Economy primed to grow

Hawaii’s construction sector is expected to finally live up to its promise in 2015.

Local economists had projected that construction projects this year would provide the catalyst to prop up the state economy in the wake of stagnant tourism. But those projections were premature, Jack Suyderhoud told business leaders Wednesday at the First Hawaiian Bank Business Outlook Forum at the Blaisdell Concert Hall.

Construction should lead the way next year as the economy continues on its slow growth track.

"Despite erratic tourism patterns and slow, but promising, construction spending, the Hawaii state economy has built some internal momentum so that output, jobs and incomes are expected to expand overall next year with continued strength in most sectors," said Suyderhoud, economic adviser to First Hawaiian Bank and professor of business economics at the University of Hawaii Shidler College of Business.

"I am cautiously optimistic about the economic outlook for the rest of 2014 and 2015. Tourism will contribute to growth, but construction will finally fulfill its anticipated role as the leading growth engine in 2015."

Suyderhoud estimated that completed construction activity will end this year up 9 percent and forecast it to rise an additional 12 percent next year based on construction permit data and the continued pent-up demand for housing. In his 2013 forecast, he had projected completed construction activity — the amount of construction that companies have gotten paid for and are reporting on their general excise tax return — to rise 15 percent this year.

Suyderhoud said healthier fiscal positions for local governments mean that deferred maintenance and infrastructure renewal spending will continue to contribute to construction’s growth.

"All of this should help bring back some of the 8,000 construction jobs that we have yet to recover from the Great Recession," he said.

Suyderhoud said the construction industry boom that was expected to begin two years ago has only happened partially. There has been a pickup in some activities, such as the rail and Kakaako, while others have fallen off, such as PV and federal construction, he said.

"There has also been a change in the composition of the construction with more emphasis on high-density housing that uses a lot of concrete and specialized labor, away from single-family housing that uses more lumber and carpenters," Suyderhoud said. "More projects face regulatory and community hurdles that are delaying construction."

Suyderhoud predicted visitor arrivals rising 1 percent this year, a record high for the third year in a row but substantially lower than the 3 percent he forecast a year ago for 2014. Through the first nine months of the year, visitor arrivals are up just 0.5 percent, according to Hawai‘i Tourism Authority data that came out Tuesday.

For 2015, Suyderhoud is forecasting visitor arrivals to increase at a slightly higher clip of 2 percent.

"At over 8 million annual visitors, we are approaching capacity constraints," he said. "In addition, high airfares and room rates — plus a continued strong dollar relative to the yen, and Canadian and Aussie dollars — all suggest that tourism will continue to contribute to growth but at a moderated pace. Visitor expenditures will remain positive but not robust."

Suyderhoud forecast visitor spending rising 2.9 percent next year after estimating a rise of 2.2 percent for this year. His forecast a year ago for 2014 called for an increase of 5.3 percent.

He said the return of construction jobs will contribute to improvements in the overall state labor market and that he expects total job growth to increase 1.6 percent next year, slightly better than his 1.4 percent estimate for 2014. He also expects the unemployment rate to dip below 4 percent at 3.9 percent next year. His estimate for 2014 is 4.2 percent.

"Hawaii’s labor market has steadily improved with the job total up 41,000 since 2010," he said. "The return of more construction jobs will help total job growth pick up slightly."

Inflation should remain benign and increase just 2 percent in 2015 after rising an estimated 1.5 percent this year, Suyderhoud said.

"Because the recovery has been gradual and there remains excess capacity in the national and Hawaii economies, inflation has not reared its ugly head as might be expected this far into an expansion," he said. "Price pressures remain subdued in Hawaii as is the case nationally. On average, inflation is about equal to the nation as a whole, with differences largely due to housing prices."

Suyderhoudsaid inflation-adjusted personal income should expand at a rate of 2.5 percent next year as the labor market improves.

In addition to Suyderhoud’s presentation that focused on the outlook for Hawaii, the First Hawaiian Bank forum included a presentation on the global economic outlook by London-based Larry Hatheway, managing director and chief economist of UBS Investment Bank.

Hatheway said the United States and United Kingdom are the sole examples of accelerating growth in an uneven global economic recovery with the U.S. enjoying the best of it. He said other parts of the world economy, such as western Europe, Japan and emerging economies, are lagging behind, and that China’s economy has slowed from its heyday of 2010 and is suffering from a severe overhang of a property recession.

Hatheway said he expects U.S. growth to accelerate at a 3 1/4 percent annual rate in the second half of this year and maintain that pace through 2015.

"The primary driver of that is increased employment and household income," Hatheway said. "The savings rate has fallen and there are some signs that consumers are more willing to take on debt … and there are signs that businesses are willing to pick up capital expenditures, which is a healthy development."