FIRST HAWAIIAN BANK ECONOMIC FORECAST:
Hawaii's Economy: A Contraction During 2008, 2009 . . .
Followed by Potential Recovery in 2010, 2011

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HAWAII ECONOMIC FORECAST FOR 2009

(Honolulu, Hawaii, November 19, 2008) -- Hawaii's economy will likely continue to contract in 2009 thanks to an unprecedented “perfect storm” of bad national and local news, but tourism could recover in 2010 and “by 2011, there is no reason now to expect that the Hawaii economy will not be firing on all cylinders once again,” economist Dr. Leroy Laney predicted this morning.

Laney, economics adviser to First Hawaiian Bank and Professor of Economics and Finance at Hawaii Pacific University, spoke at the bank's 39th annual Business Outlook Forum at Dole Cannery Ballroom.

“It's hardly news that 2008 hasn't been very kind to the Hawaii economy,” Laney said. “Going into the year, the consensus forecast was rather downbeat, but it has continually been downgraded by one blow after another -- a 'perfect storm' that we haven't experienced in the Islands in years.”

Laney said the local banking industry has been spared the problems that plague national markets, because “local bank credit policies avoided the sub-prime mortgage loans that started it all. But that does not mean Hawaii will be spared fallout from the recent financial turmoil. Hawaii tourism has been particularly hard hit by a series of setbacks, and generally deteriorating national and global conditions. Most households consider a Hawaii vacation to be a luxury, and they will reconsider such outlays for a while to come in this environment.”

• Among the developments that have hit the Islands hard, Laney said:
• Collapse of Aloha Airlines, loss of ATA service from the Mainland, plus departure of two Norwegian Cruise Line vessels.
• Job losses at Molokai Ranch (closing), Maui Land & Pineapple Co. (major layoffs) and Gay & Robinson on Kauai, which announced that in 2010 it will harvest its last crop of commodity sugar, leaving only one grower in an island economy where it was once the major industry.
• Record high oil prices squeezed consumer budgets here and elsewhere.
• The local construction cycle continues to wind down, the state budget is feeling the effects of the slowdown, and home prices are falling along with sharply lower sales.

• Laney made these forecasts for the Islands in 2009:
• Job growth: -1.2% in 2009. “It will take time for the visitor industry to regain its footing, and for the traveling public to adjust to the higher airfares that may continue despite recent lower oil prices. That likely means further weakness in accommodation and food service jobs, which will extend to transportation and utilities, as well as retail. We can't look to the construction sector for much help. By 2010, it is possible that we can return to positive job creation.”
• Unemployment: 5.5% in 2009. “This rate usually lags the overall economy. Hawaii's jobless rate has already broken well into the 4% range in 2008, up from only 2.5% not very long ago. In 2009, continued weakness can push it toward 5.5% -- where it might remain for a while.”
• Inflation: 3.5% in 2009. . “Local inflation has been falling -- though very slowly -- since 2006, when rising home prices cranked it up dramatically. Meanwhile, higher energy prices have replaced shelter as the biggest source of inflation. But if oil prices (hopefully) behave over the next year, we could see CPI inflation average 3.5% for 2009.”
• Visitor arrivals: -5.0% in 2009. “After the unexpected large drop in visitor arrivals during 2008, perhaps 2009 won't be quite as dire. But we've learned not to expect much from Japan, from which arrivals have generally been declining for over 10 years -- with a 25% drop just since 2005. If Mainland uncertainty and higher airfares continue to be felt, a milder contraction will not be surprising on the domestic side as well. With national recession, a further 5.0% contraction in total arrivals next year could be all we can hope for, however, with a full-fledged recovery in Hawaii's mainstay industry as 2010 rolls around.”
• Real personal income: -1.5% in 2009. “Hawaii's inflation-adjusted personal income growth is the broadest measure in our forecast. Recent events are enough to push the number well into negative territory.”

“The thing to remember at this stage of the economic cycle is just simply that the cycle will always be with us. We can be confident that better times will indeed return,” Laney said.

“We hope the downturns will be mild, and that expansions will last much longer. Usually in Hawaii, that has turned out to be the case. The expansion coming to an end in 2008 lasted 11 years, two years longer than the last one that ended in the early 1990s. But history suggests that such pauses in economic activity here usually don't blow over in just one year. Generalizations are dangerous, but just on the basis of this history it would be unrealistic to expect that good times are going to return instantaneously.

Laney's comments on various sectors of the Hawaii economy:

Tourism
“The sector of the Hawaii economy hardest hit in 2008 has been the visitor industry,” Laney said. “Going into the year, the consensus forecast was downbeat, but unexpected blows on so many fronts -- airline and cruise ship exits, higher energy prices, national financial uncertainty -- have only made the situation considerably worse.

“The impacts have been felt on all fronts -- arrivals, spending, hotel occupancies, visitor activities, retail, and restaurants catering to visitors among them. The Neighbor Islands, more exposed to domestic travel, have been particularly hard hit. Arrivals for each of the three major Neighbor Islands are showing declines well into the double digits.”

Vehicle Sales
“New car and truck sales are always a good indicator of consumer confidence in buying big-ticket items other than homes,” Laney said. “Higher oil prices have had their impact here, too. Total sales this year are likely to be in the mid-40,000 range, about 10,000 less than the Hawaii Auto Dealers Association projected going into the year, and well below earlier peak years at around 70,000.”

Construction
“The construction sector is on the downside of its natural cycle now,” Laney said. “Higher construction costs and tighter credit may be contributing to this, but the building cycle has been winding down in most areas here for going on two years. Historically, pauses in construction growth don't blow over in just a year; it will continue a while longer before it ramps up again.”

Laney said more residential builders are adopting a “wait and see” attitude, especially with declining home sales. “Residential permit values have been dropping for four straight quarters now,” he said.

Real Estate Sales
The real estate market has suffered “one of the biggest reversals in the state over the past couple of years,” Laney said. “The most dramatic changes have occurred in the number of sales, which are off sharply. Median prices are down some also, though not nearly so much as in many Mainland markets that were subject to accelerating increases earlier in this decade. Analysts project a continued decline in home prices for 2009, but again by relatively modest amounts.

“Trends in home prices have important implications for other components of the economy also. Consumers start to spend on other things when they feel wealthier because the price of what is usually their most important asset is valued higher in the market.

“One silver lining to declining home prices is that home affordability will be increasing gradually in a market in which prices are traditionally high, and incomes are generally lower relative to other such places. Eventually, that's positive for long-term growth. This is a trade-off that Hawaii always has faced and always will. We can't have escalating home prices as well as affordable housing.”

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