UH economics panel shares optimistic outlook for 2016

Hawaii economists are revising upward their growth forecasts for next year and beyond after 2015 exceeded their expectations.

The University of Hawaii Economic Research Organization said a buoyant year for state tourism, low energy costs, attractive airline pricing and steadily improving local labor markets all contributed to a better-than-expected year.

“This year has turned out a bit better than anticipated, and prospects remain good for 2016,” UHERO said in its annual Hawaii forecast, scheduled for public release today. “Next year will see some easing of visitor growth, but no retreat from the high levels of activity that have built up in recent years. The construction expansion will continue, and tightening labor market conditions will support income gains.”

UHERO, headed by Executive Director Carl Bonham, senior research fellow Byron Gangnes and economist Peter Fuleky, said it now expects visitor arrivals to increase 4.2 percent this year and 1.5 percent in 2016. That’s up from 3.4 percent and 1.2 percent, respectively, in the organization’s September forecast.

“Growth in the visitor industry was surprisingly strong this year, with Japanese market weakness offset by healthy demand from other international markets and from the U.S.,” UHERO said. “The strong dollar is weighing on visitor spending, which has risen just 2.2 percent in the first 10 months of the year. Still, the pace of growth has pushed occupancy rates to record highs on Oahu and above 70 percent on the neighbor islands.”

In a major revision, UHERO said it now expects inflation-adjusted personal income to rise 4 percent this year and 2.7 percent in 2016. That’s up from 2.9 percent and 2.1 percent, respectively, in its September forecast.

“This year will see the biggest gains in personal income of the current expansion, with 4 percent growth,” UHERO said. “Considering healthy demand and likely upward wage pressure, conditions will remain favorable for income gains over the next several years. Aggregate real income will rise by 2.7 percent in 2016 and about 2 percent in 2017.”

UHERO kept its forecast for “nonfarm” job growth at 1.5 percent for this year but raised its forecast for next year to 1.5 percent, up from 1.4 percent in its September forecast.

Construction is playing a big role in job creation after a much-anticipated wait for the sector to take off.

“The construction cycle is now in full swing,” UHERO said. “The pace of new permitting and job creation has picked up considerably this year, and we are finally beginning to see increased activity on the neighbor islands, which experienced a pronounced boom-bust housing cycle in the 2000s. Construction activity will continue to expand for the next several years, with growth falling off later in the decade.”

UHERO said Hawaii’s inflation-adjusted gross domestic product — the broadest measure of economic output — is estimated to rise 3.4 percent this year, up from its earlier forecast of 2.8 percent, and then increase 3.1 percent in 2016, up from an earlier projection of 2.2 percent.

The research organization estimated that the unemployment rate for this year now will average 3.8 percent, an improvement from the previous estimate of 3.9 percent, and will dip further next year to 3.1 percent, down from the earlier 3.3 percent projection.

UHERO kept its inflation rate numbers the same as previously forecast, at 0.6 percent for this year and 2 percent in 2016.

Despite the positive outlook, UHERO cautioned that the state economy could be affected by global challenges, ranging from the surging dollar to Chinese slowing and renewed terrorism threats.

“So far we have weathered weakness in Asia well, seeing slowing in visitor spending, but no falloff in arrivals,” UHERO said.

But the research organization said the pressing question is when and how Hawaii will be affected by the next business cycle downturn that could come from persistent demand weakness from struggling Europe and changing China, low commodity prices, the uncertain effects of Federal Reserve tightening, and the possibility of a persistent terrorism threat.

“The good news is that Hawaii may be more resilient today than in the last downturn,” UHERO said. “Tourism is more diversified than in 2007, when 77 percent of all tourists were from the U.S. Today that proportion is 61 percent, with roughly 20 percent from international markets other than Japan.

“Unlike in 2008, we have no housing bubble, and in fact, ongoing construction could help to offset external weakness. Public sector finances, which got clobbered in the Great Recession, are now back on firmer footing. So when the next (downturn) comes, perhaps the impact here will be easier to manage.”