” sectors are expected to see moderate job gains.
Construction sector job growth, nearly 7 percent last year, will slow to a near-standstill this year and begin to shed jobs in 2009. The construction adjustment is still expected to remain mild by national standards.
Total non-farm jobs in Hawaii are expected to contract at a modest rate for the next two years, before returning to expansion in 2010. Aggregate job growth actually picked up a bit in the first quarter of this year, but we believe this will be short-lived, as tourism and construction slowing begin to bite. We expect employment losses of about 0.5 percent in both 2008 and 2009 before recovery begins in 2010. The unemployment rate will peak at 4.2 percent in mid-2009 before beginning to subside.
Hawaii’s inflation picture has deteriorated in recent months with the spike in oil prices. Although energy is a limited portion of local household budgets, the oil surge will still be reflected in overall prices. We expect Honolulu inflation of 5 percent this year, roughly the same as last year. A partial retreat of oil prices from recent highs and continuing softening of the housing component will bring about a fairly rapid deceleration to 2.2 percent in 2009.
The slowing of nominal income as the local economy weakens and the continuation of high inflation this year will lead to flat real income in 2008. The impact of federal tax rebate checks will keep income from falling significantly into negative territory. Meager growth of 0.4 percent is expected in 2009 before a return to moderate expansion in 2010.
This forecast is for a shallow but rather lengthy economic downturn. While we think this is the most likely outcome, admittedly there are outsize risks this time around. At the top of the list are oil prices. While we believe that they will eventually recede well below current levels, timing may be everything. The longer prices remain in record territory the broader the slowdown will be in travel, and the more likely we’ll see additional route cuts or airline bankruptcy filings. In the housing sector, a deep and long slump could cause a sharper downturn in economic activity in the important American visitor market.
Are there upside risks? The relatively good Main-land performance to date raises hopes that the U.S. downturn will not be as severe as many expected. For Hawaii, a more important piece of good news would be a rapid retreat of oil prices below $100 per barrel. While the near-term path of oil prices is anyone’s guess, this would be welcome news indeed.
The UHERO Economic Information Service
UHERO’s Economic Information Service (EIS) is a community-supported research program of the University of Hawaii at Manoa. The EIS provides the Hawaii community with information on eco-nomic, demographic and business trends in the state and the Asia-Pacific region. UHERO reports with industry detail and multi-year horizons can be purchased individually or as annual subscriptions. Please browse to http://www.uhero.hawaii.edu for more information.
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