UHERO Hawaii Outlook
Plenty of Momentum in 2005
|Hawaii's economic prospects continue to look good. Both jobs and real
income likely ended 2004 with greater than 2 percent gains, and there is
plenty of momentum heading into 2005. The Japanese visitor recovery has
been a bit more attenuated than we expected a year ago, but U.S.-mainland
visitors have taken up the slack. High-energy prices shaved a bit off growth
last year and will continue to act as a drag on the economy. Nevertheless,
the economy will remain healthy, with a mild slowing of job growth as the
Over the past year, the strength of tourism drove strong job growth in accommodations and food services as well as trade. Construction added jobs, though income was flat in the first half of 2004, and service sectors such as health care continued to be strong. Notable developments for 2004 included:
o The number of non-farm payroll jobs rose by a strong 2.3 percent in the first three quarters of 2004, an increase of nearly 19,000 jobs. Employment (which includes self-employed persons) rose 3 percent in the first three quarters. The state's unemployment rate has stayed very low, at 3.1 percent in September.
o Job growth continues to be broad based. The most notable gains were in tourism-related sectors, which added jobs well beyond their pre-9/11 peaks. Other strong areas continue to be construction, education, retail trade, healthcare and social assistance and wholesale trade. Although a small sector, it was encouraging to see information technology jobs finally began to rebound late in the year.
o Mainland travel has contributed a larger-than-expected share of visitor arrivals growth. Through September, Mainland arrivals rose 7 percent, and Japanese arrivals rose 16 percent over 2003's dismal level. Total arrivals were up nearly 9 percent. Strong American demand may now be crowding out some international travel. With a lower domestic length of stay, visitor days rose 1.2 percent in the year through September.
o Among the counties, Honolulu saw the greatest growth in arrivals in 2004, up 11 percent in the first nine months, with Oahu benefiting from the return of Japanese travelers and big gains in the U.S. market. It is too soon to tell if this means change in the long-term relative decline of Waikiki as a U.S.-visitor destination. Kauai and Big Island arrivals were up about 3.5 percent. Maui saw a 1 percent decline in total visitors, despite a pickup in the third quarter.
o Not only are there more jobs in Hawaii, the average employee is seeing gains in income. Real (inflation-adjusted) payroll income rose about 3.5 percent during the first nine months of 2004, and it grew at a healthy rate in most sectors. Accommodation and food services, professional and technical services, and manufacturing were up strongly. Because of the concrete strike, there was negligible income growth in the construction sector in the year's first half. Some sectors, such as government, saw about the same nominal income growth as in 2003, but this translates into smaller gains in purchasing power, because of higher inflation. Total real personal income, which includes wage and non-wage sources of income, expanded by 2.3 percent during the first half of the year.
o The housing market remains very strong, with buoyant sales and rising prices. The median sales price on Oahu, reported by the Honolulu Board of Realtors, was running 21.5 percent higher in October 2004 than in October 2003. The average price on Oahu-which tends to be heavily influenced by high-end sales-rose 30 percent in the third quarter. Kauai single-family-home prices saw the biggest gains over 2003, with average prices 44 percent higher. The Big Island and Maui saw 30 percent and 25 percent increases, respectively. (Data from Prudential Locations Real Estate Sales & Research.)
o In recent months, the issuance of private building permits has continued at a brisk pace, but growth has slowed somewhat. The strength is on the residential side, where permits rose 31 percent. Residential permits were up 80 percent on Oahu, were up strongly in Hawaii County, while they were off somewhat on Kauai and Maui. Government contracts awarded nearly quadrupled in the first half of 2004, due primarily to Navy contracts.
o The government's fiscal condition has been on a recovery path since its low point early in 2002, and it has improved dramatically since the beginning of last year. General- fund revenues surged ahead 15 percent in the first three quarters of 2004.
o Oil prices, which began to rise significantly in late 2003, have not given up any of their gains, instead climbing to a record high, above $53 per barrel, in October. Prices of motor fuels in the consumer price index rose 9.5 percent in the first half of the year. Shelter costs rose nearly 5 percent, reflecting the hot housing market. These influences have begun to feed through into higher prices than we have seen in more than a decade, driving the Honolulu CPI 3.3 percent higher in the first half of 2004.
THE FORECAST FOR 2005-2006
The Hawaii economy enters 2005 with a lot of forward momentum. The residential construction boom, while it may be nearing its peak, still has life in it, and plans for military spending promise more support for the industry. Along with healthy tourism and service sectors, this will maintain moderately strong growth in jobs and income.
While the global business cycle peak has probably passed, there is nothing to suggest an end to the healthy external environment we have seen since 2003.
Both the United States and Japan slowed a bit in the first part of 2004. After expanding at a greater than 4-percent rate for four consecutive quarters, the U.S. economy grew only 3.3 percent in the second quarter. There was some pickup in the third quarter, but indications for the fourth quarter were mixed. Housing starts fell in September, adding to evidence that the housing boom has at least reached a plateau. The index of leading economic indicators has declined for four straight months, and consumer sentiment has also weakened.
We expect that overall 2004 real GDP growth will come in at 4.3 percent. Growth in the 3.4-percent to 3.5-percent range is expected in 2005 and 2006.
Like the United States, Japan slowed during the second quarter of last year. Still, except for a tiny decline in the beginning of 2003, the world's second-largest economy has posted nine consecutive quarters of positive growth. Non-residential investment remains relatively strong, while consumption spending has softened somewhat. Unfortunately, the public sector has become a substantial drag on the economy, with government investment falling at nearly a 25 percent rate in the second quarter due in part to efforts to address huge fiscal deficits.
