While economists at the Hawaii Economic Association’s 2022 Annual Conference did not reach consensus on whether the U.S. is headed toward recession, they were certain that Hawaii’s tight labor market and supply-side constraints could hamper economic growth.

A goal of the conference, titled “Why Is Everything in Hawaii So Darn Expensive,” was to identify polices and regulations that can be modified so that Hawaii can provide goods and services at reasonable prices. Topics for the conference, which was held Friday at the Halekulani, included dis­cussions on how supply-side constraints affect everything from restaurants, residential housing and logistics to agriculture. Hawaii’s geographical distance from other places and the perception that the state is over-regulated were two of the most common challenges addressed.

Conference speaker Paul Brewbaker, principal at TZ Economics, said he agrees with recent reports that foresee high inflation and rising interest rates intended to curb inflation likely sapping some local economic growth this year and in 2023, prolonging Hawaii’s rebound from the COVID-19 downturn.

Brewbaker said rising interest rates are dampening Hawaii’s residential real estate market. Also, he said Hawaii could see a drop in arrivals from its top tourism market if economic uncertainty prompts domestic visitors to scale back on luxury spending. Additionally, Hawaii’s top international tourism market, Japan, isn’t likely to come back as quickly as hoped, given that a stronger dollar has reduced the yen’s purchasing power.

Brewbaker told the Honolulu Star-Advertiser that amid uncertainty about recession, “We have a lot of problems here in Hawaii that we have to think about before we even get to a recession.” Economic growth here, he said, has been challenged by decisions such as tourism management goals that prioritize decreasing arrivals, dismantling telescopes, canceling biotech and long-standing impediments to home building. “People are leaving Hawaii because of those problems, not because of the possibility of recession,” he said.

Even if a recession is coming, Brewbaker said, a “soft landing” is still feasible. What’s more, he said, continued labor shortages could cause an “unemploymentless recession” that doesn’t result in mass layoffs.

“The first half of the year, GDP (gross domestic product) was not growing, but jobs were,” Brewbaker said. “You have to contemplate that it’s possible that we could have a recession like no other one, in which there isn’t a big increase in unemployment. There are still two job openings for every unemployed person in Hawaii and nationwide.”

Speaker Peter Fulkey, an economist for the University of Hawaii Economic Research Organization and an associate economics professor, said the risk of a nationwide recession is growing, although he too envisioned the possibility of a soft landing, noting that U.S. households exited the period of pandemic restriction with “relatively happy balance sheets.”

Fulkey said one risk tied to a weakening economy is that businesses that have been hoarding workers in the tight labor market might begin letting people go. However, he said the Hawaii labor market is different from much of the U.S. labor market as Hawaii’s still has not fully recovered from the pandemic-related downturn.

State Chief Economist Eugene Tian, who also addressed the conference, told the Star-Advertiser that he disagrees with Brewbaker’s view about “unemploymentless recession.”

Tian said, “Should a recession happen in Hawaii, there will be more people out of work, thus the unemployment rate will rise.” But he added, “I don’t think Hawaii will have a recession, even (though) the U.S. may have one,” because “Hawaii is still recovering while the U.S. has been fully recovered.” Further, “We will experience economic slowing down but the growth will be still better than the U.S. as a whole.”

Conference speaker Kyle Shelley, senior vice president and director of American Savings Bank’s corporate banking, said some of the bank’s customers are struggling with ongoing inflation and the increased cost of capital, but also with labor issues.

“The weakening labor participation and declining population is alarming,” Shelley said. “People have moved off the island or they have found alternative income sources (such as Uber, Lyft, Doordash, Turo, ventures) and they have not returned.”

Tian said there was an average of 17,500 unfilled jobs per month in Hawaii during the first half of 2022 — that’s up from an average of 7,600 unfilled jobs per month during 2019. Meanwhile, the state’s population had declined by 0.71% in 2021 — marking the third year of dropping population.

Shelley said one client told him that the pandemic exacerbated the company’s labor-related obstacles tenfold. He said another business told him that it had increased wages by 25% to keep staff as inflation surged.

Conference speaker Jorge Munoz, co-owner of Nalu Health Bar &Cafe, said ongoing labor challenges are a hindrance to his business. “We are having to keep employees that are much lower- caliber because we can’t afford to lose them. We’ve had to close our business multiple times in the last year because there just isn’t enough employees, even with us on the floor,” Munoz said. “Out of 20 applicants called, we get five that come, and then when we say, ‘You are hired,’ only one shows up.”

Tian said the current tight labor market is caused by market structural changes, meaning more people working in Hawaii for out-of-state firms and people changing from payroll jobs to self- employment He said other factors include mismatches in occupation as well as workers seeking changes such as flexible work arrangements, remote work and higher pay.

“The shortage of labor will drive up wages and productivity in the short run. This situation will last a few years. Business expansion will be limited by the supply of qualified labor, especially in the health care and professional services industries,” he said. “Full economic recovery will take a few years.”