FIRST HAWAIIAN BANK ECONOMIC FORECAST:
Slower Rate of Growth Forecast on Many Fronts
As Hawaii's Economic Expansion Reaches Eleventh Year

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HAWAII ECONOMIC FORECAST FOR 2008

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(Honolulu, Hawaii, November 7, 2007) - “Hawaii is in its 11th consecutive year of economic expansion in 2007, longer than the previous boom that ended in the early 1990s. However, the rate of growth has slowed on many fronts and this slower rate will likely be a feature of the Islands' landscape for the next several years,” economist Dr. Leroy Laney said today at the First Hawaiian Bank Business Outlook Forum.

Speaking at the bank event at Dole Cannery this morning, Laney -- economics consultant to First Hawaiian and professor of economics and finance at Hawaii Pacific University - noted these recent trends:

• “The local real estate boom is over” and the market is likely to be cool for some time.
• General Excise Tax revenue growth “is still respectable, but has fallen into the single-digit range (8 percent so far in 2007), down from prior boom years”.
• Visitor arrivals have been “disappointing in 2007, especially due to the chronically faltering Japan market.”
• Hawaii's inflation rate began rising in 2006 and, “if past experience is any guide, this rate will remain high and diminish only slowly, even with a cooling of economic activity.

Forecast for 2008

• Laney made these forecasts for the state in 2008:
• Job growth: +1.0 percent. “A somewhat slower economy is likely to cause a deceleration in job growth from the estimated pace of 2 percent in 2007 to around 1 percent in 2008. If the labor market remains tight, the unavailability of workers will serve as a constraint on new job growth. As the construction cycle tops out, that source of job growth will diminish.”
• Unemployment: 2.8 percent. “The unemployment rate will likely stay low in 2008, because it usually lags the overall economy. The forecast is still very better than most other economies.”
• Inflation: 4 percent. “We're not going to get much relief on inflation in the near future. We will have some deceleration in 2008, to about 4.0 percent -- still relatively high.
• Visitor arrivals: +1.5 percent. “A slower Mainland economy and the chronic drag of the Japan market may bring only 1.5 percent growth. Visitor spending will continue to fare better, possibly about 4 percent. This, of course, is the best of both worlds - more dollars with lower growth in bodies.
• Real personal income: 1.5 percent. “Slightly lower inflation will take a somewhat smaller bite out of real (inflation-adjusted) personal income growth in 2008, but the slowing economy will also hamper current dollar personal income growth.”

'Real Estate Boom Is Over'

“The local real estate boom is over,” Laney said. “The speculators expecting to flip a property quickly are gone, and those wanting to buy a place to live in are shopping more carefully. In 2006, sales of Oahu single-family homes fell 12 percent and condos fell 20 percent. If the performance in the first half of 2007 is extended to the entire year, there will be another 6 percent drop in activity.”

He noted that the median price of Oahu single-family homes “is still rising, but the acceleration of 2004 (a 21 percent increase) and 2005 (28 percemt) has halted. In single-family homes, 2006 saw a 7 percemt rise in the median price; the first half of 2007, a mere 1.6 percent increase.

“Neighbor Islands have seen price declines So far in 2007, Maui single-family median prices are off about 12% percent, while Kauai and the Big Island have dropped about 3-4 percent.”

Laney suggested this trend will not turn around quickly.

“Typically, price accelerations like those earlier this decade are followed by several years of a plateau -mild oscillations in price, but no big increases or declines. The more rapid the acceleration, the greater the likelihood of a more severe downward adjustment that brings us back to equilibrium. That's why we should actually be thankful for an end to the boom.”

But he said the current correction “doesn't mean that real estate is a bad investment. For example, average buyers who bought at the 1994 price peak in Honolulu would have lost a total of 20 percent through 1999. But if they held on through 2006, their total return would have been 75 percent -- an average annual return of over 6.25 percent for the entire period.

“I do think we have several years of hiatus before any new boom begins.

He said Hawaii is much less affected than the Mainland by the “sub-prime loan” problems, but “HawaHit would be naïve to think that Hawaii is completely immune from some of the fallout.

“As borrowers who have such loans fail to make mortgage payments, foreclosures can rise. In a market with declining prices, borrowers can't sell and recover their investment or re-finance at better terms. More foreclosures add to the supply of homes on the market, and the collapse of sub-prime lending leads to fewer buyers. Thus, more supply and less demand adds to downward pressure on prices that are already weakening,” Laney said.

Construction Pipeline Strong

“Construction is one major sector of Hawaii's economy that has continued to show strength,” Laney said. “Many contractors report enough projects permitted or underway to sustain construction activity for some time to come. But the flow of private building permits -- a forward-looking indicator in construction - gives premonitions of a slowdown to come.”

He said “there is construction activity in the pipeline - even though the pace of recent numbers has started to decelerate. And those somewhat further out in the development process - such as entitlements and land use planning -- indicate they are seeing fewer and smaller projects discussed.”

• During 2008, Laney predicted that:
• “Construction costs will continue to be steep, driven by higher prices for energy and building material.”
• “New residential activity will weaken, affected by the turnaround in home prices.”
• “Government work will grow, buoyed mostly by military housing construction.”

Down Year for Visitor Industry

“The visitor industry is having a flat year in 2007,” Laney said. “The Japan market remains the weak spot. Mainland numbers just aren't enough to offset continued anemic performance from Japan, which has been slumping for a decade now.

“This is mainly Waikiki's problem. The Neighbor Islands are doing better.”

Personal Income Growth Eroded by Inflation

“Current-dollar income growth minus inflation yields the 'real' (inflation-adjusted) number,” Laney noted. “Current-dollar personal income growth for Hawaii has been running about 6 percent, but Consumer Price Index inflation has also risen dramatically to almost 6 percent, driven mainly by shelter costs.

That doesn't leave a lot of room for much 'real' growth. When real growth gets into negative territory, we have a recession. So we're skirting closer to that line.”

Job Growth Remains Strong

“So far in 2007, job growth has been running about 2 percent, not bad at all, especially considering the labor shortage after the long recent boom,” Laney said. “Job growth continues to be especially strong in construction, as well as in business and professional services.”

First Hawaiian Bank (www.fhb.com) with $12.5 billion assets, was founded in 1858 and is Hawaii's oldest and largest bank. It has 57 branches in Hawaii, three on Guam and two on Saipan. It is a subsidiary of BancWest Corporation (www.bancwestcorp.com), a financial holding company with assets of $71.7 billion.

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