November 14, 2005

FIRST HAWAIIAN BANK ECONOMIC FORECAST

HAWAII’S OUTLOOK FOR 2006 REMAINS UPBEAT,
BUT HOUSING PRICES ARE A SIGNIFICANT CONCERN

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HAWAII ECONOMIC FORECAST FOR 2006

 

2005

2006

 

Estimate

Forecast

Job growth . . . . . . . . . . . . . .

+2.7%

+2.0%

Unemployment rate . . . . . . . .

2.7%

2.5%

Inflation (CPI) . . . . . . . . . . . .

+3.5%

+4.0%

Visitor arrivals . . . . . . . . . . . .

+6.2%

+3.0%

Real personal income . . . . . . .

+3.6%

+3.1%

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(Honolulu, Hawaii, November 14, 2005) – "After emerging from the doldrums of the 1990s, Hawaii in 2005 is in its ninth year of economic expansion," economist Dr. Leroy Laney said today at the First Hawaiian Bank Business Outlook Forum. "Things continue to look upbeat for 2006 as well."

"Although the economic report card for Hawaii continues to be an "A" again in 2005, Eden does have a few thorns. The biggest concern these days is the price of housing, which has spiked dramatically in recent years," said Laney, economics consultant to First Hawaiian Bank and professor of economics and finance at Hawaii Pacific University.

"Especially in Hawaii's low-wage, service economy, current prices are unreachable for many who live and work here. This burden extends well beyond the working class into professional ranks. No economy can continue to function without some of these positions," Laney said. "Problems are especially acute on the Neighbor Islands."

His forecast for Hawaii in 2006:

  • Jobs. "There is plenty of potential for job creation over the next year. At the state level, 2005 job growth may exceed 2004, but eventually the lack of a labor supply will kick in, causing a lower 2.0 percent forecast for 2006."
  • Unemployment. "Hawaii's jobless rate is already lowest in the nation, and nothing in the near term suggests that the tight labor market will ease. The projection for 2006 is 2.5 percent."
  • Inflation. "Hawaii inflation will change noticeably – for the worse – as we move into 2006. The fallout from higher home and energy prices is waiting for us out there, so an increase in inflation to 4.0 percent is likely for 2006."
  • Tourism. "A strong 2005 is bringing us an all-time record for arrivals, but the industry is facing its own supply constraints, with hotel occupancies pushing into ranges not seen in decades. A growth rate of 6.2 percent in 2005 could decelerate to 3.0 percent next year, but that’s still a buoyant outlook."
  • Personal income. "Growth in inflation-adjusted personal income, the broadest measure of the economy here, will easily finish 2005 well into the 3 percent range, and the outlook for 2006 continues to be optimistic at 3.1 percent. Adding that 3.1 percent to a 4.0 percent inflation rate for next year yields a 7.1 percent growth rate in nominal personal income, still quite healthy.

Concern Over Island Housing Prices
Brings Out the “B” Word: Bubble?

Laney noted that Oahu's last real estate boom -- fueled in part by Japan's speculative bubble of the late 1980s -- peaked in 1994 with the median price for a single-family house at $360,000, up 126 percent from 1985. A lengthy correction followed, bottoming out in 1999 at $290,000 after a 19 percent drop.

"Then the current rise started. Through the eight months of 2005, there was a 103 percent increase from that 1999 trough -- a doubling of median prices. Most of that happened in recent years, with double-digit annual gains since 2002. The rise in 2004 was 21 percent. Through the first eight months of 2005, the year-over-year gain was almost 29 percent -- an accelerating trend

"Because Hawaii's desirable real estate is linked to Mainland demand, the run-up here may stall only when other desirable but inflated pockets there cool. It's a simple fact that baby boomers nearing retirement have a lot of money to be placed somewhere. With an anemic stock market, real estate has emerged as the current favorite," Laney said. "But as we’ve seen before, when any single market starts to get most of the attention, there is often a tendency to overdo it.

"Whether we call today’s situation a 'bubble' or not is mostly semantics. The point is, during any sharp run-up in prices in any market, there comes a time when we begin to question the sustainability of the rise. We are beginning to ask that question now with respect to Hawaii housing. Eventually, affordability will bring the current real estate cycle to an end, hopefully with a soft landing.

"Economics 101 teaches that the only way to effectively bring down the now exorbitant home prices is to increase supply."

Hawaii’s Tight Job Market
Is Constraining Future Growth

Statewide, job growth has continued strong during 2005, Laney said. The unemployment rate is now the lowest of any state and the lowest rate in the Islands since 1990.

"In certain pockets, especially on the Neighbor Islands, the rate is estimated to be less than 1 percent. Normally, Neighbor Islands have a higher unemployment rate than Honolulu, but that gap has been closing – and even been eliminated on Kauai and Maui," he said.

There has been a deceleration in job creation during 2005 on the Neighbor Islands, but not because of any slowdown in demand. Rather, the jobs are there, but they're running out of people to fill them. Rising costs -- mainly for housing -- have kept a lid on in-migration. Hawaii's labor shortage is perhaps the biggest factor in slower rates of projected growth in some of the numbers that measure our state economy."

Laney had these comments on other sectors of the economy:

Vehicle sales: "Since 2000, low interest rates, rebates and good economic times have caused new vehicle sales to soar. In 2005, the projection is for a slight increase, although rates of growth are leveling off, a sign of some cooling and saturation of the market.

Tourism: "Visitor arrivals will easily break the longstanding 7 million barrier. The most dramatic growth during 2005 has been on the Big Island and Oahu. Domestic arrivals have shown especially strong growth in the past two years and are up 7.3 percent through August 2005. The domestic side now accounts for about 70 percent of Hawaii's total visitor arrivals. International arrivals, mostly from Japan, have also rebounded but the total is still well off its 1996 peak of almost 3 million."

Cruise travel: "The fastest growing segment of Hawaii tourism is cruise ships, with passengers 35 percent higher so far in 2005."

Construction: "Construction's boom has continued and even accelerated in 2005 -- fueled by continued low long-term interest rates and a strong pipeline of permit authorizations. Nowhere are labor shortages more acute than in the skilled building trades. Recent building permit growth guarantees that construction will continue to underpin the local economy, at least for the next several years.

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