Kaua i Economy Shows Signs of Cooling

Kaua i Economic Outlook Summary: Kaua i Economy Shows Signs of Cooling prepared for the County of Kaua i by the University of Hawai i Economic Research Organization July 1, 26

Kaua i Economic Outlook Summary prepared for The County of Kaua i July 1, 26 by the University of Hawai i Economic Research Organization 2424 Maile Way, Room 542 Honolulu, Hawai i 96822 (88) 956-765 uhero@hawaii.edu Carl S. Bonham Ph.D., Executive Director Byron Gangnes Ph.D., Research Associate Leroy O. Laney Ph.D., Research Associate Research assistance by Somchai Amornthum and Porntawee Nantamanasikarn

UHERO Kaua i Economic Outlook Summary 1 July 1, 26 EXECUTIVE SUMMARY Economic growth on Kaua i has likely peaked. The pace of job growth eased last year, and we expect further moderation over the next two years. Construction will decelerate as the market reaches a cyclical peak. At the same time, planned additions to the visitor plant will support somewhat faster Kaua i visitor expansion than we expect for the state as a whole. Conditions continue to look favorable in key external economies. We expect the U.S. economy to grow by 3.2% this year and 3.1 in 27. Forward-looking indicators of the Japanese economy are very positive, and we expect 3% growth this year, slowing to 2% in 27. Kaua i will see more than 5% visitor growth this year. The pace will slow to 3.3% next year, but remain above the statewide average of 2%. Additions to the room stock, primarily in condo and time-shares units, will keep Kaua i s occupancy rate from rising above last year s 76.6% rate. The labor market will remain extremely tight, restraining overall economic growth. The rate of job growth slowed nearly a percentage point between and, and we expect further slowing to roughly 2% growth for the next two years. Kaua i s unemployment rate will remain very low. The residential real estate cycle on Kaua i has been very pronounced. With acute affordability problems emerging, and interest rates likely to rise further, we expect that residential construction will slow over the next several years. However, with continued high permitting levels, the slowing is likely to be gradual. With slowing of overall job growth, we also expect growth of real personal income to moderate. After slowing from 4.2% in to an estimated 3.2% growth in, we expect 3% real income growth this year and next. Labor shortages will put upward pressure on wages and prices. Housing costs are likely to have a bigger impact on the Kaua i cost of living than the high energy prices. We expect local inflation (measured by the Honolulu CPI) of 3.8% this year, on par with. Inflation will remain above 3% in 27. The biggest risk to the Kaua i economy is a slowing of growth on the U.S. Mainland, which could occur if Federal Reserve monetary policy continues to tighten.

UHERO Kaua i Economic Outlook Summary 2 July 1, 26 Recent Developments 29 4 Kaua i s economy had another very good year in, but with some decline in the rate of aggregate job growth. The following are key developments over the past year: 1 The Kaua i visitor industry was healthy in on all fronts hotels, time share, rentals, activities, restaurants, and retail. Total visitor arrivals were up 6.6%, all of that attributable to strength in the U.S. market. U.S. arrivals were 8.9% higher, while Japanese visitors fell over 2.%. The Japanese share of Kaua i arrivals is very small, just 4.7% in, so the U.S. market drives the industry. 11 1 28 27 26 25 24 23 1996 1998 Non-farm Jobs, Kauai County (Thou.) Kaua i Non-Farm Payroll Jobs 3 2 1-1 18 16 14 12 1 98 96 1996 1998 Visitor Arrivals, Kauai County (Thou.) Kaua i Visitor Arrivals Falling average length of stay in the domestic market led to a smaller 1.8% rise in visitor days for. Hotel occupancy was 76.6% for the year, down slightly from, and the average daily room rate increased 4.3%. In the labor market, the numbers for tell a story of a strong economy, but one facing emerging 1 This report is based in part on the UHERO County Economic Forecast Report, which describes recent developments and prospects for Hawai i s four counties, including industriallydetailed forecasts for each county through 28. Please contact UHERO for more information. 5-5 -1 growth constraints. The total number of payroll jobs rose 3% for the year as a whole, nearly a full percentage point lower than the 3.8% growth seen in. This slowing reflects growing shortages of qualified people to satisfy burgeoning labor demand. More evidence of Kaua i s tight labor market is seen in the unemployment rate, which averaged 2.7% in, down from 3.4% in. Kaua i s jobless rate has been falling steadily over the past decade, from a high of 11.3% in 1996. Job growth was somewhat mixed across sectors in. Agriculture led with 7.8% growth, but that simply offset part of a 11% decline in. Kaua i farm job totals are now so small that the addition or subtraction of a relatively few workers can lead to large swings in growth rates. More significantly, construction jobs rose 11.7% last year, mirroring trends throughout the state. Total service jobs were up 4.2%, driven by 8.4% growth in the other services sector, which includes business, administrative and professional services. Health care jobs expanded by 2.6%. Jobs in the finance, insurance and real estate sector expanded by 3.3%. Other major job categories saw slower growth last year. The aggregate wholesale and retail trade sector

