The Forecast

Hawaii’s leading economists make tough calls on the year ahead

January, 2003

Last January, economists might as well have consulted crystal balls while charting their forecasts for 2002. The economic fallout of Sept. 11 — mass layoffs, weak visitor numbers and so on — obscured most of their attempts.

But Hawaii’s buoyant performance over the past year has not only made economists’ jobs a bit easier, it’s taught the rest of us a few lessons, as well. Paul Brewbaker, chief economist for Bank of Hawaii, says: “There’s more resiliency in the local economy than people thought. I’m not diminishing concerns over Sept. 11, because it was tragic, but the economy has shown resiliency, not vulnerability.

This year, economists face yet another challenge in generating forecasts for 2003: the potential of war with Iraq. Brewbaker says the suspense has sapped consumer confidence nationwide, hitting Hawaii where it’s most vulnerable: the visitor industry. “I’m less optimistic than I was earlier in the fall,” he says. “We expected September numbers to be weak, but that continued throughout October and November.”

Where does that position Hawaii’s economy over the next year? Here, Brewbaker and three other leading Hawaii economists share their outlooks for the upcoming year: Leroy Laney, Hawaii Pacific University professor and First Hawaiian Bank consultant; Byron Gangnes, director of the University of Hawaii Economic Research Organization, Hawaii Research Group; and state economist Pearl Imada Iboshi.

Q: How have Hawaii’s visitor demographics changed over the past year?
Gangnes: Last spring, we were already pretty negative about those Japanese numbers. But the reality has been even worse than that. In July and August, we were still down 21 percent compared to that period in 2001. And the third quarter was weaker than we had hoped in the spring. Really, if it hadn’t been for the domestic or Westbound visitors — they really saved us over the past year. They’ve been strong, in part, due to the war on terror. Americans want to travel, and they want to go somewhere exotic, but they don’t want to go too far after 9/11.

Laney: The Neighbor Islands, in general, held up better than Oahu. That’s related to the fact that the bulk of the Japanese market does gravitate toward Waikiki. To an extent, the Neighbor Islands didn’t feel the effect of 9/11 at all. If you look at the numbers, Kauai actually went up after Sept. 11, with lots of time share and condo activity going on.

Imada Iboshi: When we look at spending among Japanese visitors, we don’t see a sharp decrease on average. I think we do see fewer children and that helps to increase the per-person numbers, but it’s still a mixed market. One market we’ve seen much less of is the “opinion-leaders,” the young single women, and that seems to be a trend in overall Japanese travel.

Brewbaker: From May of last year, if you compared it to 2000 and years prior, we were even or ahead for visitors numbers throughout the entire summer; those were solid months. We expected to be down in last September because of the “anniversary effect,” but we were surprised that October faded and November came out looking pretty weak, too. It was because President George Bush had raised the red flag about the potential of an Iraq conflict, and so now, everyone’s thinking about it.

Q: So what are your expectations for visitor arrivals in 2003?
Brewbaker: Early last fall, I initially projected an 8.7 percent increase in visitor arrivals for 2003. But as I reviewed September, October, November numbers, an equivalent of 4 percentage points in tourism volume was missing because of this anticipation of an Iraq conflict. And it’s obviously dragging out at this point, affecting people’s consumption decisions.

Gangnes: The outlook for visitors for 2003 is not as rosy as we forecasted in the spring of last year. But the picture is not terribly bleak. It’s hard to get optimistic about this year, because the Japanese economy is much weaker than we had expected. We continue to hope they’ll return to 2 percent growth, which is modest for them, but they haven’t even been able to manage that.

Q: At last count, Hawaii’s unemployment rate was 4 percent. But we’re still down a few thousand jobs. How much of a concern is this?
Brewbaker: It takes a while to get back. Hiring people is the last thing firms do on their way back. I imagine we’ll see more hiring in the first quarter of 2003. Next year, I project that we’ll still be down about 0.7 percent in the numbers of jobs. … This is more of an Oahu issue, not a Neighbor Island issue. The job market is very tight over there.

Gangnes: That 4 percent unemployment rate is low, but that masks continued weakness in the job market. We’ve only partly recovered from the job losses after Sept. 11. We lost about 2 percent of all jobs, and we’ve gained back only about half of that, meaning there were 7,000 fewer jobs than prior to Sept. 11. Since gaining back that 1 percent, it’s stalled out, meaning the recovery of jobs has basically ended. It’s not so much that the number of unemployed has gone down, it’s that the number of jobs has. The labor market is still weak, and I think that we’ll see it’ll be a drag on the economy over the next year. But that downturn is in tourism-related sectors. There are pockets of strength, the nontourism sectors, in our local economy, like construction and health care.

