Federal budget cuts, if enacted, will slow Hawaii’s economic growth to 2.6 percent this year, instead of the 3.4 percent that would be likely if Washington avoids the spending reductions.

That’s the conclusion of state economists who released a new forecast for Hawaii’s economic growth Friday.

Repercussions from a budget stalemate in the nation’s capital are already beginning to ripple through Hawaii. A major defense contractor warned this week that more than 350 Pearl Harbor shipyard workers could be laid off as the Navy faces a funding shortfall. That announcement followed news earlier in the week that 125 contracted workers at Schofield Barracks were being furloughed for 30 days.

Military spending accounts for about 9.6 percent of Hawaii’s gross domestic product, while spending by federal civilian workers makes up another 5.8 percent. "Add that together and it’s pretty significant," said Eugene Tian, the state’s chief economist.

Military and civilian federal spending in Hawaii — at a combined 15.4 percent of GDP — is second only to Virginia, Tian said.

The state Department of Business, Economic Development and Tourism’s forecast of 2013 economic growth assumes that across-the-board federal spending cuts — known as sequestration and scheduled to go into effect Friday — would reduce total federal spending in Hawaii to about 10 percent of GDP, Tian said.

As a result, DBEDT economists shaved eight-tenths of a percentage point off its state GDP forecast, Tian said. What would have been a 3.4 percent increase became a 2.6 percent gain.

Richard Lim, DBEDT director, said department economists were more cautious than usual given the uncertainty over budget talks in Washington, D.C.

"This positive forecast is particularly striking given our decision to be somewhat more conservative relative to other forecast models, taking into consideration several unknown variables down the road, like the impact of potential federal budget cuts," Lim said.

Visitor arrivals and spending are expected to break records for the second consecutive year, according to the quarterly forecast from DBEDT. Nontourism sectors, including real estate and construction, are also expected to post healthy growth.

Even DBEDT’s lowered forecast of 2.6 percent economic growth for 2013 is a sizable increase from the 1.6 percent gain in 2012. Just three months ago DBEDT was forecasting the state’s economy would grow by 2.4 percent this year.

Last week the University of Hawaii Economic Research Organization put out its forecast for 2013 growth, predicting it would be 3.5 percent. The UH economists said they expect Congress to find a way to eliminate most of the looming budget cuts.

Aside from federal spending, most sectors of Hawaii’s economy are looking forward to a strong year. Both DBEDT and UHERO economists expect Hawaii to set records in tourism.

DBEDT forecasts visitor arrivals will grow by 5.4 percent this year to a record 8.43 million. Those visitors are expected to spend a record $15.56 billion, 7.1 percent more than they did last year.

The number of nonagricultural jobs is expected to grow by 2.2 percent this year, up from the previous forecast of a 1.6 percent rise. If true, it would be the largest increase in jobs since before the 2008-2009 recession.

Tian said both the visitor industry and job market got off to a good start in 2013 based on early data collected by DBEDT.

Overall passenger arrivals, which include visitors and returning residents, were up by 6.8 percent for the first seven weeks of the year compared with the same period a year earlier. The number of people filing first-time claims for unemployment insurance fell by 5.7 percent during the same time period, he said.

Another economic indicator, general excise tax receipts, rose 10.5 percent in January compared with the same month last year, Tian added.

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