UHERO Kaua i Economic Outlook Summary 3 July 1, 26 saw less than 1% growth, and jobs in transportation and utilities decline by more than 1%. Accommodation and food service jobs increased at a 1.7% pace. In the public sector, Federal jobs declined by 1.5%, and State and local jobs were about flat. 8 7 6 2 18 16 The most comprehensive measure of the Kaua i economy is real personal income, which records the income accruing to Kaua i residents from all sources. Real personal income numbers are adjusted for inflation to permit valid comparisons over time. UHERO estimates that aggregate real income for Kaua i County rose by 3.2% in, following 4.2% growth in. 2 5 4 3 2 1999 21 23 Price ($Thou.) Volume (Transactions, Right Scale) 14 12 1 8 26 18 6 Kaua i Single-Family Home Resales 17 16 15 14 13 1996 1998 Real Personal Income, Kauai County ($ Mil.) Kaua i Real Personal Income Growth ( is UHERO estimate) Kaua i s housing crisis reached acute proportions in. Median single family home prices climbed to the upper $6, range, and condominium prices are now further into $4,-plus territory. As we have noted in past reports, the housing price problem on Kaua i is in many ways more serious than on other islands. Higher paying jobs are scarcer on Kaua i, and off-shore demands for luxury real estate 2 County income data from the U.S. Bureau of Economic Analysis is published with a considerable lag. UHERO has estimated county-level income data for based on compensation, job, income tax, and statewide income figures. 4 2-2 -4 feed into the local price picture. This kind of squeeze, which Kaua i shares with Maui, has been getting progressively worse over the past several years. In some areas on Kaua i, prices have risen more than others, but they have risen considerably across the island economy. One way to see the extent of the recent home price run up is to compare current prices with those at the bottom of the last housing cycle in 1996. Price today are almost 2% higher than they were in 1996, a staggering increase. Therefore, a slowing of the hot housing market would come as something of a relief. In fact, there was a drop in resales volume late last year, which continued into the first part of 26. The slower activity is expected to presage a deceleration in price growth going forward. Another problem that has worsened in recent years is infrastructure shortfalls. Traffic congestion along the island s two main arteries has worsened. Another infrastructure problem surfaced tragically in March 26, when a broken dam caused major flooding and loss of life on Kaua i. Improved state and County budgets may permit some progress addressing infrastructure needs in coming years.

UHERO Kaua i Economic Outlook Summary 4 July 1, 26 1 1 14 4 95 9 8 6 4 12 1 2 2 8 85 8-2 -4 6 4-2 -4 75 21 23 26 27-6 2 21 23 26 27-6 U.S. visitor arrivals (Thou.) Japan visitor arrivals (Thou.) Kaua i U.S. Visitor Arrivals Forecast Kaua i Japanese Visitor Arrivals Forecast UHERO Kaua i Forecast Summary Economic growth on Kaua i has likely peaked, as indicated by the slowing of job growth that began last year. Growth at a more measured pace is expected over the next several years. Construction will decelerate as the market reaches a cyclical peak. At the same time, planned additions to the visitor plant will support somewhat faster Kaua i visitor numbers than for the state as a whole. Conditions continue to look favorable in the key external economies that underpin Kaua i economic activity. U.S. real GDP grew at an annual rate of 4.8% in the first quarter of 26, rebounding from a slow fourth quarter. The overall outlook for the U.S. economy remains sound. We expect growth to slow from the strong first quarter number, so that annual growth will come in a bit lower than we have seen over the past two years. After expanding by 3.5% last year, we expect the U.S. economy to growth by 3.2% this year, and 3.1% in 27. Japan s economy slowed somewhat in the first quarter of the year. Real GDP expanded at an annual rate of 1.9%, following 5.4% growth in the fourth quarter of last year. Private demand was fairly strong, but a cut in public investment restrained growth. We believe that Japans economy is well-positioned to continue its current expansion. After 2.7% real GDP growth in, Kaua i Economic Indicators, Year-Over-Year %Change X 23 26 27 Visitor Arrivals -3. 4.6 6.6 5.3 3.3 Japan Visitor Arrivals -45.7 6.2-2.2 5.3 9.6 U.S. Visitor Arrivals 2.8 4.6 8.9 3.8 3. Payroll Jobs 3.9 3.8 3. 1.9 2.1 Inflation Rate, Honolulu MSA (%) 2.3 3.3 3.8 3.8 3.2 Real Personal Income 3.7 4.2 3.2 3. 3. Notes: Source is UHERO. Figures for 26 27 are forecasts. Income for is a UHERO estimate.

