The 2025 first-quarter economic forecast by the University of Hawaii Economic Research Organization paints a somber outlook of the state economy, warning of the potential for a recession depending on how policy shake-ups by President Donald Trump and his new administration ultimately take shape.

The report argues that Hawaii’s economy “will feel the adverse effects of federal policies over the next several years, pulling job growth to zero and real GDP growth down to 1.6% this year,” and that “more extensive federal layoffs, tariffs, or deportations could well result in a Hawaii recession and undermine long-term growth prospects.”

Trump has promised massive cuts in federal spending and has tasked Elon Musk, a “special government employee” who crafted the Department of Government Efficiency — or DOGE — to make cuts to federal agencies.

In the first weeks of the Trump presidency, DOGE has eliminated thousands of federal workers as it goes through the government. Last week at the Conservative Political Action Conference in Maryland, Musk — the world’s richest person — took to the stage with a chain saw as he touted DOGE’s efforts to cut as many federal employees and programs as possible.

The federal deficit has con­tinually climbed under both Republican and Democratic administrations, and some budget hawks have lauded DOGE’s push as a bold move toward bringing spending under control. But the UHERO forecast argued that the largest near-term threat to Hawaii’s economy is mass firings of federal employees, which it predicts will amount to an estimated 2,200 jobs in Hawaii — or about 5% of the islands’ workforce.

That doesn’t include state jobs supported by federal grants, local workers on federal contracts or workers at nonprofit organizations that get federal funds — potentially putting many other jobs on the cutting block. The forecast argued that “these job losses will offset all of the gains in other sectors over the next few years, and they now raise Hawaii’s recession risk to its highest level since the onset of the COVID-19 pandemic.”

In a digital media round­table with reporters Thursday, UHERO Executive Director Carl Bonham clarified that the organization is not expecting a full-blown recession in the islands yet but that “at the end of the day, the forecast comes out with essentially zero job growth for all of 2025 and very little in 2026. … When the economy gets to the point where it’s not adding any jobs at all, it doesn’t take very much to tip it into negative territory.”

The cost of living remains high, and residents are struggling. The median price of a single-family home in the islands rose 9% statewide in 2024. Maui County saw the biggest increase at 13%, while Honolulu County had the smallest at 4%.

But as workers in the islands struggle to make ends meet and find gainful employment, the forecast found that the strongest sector of Hawaii’s economy is construction, with a wide range of both public and sector projects, calling it “the primary bright spot in the local economy.” It predicts construction heading toward a peak of nearly 41,000 workers in 2026.

Defense spending construction is a major contributor to that growth. Department of Defense projects in Hawaii account for around 8% of the national military construction budget — more than any other state.

The largest of those projects is Pearl Harbor Naval Shipyard’s new Dry Dock 5, which is meant to accommodate new nuclear submarines and is the single most expensive construction project in the Navy’s history. It’s expected to cost at least $3.4 billion by its projected completion in 2028 — not including upkeep, maintenance and operations costs.

Despite a directive from Trump to make budget cuts at the Pentagon, Defense Secretary Pete Hegseth has marked the Hawaii-based Indo-­Pacific Command — which oversees all operations in the Pacific — as exempt from cutbacks at a time when military leaders see the region as their top priority amid tensions with China.

Bonham said, “(We’re) not hearing of any any kind of slowdown in or retrenchment on any of the federal spending for example at Pearl Harbor, or any of the work that has already been authorized and has started on (Department of Transportation) infrastructure work, or for that matter, at some of our big contractors that are doing work for DOD.”

But he warned that as those projects near completion, employment could drop.

Even still, construction payrolls on Oahu are “near record highs,” and on Maui, where the economy has been slow to recover since the deadly 2023 fires, residents have begun finding work rebuilding the town of Lahaina. Since July 2023, Maui’s construction workforce has grown by 8%.

But federal relief funding has played a central role in the boom in Maui construction jobs. On Monday, 131 Maui residents displaced by the wildfires and working on recovery efforts through the National Dislocated Worker Grant program were laid off after the administration cut federal funding for their positions. Other programs related to Maui’s reconstruction and recovery are also in question.

