HONOLULU — A shrinking population and a weak labor force will constrain Hawai‘i’s economy this year and cause inflation-adjusted personal income growth to slow along with broader measures of economic health.
That was the opinion of University of Hawai‘i Economic Research Organization Executive Director Carl Bonham, who discussed UHERO’s second-quarter forecast on Thursday during a news conference.
UHERO expects Hawai‘i’s real personal income will slow below 1 percent this year and that real gross domestic product will drop from 3.6 percent growth in 2023 to 1.5 percent. GDP is the inflation-adjusted calculation reflecting the value of all the goods and services produced by an economy in a given year, so a decrease signals that an economy is shrinking.
Meanwhile, UHERO has raised its inflation forecast for the year to over 4 percent and is anticipating that the payroll job situation and tourism will be a bit worse than previously anticipated.
While UHERO is forecasting a slowdown, Bonham said its second quarter forecast is “not dramatically different” from its first quarter forecast.
“This is a reasonably optimistic report in the sense that I think things could be a lot worse given the complete pause in recovery on Maui for tourism and that being the primary source of weakness statewide,” he said.
Bonham said UHERO expects Hawai‘i’s economy will see some economic benefits from the rebuilding of Maui after the Aug. 8, 2023, wildfires, construction across the state and the slow recovery of international visitors to help offset the moderate pullback in domestic visitors. However, the downturn on Maui and the decline in international visitors across the state have continued to take a toll.
“As we have this weakness in the U.S. market with passengers and arrivals that are below where they were in 2023, we need to see that continued recovery particularly of Japan but other international markets, too,” Bonham said. “Total visitor arrivals are down 5 percent through March, and we know visitor spending is suffering. We think visitor spending for the whole year is going to be down about $ 1 billion, and then a gradual recovery thereafter.”
Bonham underscored the importance of international visitor arrivals, particularly from Japan, continuing to recover and offset weakness in arrivals from the mainland. He added that the economies of Hawai‘i’s major international markets are facing a strong dollar as they are weaker than the U.S. economy, which grew more than 4 percent in the second half of 2023.
“Overall, our primary international markets are dealing with about a 15 percent drop in their purchasing power,” Bonham said. “So that means even as they slowly return in numbers, their spending is going to be constrained, and so that acts as sort of a drag and not as much growth as we might have expected otherwise.”
Bonham said inflation also has picked up in the islands and now exceeds the national average. He said rising inflation in the islands is primarily due to “a delayed pass-through of higher rents” and is expected to decline over the next two years.
Soaring mortgage rates have caused existing home sales to decrease, along with rising insurance rates and a lack of inventory. Still, overall construction activity has remained afloat. UHERO expects construction employment will reach record highs as Maui rebuilds and workforce is needed for ongoing private and government projects, especially on O‘ahu.
Still, Bonham said the behavior of payroll jobs differs across the counties. He said payroll jobs on Hawai‘i Island are back to almost 100 percent of their pre-pandemic strength, but are 3 percent to 5 percent below the pre-pandemic levels on O‘ahu and Kaua‘i.
He said Maui payroll jobs are down about 6 percent, or 5,000 jobs, from July to March. However, Bonham said statewide job numbers since before the fires to now are up a little over 3,000 “because the other counties are continuing to see gains.”
He said Maui’s payroll jobs primarily have been lost in food service, transportation, real estate and rental leasing.
“You don’t see huge drops in accommodations, but you do see it in food service, and that means so long as we have the number of visitors on (Maui) 20 percent to 25 percent below where it was pre-fire, you have got 15,000 fewer people who would normally be eating out, going to restaurants, going to bars, shopping in retail establishments,” Bonham said. “That money is just not there, and so those jobs are hard to come by.”
UHERO’s report does not even take into account the potential economic disruptions from Maui or other counties passing new land-use restrictions for vacation rentals, which in recent years have represented much of the growth in lodging units.
Population changes, which have reduced government revenue, also are factoring into economic health, he said.
“O‘ahu has been losing population for several years now, and our forecast is for that to continue to be very, very stagnant,” Bonham said. “Our forecast for Maui is a 3,000- or 4,000-person loss of population between 2023 and 2024 and a very slow recovery.”
He said in contrast, Hawai‘i Island has seen the most population growth.
“It shouldn’t be a surprise that the county with the most population growth is also the county that has added the most housing units and has sort of the most affordable housing situation of any of the other counties,” he said.
“Longer term, we know that population is a major driver of overall economic growth, particularly labor force growth, and so if you don’t have labor force growth, the only thing that is going to cause your economy to grow is productivity growth,” he said. “In a service economy, productivity growth is not always as strong as, let’s say, it is at the national level.”
