Hawaii economy forecast to maintain modest growth

It’s going to be 2014 all over again for the state economy.

Hawaii is expected to continue its moderate expansion this year with nominal gains in visitor arrivals, steady labor market improvement and additional income growth, the University of Hawaii Economic Research Organization said in a report set for release Friday.

"The Hawaii economy in 2015 will look a lot like last year’s," the report said. "While not all damage from the past recession has been repaired, by many measures economic activity in the state is returning to normal."

UHERO revised upward its forecast for gross domestic product, the broadest measure of economic activity, to 3.8 percent in 2015. That’s more than its previous forecast of 3.5 percent in the October report. Last year the economy grew by an estimated 2.9 percent, up from 1.9 percent growth in 2013.

Still, UHERO cautions that the economy remains vulnerable to outside shocks, such as a global spillover of European malaise, or a natural or man-made disaster.

"Of particular concern is the possibility of a substantial cut in active-duty military presence in Hawaii," UHERO said. "The potential cuts are large enough that they would take a measureable chunk out of the overall economy, not to mention much larger adverse impacts on local communities."

UHERO expects visitor arrivals to reach record levels for the fourth straight year after the state attracted 8.28 million people in 2014. But UHERO’s forecast is only for growth of 1 percent for visitors by air, which is half the gain the state saw for that sector in 2014 over 2013. UHERO’s 2015 forecast also is lower than the 1.9 percent increase it predicted in its last report in October.

The makeup of international visitors to Hawaii continues to shift — partly due to the strength of the dollar — with Japan continuing to languish and other markets picking up the slack.

"The strongest contribution to last year’s performance came from secondary markets around the Pacific Rim, that is, international markets other than Japan and Canada," UHERO said. "At the same time, the momentum from these markets has slowed to mid-single-digit growth rates, in part because of the U.S. dollar’s strength and the rising cost of a vacation in Hawaii."

UHERO said this year is expected to be "very rocky" for Japan, which is Hawaii’s top international market for total visitors. Japan is still struggling to recover from the effects of last year’s April consumption tax increase, UHERO said.

Japanese visitor days fell by nearly 3 percent in 2014, and UHERO expects that without any major improvements in the Japa­nese economy, Japa­nese visitor days for 2015 will fall by about 4 percent. UHERO projects Japa­nese visitor arrivals will decline 2.7 percent this year after falling 0.5 percent in 2014.

On the bright side, U.S. visitors will provide much-needed support this year with a projected 1.7 percent increase, said UHERO, citing new flights introduced from the Midwest to Hono­lulu, from the West Coast to Hawaii island, and new interisland flights to Molo­kai. International visitor arrivals — other than those from Japan and Canada — are forecast to increase 2.3 percent.

Construction, which was expected to spur Hawaii’s economy with tourism growth slowing, remains "decidedly mixed," UHERO said.

"In 2014 we saw a surge in nonresidential permitting, particularly on retail and medical facilities, but there was a dramatic slowdown in permits for new residential building, particularly on Oahu," UHERO said. "Partly due to the mix of building types — large-scale projects can be built more efficiently than single-family homes — job growth in the sector was anemic."

UHERO said construction job growth was above 1 percent last year.

"(That’s) still nothing to get excited about (but) industry activity will firm over the next several years," UHERO said.

Overall, the number of jobs statewide has surpassed pre-recession levels and reached an all-time high —a trend that UHERO expects to continue this year with a projected 1.6 percent increase. UHERO expects the unemployment rate, which stood at 4 percent at the end of December, to average 3.8 percent in 2015.

UHERO forecasts inflation-adjusted personal income, which has gotten a boost from increases in property income and the effect of falling oil prices, to increase 2.9 percent this year, which would represent the fastest pace since 2005.

"The positive effects of low oil prices extend beyond keeping a lid on inflation, freeing up a substantial amount of purchasing power that would otherwise go to transportation and electricity costs," UHERO said.

Inflation is expected to remain benign and rise by just 0.7 percent in 2015, UHERO said.

ECONOMIC OUTLOOK

Projected year-over-year percentage changes

* Adjusted for inflation

Note: Figures for inflation, income and GDP for 2014 are UHERO estimates. Source: UHERO