“I would say in terms of construction, the Maui rebuild and the federal support for that is, is probably the most uncertain,” Bonham said. He noted that the forecast was finalized before news of the layoffs on Maui became public.

The forecast also warned that potential tariffs on steel, aluminum, lumber and other construction goods could have impacts on the industry — and in some cases already do. Though many tariffs have yet to take effect, it’s made suppliers anxious and changed how they do business, with many hedging on price estimates.

Bonham explained, “You might get a price quote, and it might be good for a week or two, but if you’ve got contracts that require that you do a building for the next two years, that means the builders are having to take the risk and and also expecting costs to go up. So it’s already starting to impact builders right now.”

“If we get 25% tariffs on Mexico and Canada and or if we get reciprocal tariffs for the whole world, then I would be very surprised if we avoided a recession,” Bonham said. “But the problem is, we don’t know if that’s real.”

Some commentators and economists believe Trump is using the threat of tariffs as a negotiating tactic to strengthen the U.S. position and renegotiate trade deals and that actual tariffs that get put in place will be much lower. Bonham said, “If we get the full effects that have been tossed out there, then our construction forecast will probably be too strong.”

The report also found that Trump’s aggressive immigration crackdown could have huge impacts on the construction industry nationally — both documented and undocumented migrant workers make up a significant portion of the workforce.

A reduction in construction workers through both deportations and tighter restrictions on legal immigration could contribute to a national shortage at a time when construction demand is projected to grow. The devastation of the recent Los Angeles fires and the hurricanes that rocked the East Coast is expected to create a huge demand for construction workers as communities rebuild.

“(If) you create a labor shortage nationally, that has implications for Hawaii,” Bonham said. “That excess demand on the continent drives up wages and has the potential to essentially suck workers out of Hawaii who are facing the high cost of living in Hawaii and are maybe attracted to premium wages.”

Hawaii’s other main economic engine is tourism. The forecast found that “visitor numbers are stable but not growing. … The Japanese market recovery will advance only very slowly. The recovery of other international markets will continue, although there is a risk that deteriorating global relations could hurt.”

However, the report also predicts a boost in visitors from the mainland in the short term amid tax cuts and a sense of optimism among many Americans about economic prospects under Trump. The forecast expects a 2.6% rise in arrivals in 2025 after a $1 billion spending decline in 2024 and that rather than arrivals growing at 3% in 2026 and 2027 as UHERO predicted in its fourth-­quarter forecast in 2024, arrivals will begin to decline.

“Even with the uncertainty, there is optimism around the new administration and around the U.S. economy, which is still performing at a very high level,” Bonham said. “So we think that some of that can translate into a small boost in U.S. visitors this year, but probably weakness and outright decline in ’26 and ’27 as we expect the U.S. economy to weaken.”

According to UHERO, roughly 20% of the state budget is federal grants. The report predicts that depending on whether cuts continue, that could have deep impacts on health care funding and social services, including efforts to address homelessness across the islands. It also has meant anxiety at UH and other schools that receive federal funding, and put the future of scientific research projects into question.

Several federal agencies have in recent weeks scrambled to rehire employees fired by DOGE, including employees at the Department of Energy who oversaw the safety and operation of the military’s nuclear arsenal and U.S. Department of Agriculture workers who were working to curb a bird flu academic that has ravaged chicken farms across the country, leading to shortages and escalating prices in eggs and poultry that Trump had promised on the campaign trail that he would solve.

Gov. Josh Green has publicly said the state is interested in hiring laid-off federal workers for vacancies at local agencies and made a recruiting push. Bonham said it’s feasible but noted that for many experienced federal workers, jobs at state and local agencies would be a pay cut in a place where the cost of living continues to remain high.

“While the express goal of federal firings is to reduce waste and fraud, there is little evidence that these cuts have done so,” the UHERO forecast argued. “Instead, the cuts will impose limits on a broad array of federal government services, with adverse impacts on businesses and households that rely on these services. Even if some employees are later rehired by necessity, as we assume, the lost economic support in the meantime could have permanent impacts.”