Hawaii’s economic recovery, fueled by a sharp rebound in the tourism sector, is expected to spread to other areas such as construction in 2011 and broaden out from Oahu to the neighbor islands over the next few years.

"While there is little evidence of widespread growth, it is only a matter of time," the University of Hawaii Economic Research Organization said in a report issued today. "Progress in areas such as construction and non-tourism services will begin to take over the growth momentum."

UHERO revised upward its forecast for visitor arrivals and now predicts the number of tourists to the state will rise 3.8 percent in 2011 to 7.2 million. UHERO’s previous report, issued in October, envisioned visitor arrivals next year increasing just 2.6 percent.

Visitor arrivals to the state this year through October were up 7.8 percent to 5.9 million, according to the most recent data from the Hawaii Tourism Authority.

UHERO expects visitor arrivals to end up 8.2 percent this year at 6.9 million.

Visitors spent $9.3 billion in the islands through October, up 14.7 percent from the same period last year, according to HTA. UHERO forecasts visitor spending to end 2010 up 13.9 percent at $11.6 billion.

UHERO said the state’s recovery has been "uneven" so far, with the counties "running at two speeds."

"Oahu is benefiting from strong international tourism and a more rapid stabilization of the broader economy, while neighbor island recovery lags," the report said. "These differences will gradually close over the next several years."

International air arrivals to the state were up 12.9 percent for the first 10 months of the year, while domestic arrivals were ahead 6.1 percent, according to HTA. During that same period, Maui’s 9.6 percent increase in visitor arrivals was the largest of any of the major islands — even beating Oahu’s 6.9 percent — but UHERO noted that Maui took a bigger hit during the downturn and has farther to climb during the recovery.

UHERO said while statewide visitor gains have exceeded expectations, challenging global economic conditions will cause the recovery path to somewhat flatten, particularly on Oahu where the overall gains have been the greatest.

"That will mean a slower expansion of world demand in 2011 before a pickup in 2012," the report said.

UHERO expects visitor arrivals growth in Hawaii to drop below 2 percent, to just 1.6 percent in 2012 and 1.9 percent in 2013.

Construction activity as measured by the general excise tax will end this year down 18 percent, and construction jobs will be 6 percent lower than a year ago, UHERO said, but added that it sees the state’s construction sector at a cycle bottom.

UHERO expects construction activity to rise 5.5 percent in 2011 and annual average construction employment to increase by 0.9 percent. UHERO said it has not yet factored in the impact of the proposed $5.5 billion commuter rail line on Oahu.

The state’s unemployment rate has been roughly 6.4 percent much of this year, down from last year’s peak at 7.0 percent. The drop is mainly due to an increase in tourism jobs on Oahu. UHERO expects positive job growth in all private sectors next year except for finance, insurance and real estate.

UHERO said the labor force on the neighbor islands has been shrinking, while Oahu has been gradually adding jobs. In the last four months, nonresidential building permits were up nearly 70 percent, with the bulk of that work — 84 percent — on Oahu.

Even though the report said the neighbor islands have lagged behind Oahu during the early stages of the business cycle’s upswing, it said the pendulum will swing down the road as government construction contracts end and private home building resumes.

"As this process unwinds over the next several years, moderate growth will gradually take hold throughout the islands and begin to generate significant improvements in labor market conditions and in the standard of living of Hawaii residents," the report said.