CRAIG T. KOJIMA / CKOJIMA@STARBULLETIN.COM Paul Brewbaker, economist for Bank of Hawaii, said yesterday that the state economy is set for modest growth.

Isles’ economy back
on growth path

The pace is similar to the past
5 years, an economist says

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By Dave Segal
dsegal@starbulletin.com

Hawaii's economy, jolted by the aftermath of Sept. 11, has completed its recovery and resumed the modest 2 percent growth path it has followed for the past five years.

That was the assessment of Bank of Hawaii economist Paul Brewbaker just a week before the anniversary of the terrorist attacks.

"I'm optimistic about continued moderate growth," Brewbaker said. "I think those (geopolitical) shocks lurk out there in the future. Our trick is to learn how to deal with them when they occur."

Brewbaker, who also revealed the results of the bank's semi-annual Hawaii business confidence survey, said for the first time since the summer of 2000 merchants' confidence has increased.

The survey, answered by 303 businesses statewide, showed that 45.3 percent of respondents expected sales in their own business to increase during the next 12 months with 18.1 percent expecting lower sales.

Although the results meant less than half of the businesses forecast improved sales, Brewbaker saw it as a positive sign.

"Whatever the view today, it's better than it was six months ago," he said. "It's not as good as it was two summers ago. But it's on its way back to that territory."

Generally, businesses were more optimistic about their own outlook than for the Hawaii economy. Only 24 percent saw an improved level of economic activity in the state over the next 12 months while 30 percent expected economic activity to decrease.

The Bank of Hawaii survey, conducted in August, showed a drop in confidence from a second-quarter survey conducted by the Business Banking Council and sponsored by American Savings Bank. That survey said 30 percent of responding businesses expected the economic outlook for Hawaii to improve in the coming year with 14 percent expecting things to get worse.

Brewbaker said an upswing in construction activity and real estate investments continue to drive Hawaii's economy, especially on neighbor islands where homebuilding volumes have exceeded those on Oahu. He said, though, he expects Oahu to close the gap on new home construction as regulatory growth controls take hold on the other islands.

Ultimately, he said, potential homebuyers or investors may miss the boat if they stay on the shore too long.

"If you look at most of the cyclical patterns, we're sort of halfway through in terms of the construction and real estate cycles," Brewbaker said. "One of my concerns is that the affordability window of opportunity, which was opened even wider by lower interest rates this year, might begin to close over the next couple years when you combine income, which has been growing, interest rates, which have been low, and home prices or rents, which have been low and are starting to move up. It's the last one (home prices) that is probably the greatest risk."

Brewbaker said Hawaii's objective is how to accelerate its growth given that tourism is a mature business and has stabilized.

"We've already got 4 percent unemployment," he said. "We've already got 1 percent inflation. Ten years ago, we used to dream about having both at the same time. The challenge is we've only got 2 percent real (adjusted for inflation) growth ... So how do we get to 3 or 4 percent growth? To get back to the path we were on before we would have to have a robust acceleration from this point forward. We could get that. I've seen signs of that in the real estate market and in the builders' response to the potential to make money in that arena."