Isle experts expect wave of recession

Economists say the Wall Street crisis will likely damage Hawaii’s delicate economy

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The shakeup of some of Wall Street's largest players, further exacerbating the nation's financial troubles, is expected to push Hawaii into recession.

Though far from Hawaii's shores, turmoil on Wall Street with the same-day news of Lehman Brothers Holdings Inc.'s bankruptcy, Bank of America Corp.'s acquisition of Merrill Lynch & Co. and AIG Hawaii parent American International Group Inc.'s plea for emergency funds is expected to diminish consumer confidence even more.

The state's lead tourism industry, already reeling from a sharp drop in visitors, is expected to spiral even further since it is tied to consumer spending and a healthy economy. Also of significant concern is the local housing market, which hinges on borrowing and financing for land development - a sector that is already struggling to make deals happen with the virtual dry-up of large institutional investments in the islands.

"We already predicted job losses for two years; that's a recession, and this can't do anything but make it worse," said Carl Bonham, an economist with the University of Hawaii Economic Research Organization. "It's bad, there's absolutely no doubt about that."

UHERO, which is set to release an updated economic forecast this week, predicted in June job losses of 0.2 percent for both 2008 and 2009.

To some extent, Hawaii is already seeing the effects of a recession, including increased bankruptcies and foreclosures, the demise of longtime businesses and mass layoffs statewide, according to finance experts.

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Calling it a once-in-a-lifetime financial crisis, local finance experts expect the national market meltdown to lead to a recession in Hawaii.

How does yesterday's Lehman Brothers and stock market meltdown impact you? Question: How will this affect my investments and 401(k)? Answer: It depends on what funds each participant has invested in and how much exposure they've had to higher-yielding bonds and more riskier stocks. Older participants with bigger or more mature 401(k)s have to really worry about their allocation and watch their risk, as opposed to younger participants who have most of their contributions ahead of them. Question: What will this mean for the Hawaii housing market? Answer: The financial crisis means the cost of borrowing should go up, making loans harder to get, and banks might require more money down. That should affect demand for pricier homes. Question: How safe is the local financial industry? Answer: We're relatively much better off, with one or two exceptions. Our largest banks have been run conservatively, so they're not in the same mess a lot of these New York institutions are in. Source: Neil Rose, Honolulu-based Cadinha & Co. chief investment officer; and Richard Dole, CEO of Honolulu-based Dole Capital LLC

"It's hard to see what could be the worst financial crisis in at least the last 50 years and have it not precipitate into something like a recession," said Neil Rose, chief investment officer of Honolulu-based Cadinha & Co. "We don't see this as a quick bottom - it's going to take some time to figure out exactly who is tied to these financial institutions."

Though far from Hawaii's shores, turmoil on Wall Street with the same-day news of Lehman Brothers Holdings Inc.'s bankruptcy, Bank of America Corp.'s acquisition of Merrill Lynch & Co. and AIG Hawaii parent American International Group Inc.'s plea for emergency funds is expected to exacerbate declining consumer confidence.

The state's lead tourism industry, already reeling from a sharp drop in visitors, is expected to spiral even further since it is tied to consumer spending and a healthy economy. Also of significant concern is the local housing market, which hinges on borrowing and financing for land development - a sector that is already struggling to make deals happen.

"We already predicted job losses for two years; that's a recession, and this can't do anything but make it worse," said Carl Bonham, an economist with the University of Hawaii Economic Research Organization. "It's bad, there's absolutely no doubt about that."

UHERO, which is set to release an updated economic forecast this week, predicted in June job losses of 0.2 percent for both 2008 and 2009.

While Hawaii has held up better than most areas on the mainland, the state is still extremely vulnerable to outside factors, evidenced by isle foreclosures, which jumped 132 percent year-over-year in August.

To some extent, Hawaii is already seeing the effects of a recession, including increased bankruptcies, the demise of longtime businesses and mass layoffs statewide, according to finance experts.

"I don't think we're going into a depression, but we'll probably have a recession; no doubt about that," said Richard Dole, chief executive of Honolulu-based Dole Capital LLC, a specialty private equity investment banking firm.

"It's really a crisis of confidence," he said. "If people don't have a lot of confidence on the mainland, they're certainly not coming here. Foreign markets are suffering, too."

Paul Brewbaker, Bank of Hawaii's chief economist, said isle consumers should not worry too much about the upheaval among some of Wall Street's largest players.

"The losses in this kind of financial market turbulence are not the kind of things that retail consumers are exposed to, unless they're shareholders," Brewbaker said. "The thing to remember is that the capital markets, as a whole, are secure, although a number of firms have experienced losses severe enough to put them out of business."

Some investors are concerned that AIG's problems could spill over to other companies that do business with the firm.

"The way we look at it is, as far as we know, the insurance side of our operation is fine," said Robin Campaniano, president and chief executive officer of AIG Hawaii, which wrote nearly $120 million in premiums for fiscal 2008. "The nature of our problems have less to do with the performance of our insurance portfolio than the credit and the real estate markets."