Construction to Fuel Strong Growth
There's just no stopping this economy. Just 10 months after the outbreak of the War in Iraq, economic growth in Hawaii continued unabated. While the tourism industry had not wholly recovered, it was showing surprising resilience. Buoyed by strong construction and housing, the broader economy had moved to new record-high job counts and levels of personal income. With permitting activity high and major military housing projects soon to get under way, construction will continue to grow in the coming year. Combined with gains in tourism, this will support healthy expansion for the Hawaii economy.
After tourism setbacks associated with the lead-up to war, the economy has been on a steady expansion path. While interest rates have begun to edge up, they are still at low levels, which support a a hot housing market and associated construction. Job creation is occurring across the economy, with only a few sectors (transportation, telecommunications, manufacturing, accommodations) still below pre-9/11 levels. Real (inflation-adjusted) personal income expanded at an estimated 3.5-percent rate in the first half of 2003. There is a palpable sense of optimism among households and businesses.
Notable developments over the past year include:
o The number of payroll jobs rose by a robust 2.3 percent through October 2003, compared with the same period in 2002. The job count reached an all-time high of 570,400 in October, on a seasonally-adjusted basis. Job recovery is broad based, with virtually all sectors seeing gains. The unemployment rate remains low, although it has edged up above 4 percent in recent months, because of pro-cyclical labor-force growth.
o Among sectors showing the strongest job gains over the past year were construction, which reported 3.8 percent more jobs in October than a year earlier and education and healthcare (up 2.7 percent). Leisure and hospitality jobs were up 3.2 percent in October, and are nearly back to the levels seen prior to 9/11. Information and telecommunications jobs continue to suffer here as on the Mainland, because of the lingering cyclical downturn in those areas. State government payrolls are stable at previous year levels, while federal government employment has risen more than 2 percent.
o Visitor arrivals for 2003, through October, slipped 1 percent from year-earlier levels. Moderate growth in U.S. visitors-up 2.5 percent over 2002-failed to make up for a 12.4 percent drop in Japanese visitors. Monthly visitor arrivals from Japan improved quite a bit over the summer, and they were down only 9 percent in the third quarter. Neighbor Island markets, which are less dependent on Japanese visitors, have fared better than Oahu. Arrivals were down 6 percent on Oahu through October, but were up more than 4 percent on Maui. Despite the slight drop in visitor arrivals, an increase of about 1/2 day in the typical length of stay has raised the number of visitor days more than 3 percent from year-earlier levels. Visitor days have been running at nearly the same high level we saw back in 2000.
o After a half-decade of abysmal performance, Hawaii real personal income has expanded at a 2 percent or better rate for all years, but one, since 1997. In 2002, real income posted an impressive 3.8 percent gain, and rose about 3.5 percent in the first half of 2003. Bolstered by low interest rates and a strong housing cycle, the construction sector saw more than 9 percent growth in real income in the first half of 2003; real estate, rental and leasing income was up 10 percent. Among other sectors seeing strong income growth were retail and wholesale trade (up 5.5 percent), transportation and warehousing (up 5.9 percent), professional and technical services (up 5.4 percent) and health care (up 4.6 percent). Income earned by federal government employees rose more than 9 percent from the first half of 2002.
o The housing market remains strong, reflecting both low interest rates and recent gains in household income. Sales of existing Oahu single-family homes hit 454 in July, and have been running about 25 percent ahead of 2002. Condo resales were up 28 percent in the third quarter of 2003. Prices of single-family homes were 13 percent higher in the third quarter, and condo prices were 15 percent higher. This puts home prices back in record territory, although Honolulu condo prices were still a bit below 1990 levels.
o The value of private building permits has risen dramatically over the past two years and exceeded $317 million on a seasonally adjusted basis in June. For the year through July, permits were running 73 percent above the previous year's level. Both residential and commercial permits were up sharply, residential by 52 percent and commercial by 236 percent. Government contracts awarded were lower by 30 percent for the first half of 2003, but this does not include the impact of the huge federal contracts for military housing. This combined with the strength in private permitting suggests that the current construction boom has a lot of life still in it.
o The government fiscal condition has been on a general recovery path since its low point early in 2002. For the calendar year through October, general fund revenues rose 4 percent, but with considerable month-to-month volatility. General excise and use taxes are up nearly 10 percent, a reflection of the general strength in the local economy. There is still weakness in income tax revenues, which rose a meager 0.5 percent for the calendar year through October. It is unclear to what extent this may reflect changes in tax credit rules or other influences. Withholding taxes on wages rose 4.9 percent through October.
o Honolulu inflation has remained tame, in line with developments on the U.S. mainland. Higher energy prices contributed to a modest acceleration to 1.7 percent in the first half of this year, and sharply higher home prices may result in some additional upward pressure on consumer inflation in 2004.
