New State Economic Forecast: 'Hawaii Finds Itself In An Increasingly Vulnerable Position'

Sep 20, 2019

The Federal Reserve cut interest rates Wednesday to help the slowing national economy. Meanwhile, researchers say Hawaii's economy is already weak, and the state is growing more vulnerable to global events.

The latest economic forecast for the state from the University of Hawaii's Economic Research Organization (UHERO) is a pessimistic one.  Researchers say the state's economy has stalled, and any other impacts – such as new tariffs in the U.S.-China trade war – could send it in a decline. This is due to several factors.

One of them is the unemployment rate and population. In July, the state's unemployment rate sat at 2.8% – which is still low compared to the rest of the country. But that number is up half of a percentage point since the end of 2017. It's a negative sign, and not helped by a declining population.

For the first time since the 1950s, the state's population has dropped for two consecutive years, the UHERO reports.

"The only reason the unemployment rate hasn't gone up more is that the labor force has gone down," said Carl Bonham, executive director of UHERO. "If your unemployment rate is low because your labor force has declined, that's not a sign of a strong economy. And the declining population for the last couple of years is a piece of that declining labor force."

Bonham says the decrease is due to a growing number of retirees, a lower birth rate, and an outflow of residents. The lower birth rate and residents moving out of Hawaii could be the result of the state's higher cost of living and payroll numbers remaining flat overall. Researchers are forecasting average resident pay to increase by less than a half percent in 2020.

"When you look at growth in employment and growth in income, we're near the very bottom of real income growth in the whole country," Bonham said.

UHERO expects the state's unemployment to continue to edge up, reaching 3.5% by 2021.

Another factor hanging over the local economy is the tourism industry.

While visitor arrivals continue to rise, most of those visitors are from the mainland U.S. – and not international markets. Bonham says the organization has seen a sharp decline in overseas visitors, which could be due to a strong U.S. dollar and America's foreign policy. 

"The bigger the slice of your pie that's coming from one market, the harder you'll get hurt when that market slows down," said Bonham. "But that doesn't mean the international market won't pick up when the U.S. economy slows down."

In addition, visitor spending has slipped, which could be caused by the decline in visitors' average length of stay. 

UHERO's forecast also considered the long-term impact of Oahu's latest ordinance cracking down on illegal vacation rentals. Since the law went into effect, roughly 3,500 units have withdrawn online listing.

According to UHERO, this represents more than 8% of the island's overall visitor plant industry or tourist accommodations. The organization expects the decline to have an impact on where visitors stay, and their decision to travel to Hawaii.

Bonham says it is still early to see what effect the city ordinance is having on the economy, but its effects could be seen either later this year or in early 2020.

With all these factors playing a role in the state's economic stall, Hawaii "finds itself in an increasingly vulnerable position." Bonham says it wouldn't take much for Hawaii's economy to move from weak growth into a recession. 

UHERO Report by hawaiipublicradio on Scribd