Hawaii Economic Trends

January 31, 2006

prepared by

Paul H. Brewbaker, Chief Economist Bank of Hawaii

Economic information is available electronically at http://www.boh.com/econ/

Executive Summary January 31, 2006

•     Top seven reasons to be happy about Hawaii’s economy in 2005:

1.           Hawaii construction was way stronger than forecast: closer to 15-20 percent growth vs. forecasts of 13.8 percent (October 2004), 11.0 percent (April 2005), and 12.2 percent (October 2005).

2.           Hawaii tourism numbers were slightly higher than forecast (≥7.4 million versus 7.3 million arrivals forecast by BOH, 7.2-7.4 million by the consensus).

3.           Higher energy costs were mostly absorbed; refiners appear to have profited from Hawaii’s unique, regulatory wholesale gasoline price cap, introduced the week of Hurricane Katrina (by accident).

4.           Honolulu inflation started 2005 a full percentage point lower than previously forecast for the full year (3 percent, versus 4 percent, respectively); globalization is still exerting disinflation force.

5.           Hawaii job growth in 2005 remained closer to 2.8 percent than the 1.8 percent forecast

6.           Only one-third of the State’s windfall revenue increase was attributable to an increase in delinquent collections, only one-third to unusual legislation, and one-third to the strong economy.

7.           Residential real estate projections were pretty much correct (read: no bubble).

•          The economic outcome for Hawaii in year 2006 will once again be dominated by the path of housing. The risk for housing in 2006 is that the surprises might be negative rather than positive. A decline in home sales transactions volumes, an inventory buildup causing longer selling times, and a narrowing of the list-to-sales price premia, all point to slower growth of valuations during 2006. For affordability, this time it’s all about prices, not interest rates. The affordability crisis will generate political turbulence, but household balance sheets are expected to remain intact as another year of appreciation—perhaps 10 percent—in median home prices continues. Signs in the tea leaves: values will flatten after that.

•          California markets show signs of home resale values stabilizing at or under $700,000 just like on Kauai and Maui. Continued work in our research program on home price dynamics suggests lags of 2 to 4 quarters linking Hawaii to California, but lags may be longer. The 1990s experience of price reversals, because of military downsizing, may be misleading: price stability is the most likely outcome.

•          Tourism’s record in 2005 masked surprises as well as continuing trends. It was all domestic. It overwhelmed higher than expected energy costs, a stronger than expected dollar, and benefited from stronger than expected US and Japan economies. It experienced mysterious volatility in seasonally-adjusted arrivals volumes that complicate the forecast. Underlying macroeconomic fundamentals in the US and Japan support a prognosis for continued good tourism growth during the next few years.

•          Interest rates along the US Treasury yield curve moved into a mild “U”–shaped configuration. We interpret this configuration as a reflection of the market’s continuing concern about prospects for a slowdown. In contrast, we think the Fed’s vigilance will contain inflation and, for the fourth year in a row keep US real GDP growth closer to 4 percent than 2 percent, ultimately steepening—slightly—the term structure of interest rates, but only by about 25 basis points, following the FOMC move of the Fed Funds target to 4.50 percent at the end of January 2006.

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 January 31, 2006 Bank of Hawaii Economics Research Center [www.boh.com/econ/]