Hawaii economists are getting more bullish on the state’s expansion.

The University of Hawaii Economic Research Organization is the latest group to revise upward some of its growth projections as the state closes in on a fourth straight year of record tourism and the construction sector continues rebounding.

“Hawaii’s economic outlook continues to look bright,” UHERO said in a report scheduled for public release today. “Tourism is pushing toward new records, and the construction upswing is building in strength. The overall expansion remains solidly on track, delivering better labor market conditions and the prospects of further household income gains.”

UHERO now expects visitor arrivals to rise 3.4 percent this year to more than 8.4 million, up from the 1 percent increase it projected in February when it said tourism would see only “marginal gains” and there would be “moderate” expansion. UHERO also slightly bumped up its projection for visitor arrivals in 2016 to a 1.2 percent increase from its previous 1.1 percent gain.

The research group also is optimistic about construction activity even as the state’s two largest single-family home projects, Hoopili and Koa Ridge on Oahu, are still awaiting rulings on constitutional challenges pending before the Hawaii Supreme Court.

“We are starting to see some acceleration in single-family home construction,” UHERO said. “The number of new homes permitted statewide is up almost 25 percent through the first half of the year. The strongest gains have occurred on Maui, but even Kauai and the Big Island — where conditions have been extremely weak — are seeing a pickup in homebuilding.”

UHERO’s projections are roughly in line with a forecast last month by the state Department of Business, Economic Development and Tourism, which predicted “healthy growth” due to strong tourism and a booming construction industry. DBEDT was slightly more bullish on visitor arrivals and forecast a 4.3 percent increase this year, higher than the 2.5 percent projected in its May forecast. DBEDT is forecasting a 1.6 percent increase in visitor arrivals for 2016.

UHERO said despite its optimistic outlook that there are “some ominous clouds forming out on the horizon,” such as global weakness stemming from China and anticipated interest rate increases from the Federal Reserve.

“The fallout from such developments may have adverse impacts on Hawaii,” UHERO said. “Already, we have witnessed a sharp drop in U.S. consumer sentiment in the wake of the recent stock market gyrations. The dollar, already strong, could push higher as U.S. rates rise and fears over global weakness mount. And the one-time boost from dropping energy prices is not likely to be repeated. These are precisely the sort of conditions that could threaten Hawaii’s leading industry, if they cause a sustained decline in traveler confidence or travel affordability.” A stronger dollar makes it more expensive for foreigners to travel to Hawaii.

UHERO said it expects Hawaii’s growth to gradually slow after rising this year. It said the state’s inflation-adjusted gross domestic product, the broadest measure of economic activity, will rise 2.8 percent this year from 2014 but then slow to 2.2 percent and 1.9 percent the subsequent two years.

“Looking back on the past half decade, the recovery in statewide economic output has certainly been long and gradual,” UHERO said. “New figures reveal that since the recovery began in 2009, real (inflation-adjusted) gross state product has averaged only about 1 percent annual growth. Real output increased 1.6 percent last year, on par with the fastest growth in this recovery, but still lackluster by historical standards … in large part (due) to the severe drop and limited rebound we have seen so far in the construction sector, whose output remains nearly 25 percent below its 2007 peak.”

UHERO said the visitor industry continues to exceed the research group’s expectations due to a surge in activity on the neighbor islands that has pushed hotel occupancy above 70 percent. UHERO said strong gains in U.S. visitor volume on the neighbor islands, particularly on Maui and Hawaii island, have been facilitated by increased direct airlift to Kahului and Kona.

The eroding yen, though, has hurt Japanese tourism with year-to-date arrivals off more than 1 percent and inflation-adjusted spending down nearly 11 percent.

“Depreciation of the currency above the 120 yen/dollar mark has eroded purchasing power and made it more costly for Japanese tourists to visit the state, and faltering Japanese economic growth is also a drag,” UHERO said. “The decline in purchasing power is having an impact on expenditure patterns, with visitors spending less at local retailers and for accommodations.”

UHERO said Hawaii consumers are benefiting from stable prices that are expected to keep inflation tame this year at 0.6 percent. The research group said inflation-adjusted personal income growth rose 2.9 percent in the first quarter, the fastest growth since 2009, and should end the year at that level before slowing to 2.1 percent in 2016.

The state employment outlook also remains positive, UHERO said, but incremental gains will be smaller with job growth easing from 1.5 percent this year to 0.9 percent in 2018. A silver lining this year is a pickup in construction hiring, which has surged 6.5 percent so far in 2015, according to UHERO estimates. The state’s seasonally adjusted unemployment rate now stands at 3.5 percent, the third lowest in the country.

“We expect the construction sector to continue on its current pace of healthy expansion for the next several years,” UHERO said. “There is now a large volume of ongoing high-rise activity. Even as interest rates begin to rise, healthy labor markets and household income growth will remain favorable for increased single-family building activity, which has been limited so far. Additional industry growth will add several thousand more jobs before the expansion tops out late in the decade, and income in the sector will grow accordingly.”

ECONOMIC OUTLOOK

Projected year-over-year percentage changes

* Adjusted for inflation Source: UHERO