Outlook for the Hawai'i Economy May 3, 2001 Dr. Carl Bonham University of Hawai'i Economic Research Organization
Summary The Hawaii economy entered 2001 in its best shape in more than a decade. While the external environment has deteriorated in recent months, continued strength in local economic activity will support growth for Hawaii's economy in 2001. Both west and eastbound visitor growth will slow from last years pace, yet total arrivals will set a new record year in 2001 growing by almost 2% over 2000 levels. Construction will continue to lead the economic expansion increasing by nearly 10% in real terms. Payroll jobs and real personal income growth will slow slightly from their pace in 2000, turning in 2.6% and 2.5% growth in 2001. 2000 Year in Review Hawaii's economy accelerated in 2000, posting the best annual performance since 1990. Eastbound visitor arrivals grew by 1.5%, slightly more than our year ago prediction of 1% growth. Although overall visitor days for Japanese visitors declined by 0.6%, 2000 marked the first annual increase (1.7%) in Japanese arrivals since 1997. Meanwhile, the westbound segment grew less than we anticipated, expanding by 4.5%. Total visitor arrivals grew by 3.5% for the year, with the average daily census up 3.1% due to a decline in the average length of stay (primarily Japanese LOS down 0.9%). Visitor expenditures estimates showed strength in 2000, as a result of the yen holding steady and near 107 and brisk US consumer spending. Construction put in place grew faster in 2000 than any time since 1990. After falling by 1.8% in real terms in 1999, the contracting tax base grew at almost 19% in 2000. As a result, the construction sector contributed significantly to personal income growth in 2000: Nominal contracting income grew by over 11% and construction jobs were up 8.5%. Construction sector indicators continue to point towards growth. Oahu home re-sales continue to rise strongly, aided by relatively low mortgage rates and rising consumer confidence associated with
job and income growth. The median time on the market for single-family homes remains near 40 days, the fastest absorption rates since early 1990. The same is true in the condo market, where sales increased by 19.0% in 2000 and prices stabilized. The issuing of private building permits was up almost 13% in real terms in 2000 following a 24% increase in 1999. Job creation in 2000 was also stronger than any time since 1990. State wide jobs grew by 3.1% and show few signs of slowing. In the first quarter of 2001 nonagricultural jobs continue to grow at a 3% pace compared to the same period a year earlier. While contracting job growth has slowed to just under 6%, retail trade, health services, and transportation job growth has taken up the slack. Other labor market indicators have also improved. During the fourth quarter of 2000, the state wide unemployment rate fell below 4% for the first time since 1992. The average unemployment rate for the state in the first quarter of 2001 was 4.1%. Interestingly, civilian employment, which includes self-employed persons, rose by only 1.8% over 1999 levels, suggesting that workers are increasingly holding multiple jobs. Continued improvement in labor market conditions should help to support both income growth and local consumer confidence in coming months. The rising cost of energy, tightening of labor markets, and the rapid pace of retail sales all contributed to an increase in Honolulu consumer prices by 1.8% above 1999 levels. 1 This inflation occurred despite that fact that recent increases in home rental rates have not yet shown up in the data. Once home price and rent increases show up, during the next few years, we can expect further increases in measured inflation rates. For the overall state economy, 2000 saw real income grow by slightly more than our 2.6% year ago forecast: Real income grew at a 2.9% rate, while real GSP is estimated to have grown by 3%. While this represents the most rapid expansion in more than a decade, we expect the final numbers are likely to be even higher as the BEA conducts additional revisions based on more complete data. Unless the BEA revises real income growth upwards, the 3.1% job growth reported by the Bureau of Labor Statistics, would lead one to believe that real wages fell for the average worker. Hawaii Outlook If you focus only on internal indicators of the Hawaii economy, the outlook is very good. In March of 2001, there were 30,550 more jobs and 20,500 more people employed in the state than in March of 1999. While the US economy is slowing from its torid growth in 1999 and 2000, we do not expect either the US or Hawaii economy to slip into a recession. In fact, Hawaii may very well outpace the US during 2001 in both job and income growth. As the US economy resumes a
more sustainable growth rate in late 2001 and 2002, we expect the Hawaii economy to expand at more than 2.5% for the next few years. The overall U.S. economy is expected to slow in 2001 to a near 2.3% rate of growth for real GDP. That slowdown, continued concerns about job losses, and wealth destruction will lead to a slowing of westbound arrivals to 2.3%, slightly more than half its 2000 growth rate. We expect some decline in westbound length of stay as well. The situation in Japan is more bleak. With the yen expected to average near 120 for the year, and real GDP only expected to grow at near 0.5%, eastbound arrivals growth will slow to under 1% for 2001. Overall, we expect total visitor growth of 1.8% for 2001 followed by 2.7% in 2002 as both Japan and the US economies gain some momentum. While visitor arrivals are expected to post a near 2% growth rate, average daily census will grow by 1.7%, and retail sales and hotel revenues will slow substantially with the high value of the yen. Fortunately, the internal improvements in income and job growth will help to support overall growth. We expect payroll job growth of 2.6% percent in 2001 and 2002. In contrast to past years, we expect overall employment growth to be somewhat less than job growth as workers find they are able to hold multiple jobs due to the tightening of the labor market. (The unemployment rate on Oahu has been below 4% since July of 2000.) The construction sector will continue to have a major impact on the pace of growth in 2001. We expect the real contracting tax base to grow at a bit slower rate, increasing by almost 10% in 2001 and almost 5% in 2002. Clearly a single large hotel renovation or expansion could boost the 2002 number significantly. Inflation will remain moderate, but can be expected to build gradually from 1.8% in 2000, converging toward the U.S. rate of 2.8% predicted for 2002. The inflationary process will accelerate with improved demand conditions, tightening labor markets, continued pass through of higher energy costs, and expected increases in shelter costs. We expect 2.4% inflation in 2001 and 2.8% in 2002.
While the external environment has lost much of its momentum acquired in 1999 and 2000, local conditions have picked up quite a head of steam. This domestic strength will support real aggregate personal income growth of 2.5 % in 2001, and over 3% in 2002. Real gross state product will show similar growth. Hawai'i Economic Indicators (Annual Growth Rates)* 1999 2000 2001 2002 Personal Income (Current $) 2.5 4.7 4.9 5.9 Real Personal Income 1.5 2.9 2.5 3.1 Real Gross State Product 1.6 3 2.6 3.2 Consumer Price Inflation 1.0 1.8 2.4 2.8 Visitor Arrivals 2.2 3.5 1.8 2.7 Eastbound -5.4 1.5 0.9 2.1 Westbound 6.6 4.5 2.3 3.1 Real Contracting -1.9 18.7 9.7 5.1 Non-agricultural Jobs 0.7 3.1 2.6 2.6 Employment 0.4 1.8 1.8 1.6 *2000 state product figures are estimates. All 2001 figures are forecast. Real values adjusted for Honolulu CPI inflation. Footnotes: 1. UHERO uses statistical models to prepare forecasts for Hawaii, the US and Asian economies. In those models, we use consumer prices and other data with precision beyond two digits. Because we do not round annual values to the first digit when calculating inflation rates, it is possible that UHERO's estimated inflation rates can differ from those calculated using the Bureau of Labor Statistics' annual numbers. email: bonham@hawaii.edu, gangnes@hawaii.edu Copyright 2001 Carl Bonham. All Rights Reserved.