The Year Ahead
Our discussion above indicates the general good health prevailing in the local economy. Strengthening conditions in the external environment, as well as momentum in homegrown activity, argue for optimism that strong growth will continue over the coming year.
Recent news about the U.S. economy has been very encouraging. The U.S. economy expanded at a better than 8 percent annual rate in the July to September period, the most rapid growth since 1984. This in part reflects one-time stimulus to consumption from child tax-credit rebates over the summer, but there was also an encouraging pickup in business investment spending. The Federal Reserve has signaled a willingness to continue to hold interest rates low for the near term, which should provide further economic support. The greatest area of concern continues to be the labor market. Notwithstanding employment growth in late 2003, the job picture has improved much less rapidly than in a typical recovery. Overall, we are confident that a moderate acceleration of the economy is underway, which will serve to support additional growth in Mainland arrivals over 2004.
There have also been signs of recovery in Japan. The world's second-largest economy has posted six consecutive quarters of positive growth, although revised third-quarter growth was just 1.4 percent. Net exports and healthy capital spending have contributed to recent gains, with weak private consumption and declining government spending holding back stronger growth. Business investment has grown at a 7 percent annual rate. The Tankan index of business confidence has also continued to improve, although it remained negative late in the year.
Notwithstanding these cyclical factors, the Japanese economy will continue to struggle with some of the same structural hurdles that have held back growth in recent years, including the perennial bad-debt problem, anemic investment climate and job-market weakness. Because of these concerns, our outlook for Japanese travel to the Islands is lukewarm. Arrivals recovery was slow but steady for most of 2003, and despite recent cooling we expect that to continue in coming months. This will lead to impressive year-on-year Japanese arrivals numbers, but the total number of Japanese visitors will still fall short of pre-9/11 levels.
With a return of Japanese tourists and continuing strength in the U.S. mainland market, total arrivals in 2004 will approach the record level set in 2000, rising by more than 8 percent. We expect U.S. arrivals to rise 4 percent in 2004, on par with the 3.9 percent expected for 2003 as a whole. Japanese arrivals will soar 24 percent, after falling more than 13 percent in 2003, but again this is a reflection of continuing recovery from the falloff that occurred during the Iraq War.
The Hawaii job market's newfound strength is expected to continue. On the basis of the extraordinary growth in permits, substantial additional jobs are expected in construction. After strong growth in 2003, at least 5 percent more construction workers will be added in 2004, for a combined two-year increase of more than 3,000 jobs. Above-average job growth is also expected in service areas, including business services, health care, finance, real estate and related fields.
A large additional stimulus to construction is coming in the form of roughly $3.5 billion of military home construction and renovation over the next decade. Planning is already underway, and construction is expected to begin by spring 2004. While it is unclear how rapidly construction will ramp up, the projects have the potential to add several thousand construction workers to payrolls in coming years.
Overall, we estimate that payroll jobs rose 2.3 percent in 2003, and expect slightly slower 2 percent growth in 2004. Employment numbers from the household survey have begun to show marked improvement only since the beginning of last year, and so they will show an even stronger annual increase of nearly 4 percent for 2003 before settling in at 2.3 percent growth in 2004. This will keep the unemployment rate just below 4 percent.
The real income growth pattern will largely follow that of payroll jobs, and aggregate income for 2003 should come in about 3 percent higher than 2002. Income growth is likely to remain robust in 2004, although a pickup in inflation may reduce inflation-adjusted income slightly below 2003's growth rate. Consumer price inflation will build modestly, as the effects of firmer home prices work their way through the local economy. Still, inflation will remain tame by historical standards.
Concluding remarks and forecast risks
This forecast builds on the positive outlook we reported in late summer. Hawaii's economy is poised for a continuation of the healthy growth we have seen over the past two years.
We are not used to seeing Hawaii outperform the U.S. mainland, particularly the vibrant West Coast regions that soared during the tech-industry boom of the late 1990s. However, that is precisely the unusual situation in which we now find ourselves. Late in 2003, the California job count remained a tenth of a percent lower than the previous year. In Washington state, the unemployment rate hovered at 7 percent, near levels last seen in 1993. Personal and state budgets throughout the region are suffering. Hawaii's late entry into the 1990s U.S. expansion and the housing upswing have positioned us fortuitously, but the willingness of Mainland visitors to travel here in the uncertain period since 9/11 has also been key.
There may be more at work here than being out-of-cycle with Mainland trends. The mood around town is decidedly upbeat. Gone is the gloom-and-doom talk about the inability of Hawaii tourism to compete with low-cost travel destinations, and there appears to be a renewed confidence in the future of both enterprises and communities. A little income growth can do wonders!
At the same time, there remains a sense of the precariousness of Hawaii's external linkages, after two years with two major disruptions to the travel industry. This increased vulnerability to outside risks may be a fixture of the coming decade. If so, businesses will find a continuing need for plans and strategies to cope with the ups and downs in the "global security cycle."
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