UH economists warn of slowdown, inflation

Growth is expected to come at a more measured pace than last year's boom

Hawaii's economy will continue to slow as the state's labor, housing and tourism markets remain tepid, inflation soars and personal income growth idles, according to the latest report from the University of Hawaii Economic Research Organization.

It's hard to find good news in the group's newest economic update for 2006 when it's compared to 2005, one of Hawaii's most exceptional years. Last year, tourism set records and the construction industry added jobs at an unprecedented rate. State tax revenue ballooned and residents spent money as personal income growth and home prices soared.

But the good times came with a price. Economic expansion created a tighter job market and higher inflation. Hawaii residents felt more of a pinch in 2006 as wage increases failed to keep up with inflation, said Carl S. Bonham, UHERO director, who prepared the organization's latest report along with Byron Gangnes.

"We are talking about slowing growth, but it doesn't mean that the economy is falling off the edge," Bonham said. "Growth will still continue. It's just going to be at a more measured pace than we saw in 2004 and 2005."

Hawaii's economy isn't likely to sour as badly as it did in 1991 and 1992 after the state's last housing boom took its turn for the worse, he said.

"This is a much more stable slowing," Bonham said. "We have lots of military construction, the housing bubble wasn't as big and our population isn't downsizing. This is a slowdown; it's not a contraction."

However, the cooldown has made Hawaii's economy more vulnerable to shocks such as major natural disasters or tragedies, he said.

The UH organization's third-quarter update made the following revisions to its February forecast:

"Over the next two years, a number of factors will weigh on the Hawaii economy, including high inflation, the end of the construction impetus to growth, and tepid visitor arrivals," the report said. "While hotel rates are likely to remain healthy, the potential for a broad slowdown in the U.S. economy and the persistence of high energy prices both pose risks for the visitor industry."

Slowdowns in the construction and housing markets in some U.S. mainland regions could result in decreased travel and second-home buying in Hawaii, Bonham said.

Still, external conditions remain generally favorable, and growth in local jobs and personal income provides a sound foundation for continued spending, he said.

Barring a natural disaster or major tragedy, Hawaii residents -- especially those who own their own homes and aren't subject to increased rents -- are unlikely to notice the slight changes in Hawaii's economy, Bonham said. The greatest impacts will be felt at the cash register because few people have found that their wages have kept pace with the cost of living, he said.

"We are going through a period where wages aren't going to keep up with inflation," he said. "The average man or woman has already seen this at the gas pump, in their rent, in their health care costs and at the grocery store."

Dick Grimm, president of the Hawaii Foodbank, said tighter budgets in 2006 have given rise to more clients.

"Our food is distributed through 250 agencies on Oahu and they are saying that there has been a tremendous increase in the number of folks who are coming in to get food," Grimm said.

Rising rent appears to be the largest problem for the 131,000 or so clients served each year by the Foodbank, Grimm said. Caseloads have increased about 14,000 or so since 2001, he said.

Some Hawaii residents are likely to see wages start to catch up in 2007 and 2008, Bonham said.

"Public sector workers got an estimated 4 percent increase during their bargaining this year -- it didn't cover inflation this year, but it's close enough to cover inflation next year or maybe the year after," he said.