The Sept. 11 Terror Attacks

Effect on Hawaii’s Economy.

December, 2001

By Carl Bonham and Byron Gangnes, University of Hawaii Economic Research Organization

he economic fallout from the Sept. 11 terror attacks is being felt worldwide, but few places more deeply than Hawaii. Because of our reliance on air transportation and tourism, Hawaii’s economy has already suffered sharp losses. While there remains considerable uncertainty about a tourism recovery, we now have sufficient evidence to form a preliminary forecast for the coming two years.

Hawaii’s tourism industry has been thrown into a severe downturn. Effects on the broader economy will be less severe, partly because the Hawaii economy was performing relatively well before the attacks, and partly because expansionary monetary and fiscal policy in the U.S. will begin to provide stimulus in coming months.

Hawaii Tourism Hit Hard

Visitor arrivals to Hawaii were completely interrupted for two days following the attacks. Since then, domestic passenger numbers have improved to about 11 percent below last year’s levels. There has been no discernable improvement in international passenger counts, still nearly 60 percent lower than last year. The effect of the September losses alone caused third quarter domestic arrivals to fall by 7 percent, 17 percent for international arrivals. Tourism businesses have responded to the downturn with a rapid pace of layoffs and reductions in their workers’ hours. Between Sept. 11 and Oct. 13, there were nearly 17,000 new initial claims for unemployment insurance benefits; we estimate that about 11,000 are attributable to the attack. About half of these claims occurred in the hotel industry, where more than 5,000 new claims for compensation were filed. The majority of the remaining claims occurred in other sectors closely related to tourism: transportation, eating and drinking establishments, and other retail businesses. The actual number of jobs has fallen by less than this, since the unemployment figures include persons claiming partial compensation because of reduced hours.

Job losses have not extended significantly beyond the tourism and related industries so far. But there already are some indications of general economic fallout from the tourism slump. Personal bankruptcy filings in Hawaii increased by 62 percent in the three weeks following the attacks, an increase that led the nation. As the tourism downturn continues, weakness will spill over more substantially to the broader economy.

Recession Before Recovery

Over the next two years, Hawaii’s prospects will depend on economic developments in the U.S. and Japan, but also on the military and security situation, which is much harder to predict. The latter is key to a potential recovery of consumer confidence in air travel and a willingness to vacation in Hawaii.

The immediate impact of the September attacks caused a contraction of 0.4 percent in U.S. gross domestic product for the third quarter, with continuing weakness expected to push the economy into official recession by the end of the year. However, residual strength in consumer spending and housing investment, combined with significant government stimulus, will make this a short and shallow recession by historical standards. For Japan, the terrorism crisis and the downturn in the all-important U.S. market have pushed the economy deeply into recession. Output will fall sharply through the end of the year before a modest recovery starts by the middle of next year.

Economic weakness in key markets and lingering concerns about air travel will delay recovery of Hawaii tourism. Westbound visitor arrivals are expected to fall 9.2 percent in the fourth quarter compared with the fourth quarter of last year, after a 4.4 percent year-on-year decline in the quarter just ended. That will bring westbound arrivals for the year 3.9 percent below their 2000 level. Continuing gradual recovery in mainland-Hawaii travel will bring westbound visitors close to our pre-attack forecasts by the end of 2002.

The eastbound outlook is considerably worse, with arrivals fully 41 percent below last year in the fourth quarter, after a 14 percent decline in quarter three. Recovery is very slow, so that eastbound arrivals remain far below pre-attack expectations for the entire forecast horizon, and in fact, fail to regain pre-attack levels.

Overall visitor arrivals are expected to fall nearly 8 percent for 2001 as a whole. They will rise 2 percent in 2002 and accelerate to 7.4 percent growth (from a low base) in 2003 as a strong mainland expansion and, finally, Japanese recovery drives a tourism revival.

In Hawaii, sectors closely related to tourism will bear the brunt of the visitor slowdown. The hotel industry is expected to lose 6,400 jobs by the first quarter of next year (roughly 16 percent of the hotel workforce). Jobs will be added back slowly as the industry recovers, approaching pre-attack levels only at the very end of 2003. Income in the hotel sector will show a similar path, falling nearly 14.3 percent below 2000 levels by the fourth quarter of the year, and recovering gradually thereafter.

The transportation sector will shed about 2,700 jobs due to the attacks. This will pull real income for the broader transportation, communication and utilities sector down 2.1 percent in the fourth quarter compared with 2000 and 5.7 percent below last year’s levels in the first quarter of 2002. Because of the general tourism slump and also a change in the visitor mix toward lower-spending mainland visitors, retail trade will suffer a pronounced setback. The industry will lose more than half of the jobs that it added over the past two years — about 5,000 jobs overall — and see a decline in 2002 income of 3 percent.

The aggregate impact on Hawaii’s economy will be less severe than in the tourism-related industries. Total non-agricultural employment will fall by “only” 14,100 payroll jobs (about 2.5 percent) because modest continuing growth in some sectors will offset losses in others. Jobs will return to pre-attack levels by the beginning of 2003, but at these levels will be about 4 percent lower than we had forecast prior to attacks. Because survey employment will fall by less than payroll jobs, the unemployment rate will rise 1.2 percentage point to 5.6 percent by the second quarter of 2002 before falling back somewhat as economic recovery takes hold.

Aggregate real income, the broadest measure of overall economic activity that we track, will shrink in the fourth quarter of 2001 and first two quarters of 2002, before resuming growth. By 2003, the stimulus from rebounding visitor arrivals will create robust growth at about a 3.5 percent annual rate. A familiar silver lining in slack economic times in Hawaii is falling price pressures. We expect to see that in this case as well, with consumer inflation declining to just below 1 percent in 2002.

A Perilous Time for Forecasts

There are always risks that unforeseen events will lead to outcomes that differ in important ways from forecasted values. In the present situation, the risks are considerably larger than normal because some of the primary factors likely to drive the economy are simply unknowable at this point. At the head of the list is the progress of the War on Terrorism: will hostilities in the Middle East be brought to a close fairly quickly, or will the scope of war in the region intensify? At home, how will the threat of new terrorism attacks unfold?

Of greater importance for Hawaii may be the evolving attitudes of consumers toward vacations and air travel. For mainland travelers, there appears to be continuing improvement in confidence and willingness to travel. The resilience of this renewed confidence is unclear, and there is no evidence yet of a turnaround in the Japanese market.

There are also policy uncertainties. The quick response by the Federal Reserve will begin to be felt soon. The federal government also has moved quickly to support airlines and New York rebuilding, with a promise of general economic stimulus in coming months. Japan faces real constraints as it tries to deal with this crisis on top of an already faltering economy, and the hesitance of authorities to provide needed stimulus makes a quick recovery difficult to foresee.

The State’s own policy response to the looming downturn has been distressingly cautious. October’s special session yielded tax incentives and program support to address the social costs of the slowdown. Legislators called for budget cuts that could completely offset any stimulus. The legislature approved only limited new borrowing authority for capital improvement projects, the single area where the state government has the potential to substantially increase spending.

Hawaii has been aided by the relatively strong position of the economy going into the crisis, particularly a strong construction industry and rapid income growth for Hawaii residents. The depth of the tourism shock makes it difficult to predict how other sectors like construction will weather the storm. And the new risk to tourism posed by dengue fever cannot be ignored. These additional risks raise the possibility that the pace of Hawaii recovery could be further delayed.

For more on the UHERO forecast go to This research was supported in part by a grant from the State of Hawaii Department of Business, Economic Development a

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Carl Bonham and Byron Gangnes