Q: Construction and real estate investment, specifically residential, are considered the main economic drivers in our local economy. Can we expect that to continue throughout 2003?
Gangnes: Low interest rates and higher home prices have helped consumers tap into purchasing not otherwise available to them. These are some of the lowest interest rates we’ve seen in years, and it’s because the federal government has made a conscious effort to help strengthen the economy. It’s great for the housing situation and banks and the local economy, and it supports consumer spending.

Laney: There does tend to be some antigrowth sentiments on some islands, namely Maui. They’re worried about congestion. Growth moratoriums over the next couple years, with the recent county council elections — I don’t know how that’s going to shake out. But with the building boom we’re experiencing, it won’t be much of a drag in 2003.

Brewbaker: We’re heading into a peak zone here for the Neighbor Islands, which means not as much growth as the last five years. If you missed out, it’s pau already. Whereas on Oahu, the catch-up is just starting to occur. In terms of overall construction activity in the state, we’ll stay at this place for the next few years or so, about $4 billion or more, maybe $4.5 billion. But what’s missing is what determines whether you get the $5 billion: no new office towers, no new destination resort development and, to my knowledge, no new hotels. I’m predicting a 6 percent increase in construction for 2003, and that growth becomes more important with the effect of the potential of war with Iraq.

Q: Low interest rates and less housing inventory have caused home sale prices to surge over the past year. Will these increases eventually cause concern this year?
Imada Iboshi: It’s always a possibility, but the conditions are different now than they were in the ’80s. That bubble was fueled by all this money coming in from Japan, and we’re not seeing that here now. We’re seeing a situation where a lot of the purchasing is being done internally by residents and Mainland investors, as well. One of the reasons the market has been so strong is that we hadn’t increased prices in such a long time. We’re used to being at the top in terms of being one of the most expensive places for home purchases, but we’ve steadily gone down that list. Compared to other places that are as a desirable as Hawaii may be, we’re relatively inexpensive.

Brewbaker: Can home prices continue going up? Hell, yeah. Consider this: Interest rates got low a year ago. Home sales started going up five years ago. So interest rates at these levels were not a deterrent to this upswing. It’s just the real estate cycle. I’m not saying interest rates aren’t important. And as interest rates rise at some point next year, it’ll take a little bit of the edge off of this. But it’s these other elements that have contributed even before interest rates became low—income growth, economic growth, job growth. The median single-family-home price could climb to $450,000 or $500,000 before it starts to bite, just before it kind of gets out of reach. And what’s the median single-family-home price in San Jose? $450,000. So if you’re coming from Northern California, a Hawaii home is a bargain.

Q: There’s that one unpredictable variable that could render any forecast worthless: the potential of war with Iraq. How much of an impact would war have on Hawaii’s economy?
Brewbaker: If you’re looking for a comparison of where we’re at now, you look for templates from the past where there are shocks that provide you with the framework to think about this analytically. Y2K and the Gulf War are sort of the two closest examples in the sense that both involved a certain anticipation of something to occur, but wasn’t sure what exactly. Prior to Operation Desert Storm, we had the mobilization of troops over a six-month period in Operation Desert Shield. Of course, the uncertainties and their weight on travel demand were resolved by the war itself. The timelines in this case are reminiscent because the same set of factors were at work. I don’t know where it’s going to end; we’re kind of in a wait-and-see mode.

Imada Iboshi: The immediate period of actual war would have a very negative impact. The longer term is uncertain. The other concern is how it would impact the U.S. economy as a whole. What happened after the Gulf War, which was of a short duration, was that even though we saw our visitors come back very quickly, the U.S. recession hit. And that had a huge impact on us for several years. More important on the domestic side, at least, is how the U.S. economy handles the situation as a whole. If engagement is decisive and quick, it will help the situation turn more quickly.

Laney: The biggest way we’d be affected is the same as everybody else in the United States. Our recovery would just sort of sputter out, and there’d be a drag on our Mainland visitor industry. It’s a possibility we’d see some increase in defense spending here as a staging area, but that wouldn’t offset the initial negative effects.

Q: Please characterize your overall forecast for 2003.
Imada Iboshi: With the exception of continuing softness in the Japanese market, most of the problems we’ll see will be from any changes in the U.S. economy rather than 9/11-type issues. Our expectation is for relatively low growth, and it really will depend on lots of external conditions, like war with Iraq.

Laney: One of the broadest numbers we get is real personal income, and that has held up in 2002. Amazingly so, in light of the wealth of jobs lost. The biggest wildcard is what happens to the national economy. If it gets back to a recession, we might feel it. But right now, we’re in better shape than the rest of the nation.

Gangnes: I’d expect to see continued moderate growth. That means we’re not ready to take off in the robust growth and job creation we saw in 1999 or 2000, which were banner years. But we’ll continue to move forward at a modest pace over the next year.

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