We project Japanese economic growth in the 2.0-percent to 2.5-percent range for the next two years. Japan's labor market has been making steady improvement, and we expect the unemployment rate to trend down to 4.4 percent by 2006.
For Hawaii, the boom in military construction spending is still to come. (See the UHERO Construction Outlook, October 2004, online.) When it is in full swing over the next several years, it will provide a substantial stimulus. We expect to see roughly $3.5 billion of military home construction and renovation over the next decade. These projects will support several thousands of construction workers in the coming years.
Military deployments have hurt Hawaii over the past year, and that will likely continue well into 2005, as we await the return of troops and their families. By the following year, we will start to see a positive impact from the arrival of the Stryker Brigade and associated air wing. Eventually this will mean more than 800 additional soldiers for Schofield Barracks, and nearly $1 billion will be spent on ranges, road and training facilities. There may well be other additions of military personnel during the coming decade, as the United States carries out a planned global forces reconfiguration.
The Japanese market was severely affected by the Iraq war and the SARS epidemic of early 2003, and its recovery remains far from complete. Last year's estimated 13 percent rise in Japanese arrivals will still leave the market 18 percent below its level in 2000. At this rate, it will take several more years to regain that level.
With occupancy rates high and rising, some slowing of expansion for the U.S. visitor market must occur over the coming two years. We anticipate that U.S. arrivals growth will finish 2004 nearly 8 percent higher than 2003, and growth will be in the 2.8-percent to 3-percent range for 2005 and 2006.
Overall visitor arrivals are expected to end 2004 nearly 8 percent higher than in 2003, before slowing to 3.6-percent growth in 2005 and 3.5-percent growth in 2006. Visitor arrivals will crack the 7 million mark for the first time this year. Because of modest expected decline in the international length of stay, average daily census growth will be modest.
Last year saw the emergence of a very tight local labor market. Despite likely in-migration, we expect labor constraints to slow job growth, from about 2 percent in 2004 to 1.6 percent by 2006. Hawaii's unemployment rate will edge up toward 3.5 percent. Still, Hawaii will see a very tight local labor market for the foreseeable future.
The private-residential construction cycle may well peak this year. The relative flattening of contracting tax revenues and falloff in permitting on Kauai and Maui in 2004 provide evidence that the cycle is maturing. As the Federal Reserve Board continues to raise policy interest rates this year, we expect home resales to gradually decline. Construction job growth will remain strong in 2005, largely on the strength of the military sector. It will gradually plateau thereafter.
Other areas of strong job growth in 2005 will be wholesale and retail trade, health care and other service areas. Government and finance, insurance and real estate will see relatively modest additional job gains.
By and large, the pattern of income growth will mirror that of jobs. The construction sector will post nearly 6 percent real (inflation-adjusted) income growth in 2005. Real income to employees in wholesale and retail trade will rise by more than 4 percent, and real income for all service areas and government will average about 3.5 percent. Two large public-sector unions, HGEA and UPW, will receive 5 percent pay increases in January 2005 and will be negotiating for new contracts to begin July 1. Hawaii's residents will continue to share in the benefits of a healthy and growing local economy.
We expect aggregate Hawaii real personal income growth for 2004 as a whole to come in at about 2.5 percent, roughly on par with the 2.3-percent growth recorded in 2003. A similar overall income performance is expected this year, with some acceleration in 2006 (2.8 percent), primarily due to expected acceleration in non-labor income.
The pickup in inflation will only gradually abate. High oil prices have proven stubbornly persistent, and there is still room for more pass-through of housing costs. We expect inflation to peak at 3.8 percent in 2005 and remain above 3 percent in 2006. This return to inflation above the national average is consistent with the performance of Hawaii prices over past business-cycle expansions.
CONCLUDING REMARKS AND FORECAST RISKS
With tourism now showing strength on par with construction and other service areas, growth in Hawaii has become widespread. The U.S. visitor market has been particularly strong, offsetting an attenuated recovery on the Japanese side. Some slowing in job growth can be expected this year and next, a reflection of rising labor shortages as well as the mature state of the expansion.
Inflation now represents a somewhat larger risk to the economy than in the past. We have been surprised by the persistence of record-high oil prices. We now expect these prices to translate into higher local inflation for 2005, but this also increases external risks. Rising inflationary pressure could lead to aggressive tightening by the Federal Reserve, bringing a swifter slowdown or even an end to the U.S. expansion. On the other hand, weak national labor markets, which have only recently begun to improve, argue against harsh Fed action.
Security concerns continue as a downside risk. The passage of the U.S. election period without a terrorist attack is good news, but the high level of violence in Iraq and terrorism abroad are still causes for worry. It is now more likely that there may be a slower return of Hawaii's troops and further deployments down the road.
Finally, as Hawaii's expansion has solidified, constraints to growth and adverse side effects have once again come to the fore. In the housing market, record-high prices have put home affordability back on the agenda in state and local policy discussions. The limits of present infrastructure have delayed or prevented some development plans. In the tourism sector, high occupancy rates signal limits to further visitor growth, at least in the near term.
It has also become clear that not all Hawaii citizens share equally in the job and income gains from the current expansion. Recent data from the Census Bureau and economy.com appear to show a decline in median household income over the past four years. While it is not clear at this point how accurate these estimates are, they certainly raise a red flag.
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