Fed president sees Hawaii in strong position to weather slowdown
Yellen predicts U.S. will avert "outright recession"
Federal Reserve Bank of San Francisco President Janet Yellen said Hawaii is poised to fare better than much of the country during the U.S. economic slowdown but that the state nevertheless is feeling the effect from a reduction in consumer spending.
"It seems that in many ways, because housing is stronger and that's not a source of such drag in Hawaii as it is elsewhere in the country, that Hawaii should perhaps do better than the country as a whole," Yellen said last night following her speech at an economic forecast dinner at the Waialae Country Club. "But my guess is that (Hawaii) will see some spillover just from the (nationwide) cutback in consumer spending. There could be an impact on tourism from the mainland."
Yellen, a member of the Federal Open Market Committee headed by Chairman Ben Bernanke, said in her prepared remarks that the U.S. economy probably will experience "slow, sluggish growth, and not outright recession, in coming quarters."
But when pressed later about whether the U.S. could avoid a recession, Yellen said she wasn't totally confident about making that call.
"What I am saying is my most likely outcome is not a recession, but there is considerable uncertainty around that," she said.
Yellen said that the Federal Reserve's federal funds rate cuts, which have totaled 2 1/4 percentage points since last September to the current 3 percent level, should "promote a pickup in growth over time." Yellen forecast "anemic growth" in the U.S. for at least the first half of 2008.
While acknowledging that Hawaii hasn't been immune to the slowdown, Yellen -- noting the drop-off in tourism -- said the state has an economy with a different industrial structure than the rest of the country.
"Tourism is so important and military defense is also highly important, so it's a somewhat unique industrial structure," she said during her post-speech remarks. "I think those things will be protective, so even though there's been some slowdown in the economy, you're starting from such a very strong situation."
Yellen, making her first speech of the year, said even though tourism has slowed and unemployment has risen to 3.2 percent from an all-time low of 2 percent at the end of 2006, economic conditions in Hawaii remain sound by historical standards and that the state appears well-positioned to weather any further spending reductions by U.S. consumers.
Hawaii's lack of exposure to the subprime lending market also has helped prevent a steeper slowdown, she said. Subprime lending accounted for only about a fifth of mortgage originations in Hawaii in 2006 compared to about one-third in parts of Arizona, California and Nevada -- three states that have suffered the worst of the downturn.
Yellen said her sense as to why the Hawaii property market seems to be holding its own is because there was less subprime lending than on the mainland, the influence of Asia and foreign purchases is larger, and the depreciation of the dollar.
"There is a lot of differences across different areas in the country and even within the 12th District," Yellen said. "Hawaii's on the stronger side. But it's not as though Hawaii is utterly unique and having fewer problems than some of the hard-hit areas. For example, Washington and Oregon -- those markets are also on the stronger side.
"Every place we've seen a deceleration in prices, but the run-up in prices where the run-up was the most extreme -- in areas of Arizona, Nevada, California -- there we're seeing a big decline. But there is considerable difference across regions, and Hawaii is with the stronger side. You see deceleration but not a dramatic decline."