Positive expectations outweigh negative ones in a new Hawaii economic forecast where rising personal income and construction offset a small decline in visitor spending and higher unemployment to help the state avoid a recession in 2024.

The University of Hawaii Economic Research Organization said in a report released for publication today that external risks causing a recession in Hawaii in 2024 are elevated but likely won’t result in local economic contraction.

“The external environment facing Hawaii is dicey,” the report said. “A national recession will weigh on Hawaii later this year, but local sources of strength should keep our heads above water.”

Sources of strength include a lot of public-sector construction projects, increased state government spending and a rise in personal income after accounting for inflation that has receded rapidly.

For construction, the report noted a $4 billion Navy plan to update naval infrastructure is beginning to appear in local contracts with spending scheduled to run through 2027, including $2.8 billion recently awarded to a consortium of construction and dredging companies in the state to improve facilities at Pearl Harbor.

The report also mentioned a $200 million project award earlier this year by the state Department of Transportation for road improvement work across the state.

“Pending construction activity is looking even better than we had anticipated only a few months ago,” the report said. “Surely high employment and construction costs will challenge the industry, but from a macro perspective the timing of this construction cycle could not be better.”

UHERO also noted that the state’s plan to spend much of a roughly $2 billion revenue surplus will offset some drag on the local economy from a weaker U.S. economy.

Personal income adjusted for inflation in Hawaii is expected to rise 3% this year and 2% in 2024. UHERO said such gains, which tend to result in more spending in the local economy, were possible because of inflation moderating a lot since 2022.

The report estimates that inflation for Honolulu this year will end up being 2.4% after hitting 6.5% in 2022, and then settle further to 2.2% in 2024.

“Inflation in the Islands is receding rapidly, setting the stage for stronger gains in the standard of living,” the report said.

Overall, the value of all goods and services in Hawaii adjusted for inflation, a broad measure of the economy known as real gross domestic product, is expected to rise 2.6% this year to $100.8 billion, from $98.2 billion in 2022, and then gain another 2% in 2024 to $102.8 billion.

Peter Fuleky, a UHERO economist, said Thursday during a news conference that such growth would continue a rebound for the local economy that has not yet fully recovered from losses since the coronavirus pandemic took hold in 2020.

“Hawaii is still on a recovery path,” he said.

There are several factors noted in UHERO’s report that are limiting or threatening Hawaii’s continued economic recovery.

The organization expects that in 2024 the local real estate market will remain weak, visitor arrivals will slip along with how much tourists spend, high interest rates will inhibit business growth and unemployment will rise a bit.

There’s also a prospect that political wrangling in Congress causes a national debt default in the next few weeks or so, which could destabilize economies across the globe and cause economic losses in Hawaii as well.

Regardless of whether such a catastrophe occurs, Hawaii’s largest industry, tourism, is expected to slip a bit in 2024 after a small gain this year.

UHERO projects that the number of visitor arrivals will rise to 9.84 million, up 6.4% from 9.25 million in 2022, while visitor spending edges up 2.1%, or by $405 million, to $19.7 billion adjusted for inflation.

In 2024, though, the number of visitor arrivals expected by UHERO slips by 1.1% to 9.72 million, and visitor spending decreases 2.2%, or by $429 million.

The organization expects that mainland visitor arrivals will soften this year amid a slowing U.S. economy and be only partially offset by some recovery in the international visitor market, which includes arrivals from Japan, which remain one-third of what they were in 2019 prior to the pandemic.

In the local housing market, high mortgage interest rates and high home prices, the later of which were driven up in recent years by low production and strong demand, are depressing sales. This combination means that it takes about twice as much income to afford a median-priced single-family home today compared with a decade ago, the report said.

A combination of expected factors, including the dip in tourism and high credit costs for businesses, is expected to cause the state’s unemployment rate to reverse a two-year downward trend by rising this year to 3.9% from 3.5% in 2022, and then to 4.2% in 2024.

UHERO’s report said a broad worker shortage in Hawaii has been largely eliminated due to recovery in the labor force and softening labor demand, though businesses still report some hiring challenges.

One weighty uncertainty in UHERO’s forecast that could alter the expected trajectory of the local economy lies with the federal government, particularly how long the Federal Reserve keeps interest rates high in its effort to combat inflation.

“Higher rates for longer would impose a significant burden,” UHERO said in its report.

UHERO already expects a U.S. recession will begin late this year and weaken the national economy this year and in 2024, and that a national recession will weigh on Hawaii’s economy over the same period.

“Continuing high interest rates and softening U.S. and global conditions will cause a slowdown in Hawaii growth, but not a local recession,” the report said. “Despite heightened downside risks, Hawaii is still likely to avoid an outright recession.”