Hawaii's economic growth slowing, UH report says

Feb. 23—While the University of Hawaii Economic Research Organization is forecasting a slowdown, its latest first-quarter forecast was more optimistic than previous forecasts.

With the islands' post-pandemic recovery almost complete, the University of Hawaii Economic Research Organization is forecasting that Hawaii's economy will "downshift this year, and growth will increasingly come from local sources, including a robust construction sector bolstered by the rebuilding of Lahaina."

UHERO Executive Director Carl Bonham said Thursday at a news conference to discuss UHERO's first-quarter forecast that "the overall picture is one of sort of continued growth but much, much slower and, going forward, even slower growth."

He says slowing will come from a variety of factors, including the end of the post-pandemic recovery, the drag on U.S. visitor spending that has occurred since the Maui wildfires, and constraints from slow population and labor force growth.

The slowing is expected to show up in a range of economic measures in Hawaii, most notably a drop in real gross domestic product, which is an inflation-adjusted calculation reflecting the value of all the goods and serv ­ices produced by an economy in a given year. Put simply, a decrease in GDP signals that an economy is shrinking.

"Real GDP growth has averaged probably 4 % (for the past three years ), " Bonham said. "We think it will be less than half that at 2024. Then growth will accelerate a little bit when the sort of serious rebuilding efforts begin on Maui and the sort of pile-on construction spending."

The UHERO report said slower population growth and labor force growth are reasons that annual job growth will trend below 1 %, and real personal income below 1.5 %, by late in the decade. UHERO said visitor growth also will slow, especially as the industry pushes its capacity limits.

While UHERO is forecasting a slowdown, its first-quarter forecast was more optimistic than previous forecasts.

"Overall, this sort of continues a trend of us raising our forecast. Each time we release an update, it's been a little more optimistic sort of going all the way back to when we were forecasting that the U.S. economy would be in a recession in 2023, and of course that didn't turn out, " Bonham said.

He said the current narrative for the U.S. economy is a "soft landing, " which is "incredibly important " to Hawaii as the mainland currently supplies roughly three-quarters of Hawaii's visitors as well as visitor spending The UHERO report forecasts that visitor arrivals will grow by 2 % in 2024, 4.8 % in 2025 and 3.1 % in 2026.

Bonham said the ongoing international arrivals recovery, even with the Japan source market still at only half of the pre-pandemic levels, has offset softening in U.S. arrivals.

Moreover, he said data shows that real visitor spending in the first quarter of 2023 reached $5.39 billion—the first time that real visitor spending had surpassed the peak $5.365 billion in the second quarter of 1989.

The UHERO first-quarter forecast expects a decline of 1.9 % in real visitor spending for 2024 and a dip of 0.2 % in 2025, followed by a slight 0.8 % uptick in 2026.

"We're still sort of up there at (real spending ) levels close to where we were back in (1989 ), " Bonham said. "Of course, that's happening with many, many more visitors than we had in (1989 ). The per-person-per-day spending for a typical visitor is much lower than it was in (1989 )."

He said attracting higher-spending visitors has been Hawaii's goal for decades, but the data shows "that we haven't been very successful."

Bonham said Hawaii has had "a bit more " success at attracting higher-spending visitors in recent years because of increases in the cost of goods and services and the addition of county transient accommodations taxes.

But he added that "typically in the past when you weren't in a bounce-back recovery, rebuild visitor spending was trending downward rather than growing."

Bonham said that's concerning from a macro-economic standpoint given that "once we are done with this bounce-back from the latest crisis, there is no growth in visitor spending."

He said tourism is the biggest chunk of Hawaii's economy. However, long term, "it's not going to add to economic growth and grow the pie in a way that will allow us to deal with everything from climate change to population, aging, etc."

Bonham expects that as Maui rebuilds from the deadly Aug. 8 wildfires, growth will come from local sources, including a robust construction sector.

The UHERO report said the construction industry has been buoyed by large federal and state contracts as well as robust home building on Oahu. The report estimates that Maui will need 2, 500 more construction workers over the next three years.

Bonham said UHERO's calculations take into account that some construction workers will come from the mainland and that "some of the benefits of that spending will leave the islands."

"The key really is to be able to hire as many local workers as possible and to retrain people into these fields. These are areas where we are going to need workers for a very long period of time, " he said.

Overall, the UHERO report said the state's labor markets remain healthy, with unemployment rates falling in 2024 for all counties except Maui.

Bonham said unemployment claims for Maui peaked at about 8, 800 in mid-September and as of Thursday were below 3, 400.

Eligibility for unemployment is coming to an end for the residents who lost work on Maui and filed in the first week. However, he said data suggests that most people who filed early have found work.

"They found jobs because there were so many jobs available even before the fire and because of the jobs that were made available by Red Cross and (Council for Native Hawaiian Advancement ) and FEMA and others, " he said.

Bonham said the harder task is getting the next 3, 000 or so Maui residents off the unemployment rolls and into permanent jobs and permanent housing.

"That's the part that we think is going to take a while, in part because we also think that we've done sort of the easy part of the bounce-back in tourism, " he said.

Bonham said that immediately after the fire, Maui lost about 75 % of its visitors and was down 50 % for all of August and September. He said Maui's tourism recovery was stronger than anticipated, although arrivals are still down about 25 %.

"Getting from there to 100 % (recovery ) is going to take a very long time, " he said. "Even getting the next 10 % or 15 % recovery is going to take an extended period of time, and that's also needed to add more jobs to continue to repair the unemployment situation."

Elsewhere in the state, Bonham said, labor markets are healthy, and employment has held steady or increased slightly. However, he said various population trends are affecting county labor markets differently.

For instance, UHERO estimates that Maui already has had 3, 000 or 4, 000 people leave the islands. Bonham said that drain on population and labor force won't stop until the housing crisis is addressed.

He said population growth on the Big Island has raised the labor force above pre-pandemic levels, while the other counties remain 3 % to 4 % below their pre-COVID-19 levels.

"Essentially, statewide what we will tell you about is no population growth or incredibly limited population growth all the way out to the end of this forecast period, which means very, very little labor growth and as a result sub-1 % job growth and between 1.5 % and 2 % real income growth for as long as this forecast cycle goes, " Bonham said.