First Hawaiian Bank: Hawaii/Guam

November 9, 2006

FIRST HAWAIIAN BANK ECONOMIC FORECAST:

HAWAII'S 10-YEAR-OLD EXPANSION HAS COOLED,
BUT OUTLOOK FOR 2007 IS ‘BETTER THAN JUST A SOFT LANDING’

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HAWAII ECONOMIC FORECAST FOR 2007

	2006	2007
	Estimate	Forecast
Jobs	+2.5%	+2.0%
Unemployment rate	2.8%	3.0%
Inflation	+5.0%	+4.5%
Visitor arrivals	+0.5%	+2.4%
Real personal income	+2.0%	+2.0%

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download forecast (pdf, 973kb)

(Honolulu, Hawaii, November 9, 2006) – “Hawaii’s housing market has cooled noticeably and inflation has gotten significantly worse over the past year, signs of a slowdown in the local economy that will continue into 2007. However, even though our long 10-year expansion has entered in a maturing phase, the outlook for the next year is for respectable real growth – better than just a ‘soft landing,’” 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 – made these forecasts for the remainder of 2006 and for 2007:

Jobs: “A somewhat slower economy is likely to cause a deceleration in job growth from an estimated 2.5 percent in 2006 to around 2.0 percent in 2007. That’s still a pretty healthy rate of job creation since the unavailability of workers to fill new positions will still serve as a constraint on new job growth, especially on the Neighbor Islands.”
Unemployment: “The unemployment rate, estimated at 2.5 percent for the full year of 2006, will likely stay low, but can’t fall much lower because there are always people between jobs in even the strongest of economies. The rate should rise just slightly to 3.0 percent in 2007.”
Inflation: “We expect inflation for 2006 to be 5.0 percent. Inflation will remain high because it takes time for some of the recent price increases, especially in housing and energy, to be reflected fully in the broader index. If most of the price shocks dissipate a little, maybe some deceleration to 4.5 percent is plausible for 2007, but that’s still pretty steep inflation.”
Visitor arrivals: Laney predicts “an almost flat year in 2006 for visitor arrival growth (+0.5 percent). A somewhat slower Mainland economy, with a turn in the real estate market there as well as other factors, could curb Hawaii tourism growth a little more than might otherwise be the case. But barring unforeseen non-economic developments, I would expect growth of about 2.4 percent in 2007.”
Real personal income: “Even with high inflation and a cooling economy, Hawaii real personal income can hold steady at about 2.0 percent in 2007. That’s better than just a ‘soft landing.’ It’s still respectable real growth.” He pointed out that 2 percent growth in real income plus 4.5 percent inflation equals 6.5 percent current dollar growth for 2007, just a marginal slowdown from this year.

“The current expansion has now reached 10 years, already longer than the last one. If the economy continues to grow in 2007, we will extend that span to 11 years – a pretty good run as economic expansions go. That’s been very welcome after the anemic years of the mid-1990s,” Laney said.

But inflation, which has now come back with a vengeance, will eat into personal income and make the inflation-adjusted number lower. With rising shelter and energy prices, there is less left over in household budgets to spend on other things.”

Highlights of Laney’s forecast:

Job growth: “Hawaii’s labor shortage, after years of strong growth, continues to be acute.”

Unemployment: “The Hawaii jobless rate also continues to be lower than any time since 1990, the end of the last boom. It should finish 2006 at about the level of a year earlier. Beyond a certain point, it really can’t go much lower.”

Inflation: “You can’t sustain the kind of growth that Hawaii has been experiencing without inflationary pressures building up. For example, the labor shortage puts upward pressure on wages, and rising construction material costs are something builders have been noticing. Add to that the big effects of higher energy and home prices, which also feed into rents and property tax valuations, and we start getting sharply higher readings on inflation.

“The Honolulu Consumer Price Index increase for the first half of 2006 was 5.8 percent on a year-over-year basis, much higher than the 3.8 percent increase for all of 2005. That was the highest reading in Hawaii since 1991. Housing (8.5 percent) and transportation (7.1 percent, mostly due to fuels) led the 2006 Honolulu surge.”

Vehicle sales: “New car and truck sales are a good indicator to watch for consumer confidence. With the effects of low interest rates and rebates in earlier years wearing off, some slowdown is evident here. A leveling off in 2005 is likely to be followed by a slight drop in 2006. However, the number is still high relative to historical levels.”

Tourism: “After a couple of years of strong growth, Hawaii visitor arrivals seem to be leveling off. Visitor spending -- up 4.5 percent through August -- shows a better picture than arrivals, however. Strength is still concentrated on the U.S. domestic side. So far this year, domestic arrivals are up 2.2 percent, offset by a decline of 5.4 percent on the international side – especially from Japan.

“By island, Kauai leads so far this year in arrival growth, up 8.3 percent, followed by the Big Island at 5.8 percent, and Maui at 4.7 percent. Oahu is down 3.1 percent for the year, due largely to the slump from Japan. Cruise ship visitors are still showing dramatic increases, up 37 percent so far in 2006.”

Construction: “Construction continues to be very strong; 2006 will easily set a new record for construction completed in current dollar terms. However, this year’s slight drop in private building permits contains premonitions of a slowdown to come in the industry. Government contracts are up from last year, but both 2005 and 2006 will be down from the record value of contracts awarded in 2004. On balance, with respect to both private permits and government contracts awarded, there’s enough in the pipeline to keep the industry going for a while – even though the pace has started to decelerate.”

Real estate: “One of the biggest changes in the Hawaii economy over the past year has occurred in the real estate market. It’s fair to say that the local real estate boom is about over. The decline in sales of single-family homes that began in 2005 has accelerated during 2006. At the same time, median prices have continued to increase, but at a considerably slower pace than the heated rises of 2004 and 2005. Speculation is much less in evidence, and more buyers just wanting a house to live in are on the sidelines, observing prices more closely.

“The real estate market in Hawaii typically goes through periods of increasing prices, then levels off for several years. Mild declines have occurred in the past, although corrections have not been major compared to the previous run-up.”

“Consumers are inclined to spend more on other things, and perhaps save less, when they feel wealthier because the market value of their primary asset – their home -- is higher. As the real estate market cools, so does that wealth effect. This may play an important role in a slower overall economy here in the next few years.

“But some relief in rising home prices is actually good news for the economy over the longer term. Unaffordable shelter makes it much harder for those who just live and work here to make ends meet. It also encourages out-migration, discourages in-migration, and aggravates our labor shortage. So current trends really aren’t bad news at all.”

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