Hawaii appears poised to escape a recession, but a group of local economists says that high interest rates and prices will cause weaker growth in the state through the first half of this year.
The state’s gross domestic product — the value of Hawaii’s goods and services adjusted for inflation — will slow to 1.7% growth in 2023 from 2.5% in the previous year, according to quarterly report due out today by the University of Hawaii Economic Research Organization. However, a more positive sign is that UHERO sees Honolulu inflation dropping to just 2.9% this year after reaching 6.5% in 2022. The report also says the state’s labor market already has normalized because job openings have diminished as businesses have slowed down.
International tourism, which has been the state’s laggard in the visitor industry, will continue to recover, the report says. However, it notes that domestic travel will soften in the wake of a U.S. recession.
“It’s a little bit more optimistic than our last two reports,” UHERO Executive Director Carl Bonham said in a video accompanying the report. “The U.S economy continues to be more resilient and (have) a stronger labor market, with a modest consumer spending than we had anticipated. That is translating into really stronger U.S. visitor demand than we were expecting at this time in the fourth quarter or even in the third quarter.
“We continue to forecast that the U.S. economy will experience a mild recession in 2023, maybe slipping into 2024, and Hawaii will avoid that … recession.”
However, UHERO cautioned in its report that the so-called “soft landing” for Hawaii could be derailed if the Federal Reserve decides a sharper upward interest rate path is needed to quash a stubbornly strong U.S. labor market and its upward effects on inflation. The Fed, which has raised interest rates eight straight times, is scheduled to announce its next expected interest rate increase on March 22.
“The Fed is trying to get people to stop borrowing money,” Bonham said. “They’re trying to reduce demand for loans, reduce borrowing, and that means reduced spending, which then means reduced demand for workers, which means reduced pressure on wages and, then ultimately, reduced pressure on inflation.”
U.S. inflation has declined from 9% in the summer of 2022 to 6.4%.
“Our forecast is U.S. inflation around 3.5% by the end of the year, and that should be enough for the Fed not to keep jacking up interest rates,” Bonham said.
UHERO forecasts that visitor arrivals by air in Hawaii will rise 6.7% to nearly 9.9 million this year before slipping 1.4% to 9.7 million in 2024.
Bonham also expects the housing industry to continue slumping even though he expects median home prices in 2023 to be higher than they were in the first two months of this year.
The median price for single-family homes on Oahu dropped below $1 million in January and February. UHERO expects the median price to finish the year at $1.02 million — albeit down 7.1% from $1.1 million in 2022. The report forecasts the median condominium price on Oahu to finish 2023 at $475,800 — down 6.1% from $506,500 last year.
“Those interest rates are biting, and the place they’re biting are in housing nationally and in Hawaii,” Bonham said in the video. “Oahu single-family resales — we’re talking 45, 46% drop year over year. That’s consistent with what we’re seeing on the national level. That’s the biggest drop we’ve seen since 1991 on Oahu, and we’re seeing resales getting down at a level that’s consistent with Great Recession levels.”
For prospective buyers and renters, though, he said “the good news is that home prices are starting to come down and rent growth has slowed very, very sharply.”
“So that’s helpful with the inflation picture,” Bonham said. “And if you look at the inflation picture for Hawaii, inflation has come down very, very sharply (due to lower costs for items like gasoline, rent and food at home) … We think by the end of 2023, the Honolulu CPI (consumer price index) will be growing at less than 3% annualized.”
