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Economists predict a dicey but promising 2023 for Hawaiʻi

FILE - People take to the waves on Waikīkī Beach on June 23, 2022. (AP Photo/Marco Garcia)
Marco Garcia/AP
FR132414 AP
FILE - People take to the waves on Waikīkī Beach on June 23, 2022. (AP Photo/Marco Garcia)

The University of Hawaiʻi Economic Research Organization, better known as UHERO, released its second quarter economic forecast for the state today.

"We expect the U.S. to fall into a mild recession before the end of this year," said Peter Fuleky, a UHERO economist. "But Hawaiʻi will likely, more likely, avoid a recession."

Despite increasing uncertainty surrounding the nation's looming debt ceiling deadline and the Federal Reserve's continuing interest rate hikes, which had an effect on banks and consumers, UHERO reports Hawaiʻi is still on a path to recovery.

"Essentially the tourism industry is our export. And so far, the U.S. market has been solid and sustaining us," Fuleky said. "If there is a downturn at the national level in the U.S., we might see weakening of U.S. tourism, but at the same time we haven't fully recovered on the international side."

According to the Hawaiʻi Tourism Authority's latest monthly visitors report, the U.S. markets still made up a majority of visitor arrivals in March — with nearly 710,000 travelers. That statistic was 686,000 in March 2022.

Meanwhile, Canadian visitors continue to be the largest international market for the state — with more than 64,000 visitors, an increase of 18% compared to March 2022. The HTA reported 900,800 total visitor arrivals by airplane and by cruise ship in March.

Visitor spending continued to grow in March 2023. According to HTA, travelers spent more than $1.84 billion — 20% more than in previous years. One contributor to the higher spending is hotel room rates, which continue to be higher than other U.S. destinations.

But the state's tourism industry is still awaiting the full return of Japanese travelers. A total of 40,000 Japanese visitors came to the islands in March, which is 10 times the amount compared to March 2022. However, that is still 70% lower than pre-pandemic levels.

"The Japanese visitors expressed some reluctance to travel. This has been documented in some surveys, where Japanese travelers were asked whether they are planning to take vacations in the future," Fuleky told HPR.

Passengers on Japan Airlines flight 177 arrive at Ellison Onizuka Kona International Airport on Tuesday, Aug. 2, 2022.
Erin Khan/Hawaiʻi Tourism Authority
FILE - Passengers on a Japan Airlines flight arrive at Ellison Onizuka Kona International Airport on Tuesday, Aug. 2, 2022.

In that survey, roughly a third of respondents said they don't plan to travel again. Fuleky indicated the survey was taken in 2022, and there may be some questions with the response options given to participants and a change in public sentiment since then. However, he said other factors such as Japan's aging, and shrinking, population can be attributed to fewer travelers coming to the state in the future.

"Hawaiʻi used to be a honeymoon and wedding destination for Japanese travelers. There is fewer people getting married in Japan," Fuleky added. "We do expect continuing improvement. But even at the end of the five-year forecast horizon, we don't expect to reach the level of Japanese visitors we have seen before the pandemic."

But there are other positives in other international visitor markets. According to UHERO, there are strong arrival numbers in Korean, Australian and New Zealand visitor markets.

Other than tourism, UHERO's report also highlights a strong construction sector, cooling inflation, and a healthy labor market in the state. According to researchers, those are positives that will help Hawaiʻi for the rest of the year — despite the uncertainty surrounding the US economy.

"The construction industry is one of the bright spots," Fuleky said. "Overall, it has performed quite well. Despite the fact that we are seeing higher interest rates."

UHERO's report outlines construction jobs have recovered to pre-pandemic levels, and going forward large federal projects will help keep the industry afloat — even in the event of a decrease in federal funding.

However, construction of new residential properties remains "sluggish," due to permitting regulations. That continues to impact the state's cost of living, and a continued outmigration of residents.

That also impacts the state's labor market. Although unemployment sits at 3.5% currently, UHERO expects that to increase to 4% by early next year — due to weakening U.S. tourism, tight credit and high interest rates.

"We have seen an outmigration from the state, and effectively the number of people who can work currently is fewer than it was before the pandemic."

Although the state experienced a sharp increase in prices, Fuleky said inflation in the state appears to be cooling. Meanwhile, other municipalities in the U.S. are still experiencing rising costs for goods and services.

While the overall state economy may avoid a recession, a downturn may still affect certain areas and residents more than others. Fuleky said counties that have relied on U.S. visitors during the past two years will be impacted the most if there is a recession.

If the U.S. Congress doesn't raise the debt ceiling, that will affect 7% of Hawaiʻi's workforce employed directly by the federal government — and even more workers have jobs tied to federal activity. UHERO warns the longer any federal shutdown lasts, the larger the impact will be.

However, UHERO's report suggests the Federal Reserve's ongoing fight against inflation can have a significant impact on the local and national economy. Despite that uncertainty, researchers believe the state can avoid an outright recession.

Casey Harlow is an HPR reporter and occasionally fills in as local host of Morning Edition and All Things Considered. Contact him at charlow@hawaiipublicradio.org or on Twitter (@CaseyHarlow).
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