UHERO Kaua i Economic Outlook Summary 5 July 1, 26 we expect 3% growth this year. Growth will slow to 2% next year, as the business cycle expansion matures. Kaua i will see more than 5% visitor growth this year, primarily from the key U.S. market. After three very strong years, the pace of visitor growth will begin to slow, although not as rapidly as on other islands. Kaua i is seeing relatively stronger growth in accommodations than the other islands, and so the County will maintain growth above 3% for the next few years. By comparison, statewide visitor growth will drop to 2% in 27, and will slow further thereafter. U.S. arrivals growth will decelerate to 3% in 27. We expect the Japanese market to turn moderately positive this year, following a 2% decline in. There will be further recovery of the Japanese market, to 5,6 visitors in 27. Still, Japanese visitors will account for just over 4% of Kaua i visitors. Additions to the room stock, primarily in condo and time-shares units, will keep Kaua i s occupancy rate from rising above last year s 76.6% rate. 31 3 29 28 27 26 25 21 23 Payroll Jobs (Thou.) 26 Kaua i Non-Farm Payroll Job Forecast 27 The labor market will remain extremely tight, restraining overall economic growth. The rate of job growth slowed nearly a percentage point between and, and we expect additional slowing this year. After 3% job growth in, job growth will manage roughly 2% growth for the next two years. This will 4. 3. 2. 1.. 185 18 175 17 165 16 155 15 21 23 Real Income ($ Mil.) Kaua i Real Income Forecast 26 27 keep Kaua i s unemployment rate near the very low levels we have seen in recent months. The residential real estate cycle on Kaua i has been very pronounced. With acute affordability problems emerging, and interest rates likely to rise further, we expect that residential construction will slow over the next several years. However, there was a very high level of permitting last year, so the slowing is likely to be gradual. With slowing of overall job growth, we also expect growth of real personal income to moderate. After slowing from 4.2% in to an estimated 3.2% growth in, we expect 3% real income growth this year and next. Labor shortages will put upward pressure on wages and prices. For consumers, the story of the year has been high gasoline prices. However, the limited expenditure by residents on transportation fuels limits our overall exposure to energy-related inflation. Home prices and electricity costs may continue to feed through. We expect local inflation of 3.8% this year, on par with. Inflation will remain above 3% in 27. 3 3 Consumer prices in Hawai i are available only for the Honolulu MSA. 6 5 4 3 2 1

UHERO Kaua i Economic Outlook Summary 6 July 1, 26 4. 3.5 3. 2.5 2. 1.5 1..5 21 U.S. 23 Honolulu 26 27 U.S. vs. Honolulu Inflation Forecast The biggest risk to the Kaua i economy is a slowing of growth on the U.S. Mainland. The Federal Reserve has begun to express rising concern about inflation risks, signalling that further interest rate hikes are likely. Not surprisingly, financial markets have reacted negatively to this, and stock markets recently gave up most of their year-to-date gains. Tighter monetary policy runs the risk of weakening the national economy and precipitating a rapid slowdown of the visitor industry, an industry that remains the anchor for the Kaua i economy.

UHERO Kaua i Economic Outlook Summary 7 July 1, 26 TABLE 1: MAJOR ECONOMIC INDICATOR SUMMARY KAUA I COUNTY FORECAST 23 26 27 Non-farm Jobs (Thou) 27. 28.1 28.9 29.4 3.1 % Change 3.9 3.8 3. 1.9 2.1 Total Population (Thou) 6.7 61.8 62.6 63.4 64.2 % Change 1.2 1.9 1.3 1.2 1.3 Total Personal Income (Mil) 1,553.9 1,672. 1,791.2 1,914.5 2,34.2 % Change 6.2 7.6 7.1 6.9 6.3 Inflation Rate, Honolulu MSA (%) 2.3 3.3 3.8 3.8 3.2 Real Personal Income (Mil $) 1,65.3 1,672. 1,725.6 1,776.5 1,829.6 % Change 3.7 4.2 3.2 3. 3. Real Per Capita Income (Thou $) 26.4 27. 27.5 28. 28.5 % Change 2.5 2.3 1.9 1.7 1.7 TOURISM SECTOR DETAIL Total Visitors (Thou) 975.9 1,2.9 1,88.6 1,146.8 1,184.4 Japanese Visitors (Thou) 51.7 54.9 43.8 46.1 5.6 U.S. Visitors (Thou) 817.4 855.4 931.2 966.5 995.2 % Change - Total Visitors -3. 4.6 6.6 5.3 3.3 % Change - Japanese Visitors -45.7 6.2-2.2 5.3 9.6 % Change - U.S. Visitors 2.8 4.6 8.9 3.8 3. Avg. Length of Stay (Days) 6.7 6.7 6.4 6.4 6.4 Visitor Days (Days) 6,516.7 6,86.9 6,983.3 7,353.5 7,6.1 % Change 5.8 5.3 1.8 5.3 3.4 Avg. Dail Census (Thou) 18.2 19.2 19.7 2.3 2.8 % Change 4.7 5.5 2.7 3.3 2.4 Occupancy Rate (%) 74.7 77.5 76.6 76. 76.5 Total Room Stock (Thou) 7.3 8.1 8. 8.2 8.5 % Change 3.1 11.7-1.3 2.5 3.7 Note: Source is UHERO. Figures for 26 27 are forecasts. Figures for income are UHERO estimates.