Deep isle slump forecast

UH report grim on isles’ economy

The University of Hawaii Economic Research Organization revised its state quarterly forecast in a report released today, portraying a much deeper downturn this year and next.

UHERO says the visitor industry will be the hardest hit by the demise of ATA and Aloha airlines, in addition to the departure of a second cruise ship and a surge in oil prices.

Instead of a 1.9 percent drop, visitor arrivals are now expected to fall by 4.6 percent this year, according to UHERO.

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The organization also reduced its forecast for 2008 inflation-adjusted growth by nearly half a percentage point, to minus 0.1 percent, and expects employment to fall by about half a percentage point this year and next. Inflation, meanwhile, is expected to be higher than originally predicted, at 5 percent, this year.

No relief is in sight until 2010.

NINA WU

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By Nina Wu
nwu@starbulletin.com

Hawaii residents will need to brace themselves for an even deeper economic downturn than originally expected.

The University of Hawaii Economic Research Organization's June quarterly forecast update portrayed a grim economic outlook for the rest of this year and next, with drastically reduced visitor growth, net job losses, lower real income growth and higher inflation.

The visitor industry is the most affected, according to Byron Gangnes, co-author of the report along with Carl Bonham.

"I think the weakness in the visitor industry, after the failures of ATA and Aloha airlines, is the biggest part of this downward revision, and, of course, compounding that is the concern about what's going to happen with air travel and air solvency going forward because of oil issues."

Byron Gangnes / Co-author of report

UHERO revised its 2008 forecast for visitor arrivals to a 4.6 percent drop from a 1.9 percent drop due to the closures of ATA and Aloha airlines, as well the departure of a second cruise ship and a surge in oil prices.

UHERO now expects small net declines in both real income and jobs this year, and a higher 5 percent inflation.

The real income, or inflation-adjusted, growth forecast for 2008 has been reduced to minus 0.1 percent from 0.3 percent. Employment is expected to fall by about half a percentage point this year and next.

Net job losses are expected to occur in most sectors of the local economy over the next two years, with the airline industry suffering the largest losses, followed by the tourism sector, accommodation and food services, and wholesale and retail trade.

Some net job losses also are predicted to occur in the finance, insurance, real estate and civilian federal government sector, as well as in the small and perennially shrinking agriculture and manufacturing sectors.

Construction, which expanded by nearly 7 percent last year, will slow to just 1.4 percent job growth this year and begin to shed jobs in 2009, said the report.

However, Gangnes said, these losses are not terribly large. The net job decline is forecast at less than 5 percent in 2009 and 2010, mild by national standards.

The annual unemployment rate is expected to peak at 4.2 percent in the fourth quarter of 2009 before beginning to subside.

Due to the sharp rise in oil prices, UHERO has raised its Honolulu inflation forecast by six-tenths of a percentage point to 5 percent inflation for 2008, roughly the same experienced last year.

No significant recovery of the local economy is expected to begin until 2010, according to UHERO, making this a "shallow but fairly lengthy Hawaii economic contraction."

Compared with the Sept. 11, 2001, terrorist attacks, Gangnes said the airline woes and oil prices are expected to create a longer period of weakness.

After 9/11, he said, Hawaii's visitor industry experienced a sharp downturn but made a relatively rapid snapback, particularly from U.S. mainland visitors.

"This time around, we don't expect as deep a slump in the visitor industry or the local economy," Gangnes said. "But it's going to take a couple of years to get back on track."

UHERO expects overall visitor arrivals by air to Hawaii to fall 4.6 percent this year to 7.03 million visitors, nearly 3 percentage points weaker than the March forecast. Visitor days also are expected to decline by more than 4 percent.

Some positive news is that - despite the drop in U.S. mainland and Japanese visitors - there has been an uptick in European, Canadian and other Asian visitors.

UHERO sees some promise in potential new visitor markets coming from China and Korea, but these are still relatively small.

Oil prices remain a wild-card factor that could have long-lasting impacts on the Hawaii economy.

"There's a lot of uncertainty about that," Gangnes said. "Oil prices are a big unknown now, while the situation in the housing market and U.S. credit is still an unfolding story."

But UHERO's view is that oil prices cannot sustain these high levels, Gangnes said, and eventually will fall below $100 a barrel by the end of the year.

If oil prices remain at current record levels, however, there could be a profound negative impact on travel plans and the visitor industry, and a deeper slowdown could occur.

"For that, about all we can do is keep our fingers crossed," the report said.