awaii’s housing market has coolednoticeably and inflation has gottensignificantly worse over the past year,
signs of a slowdown in the local economy thatwill continue into 2007. However, even though ourlong 10-year expansion has entered a maturingphase, the outlook for 2007 is for respectablereal growth — better than just a “soft landing.”
� Jobs. A somewhat slower economy is likelyto cause a deceleration in job growth froman estimated 2.5% in 2006 to around 2.0% in2007. That’s still a pretty healthy rate of jobcreation since the unavailability of workersto fill new positions will still serve as aconstraint on new job growth, especiallyon the Neighbor Islands.
� Unemployment. The unemploymentrate, estimated at 2.8% for the full year of2006, will likely stay low, but can’t fall muchlower because there are always people betweenjobs in even the strongest of economies. Iexpect the rate to rise just slightly to 3.0%in 2007. That may take us out of first placeas the nation’s tightest labor market, butwe’ll still be near the top of the list.
� Inflation. All forecasters were surprisedat just how high Hawaii’s inflation rate wasfor the first half of 2006 — a whopping5.8%. We expect the full-year total to be5.0%. We’re not going to get much reliefon that front in the near future. Inflation
Although Hawaii’s 10-Year Expansion Has Cooled,2007 Outlook is for ‘Better Than a Soft Landing’
Economic analysis by:
Dr. Leroy O. Laney Economics Consultant to First Hawaiian Bank, Professor of Economics & Finance, Hawaii Pacific University
2007 HAWAII FORECAST
JOBS
UNEMPLOYMENT
INFLATION
VISITOR ARRIVALS
REAL PERSONALINCOME
+2.0%
+3.0%
+4.5%
+2.4%
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2006Estimate
GROWTH RATES2007
Forecast
Hawaii Outlook . . . . . . . . . . Page 1
Big Island Economy . . . . . . . Page 6
Maui Economy . . . . . . . . . . . Page 8
Kauai Economy . . . . . . . . . . Page 10
U.S., World Economy . . . . . . Page 12
will remain high because it takes time forsome of the recent price increases, especiallyin housing and energy, to be reflected fullyin the broader index. If most of the priceshocks dissipate a little, maybe somedeceleration to 4.5% is plausible for 2007,but that’s still pretty steep inflation.
� Visitor arrivals. I anticipate an almostflat year in 2006 for visitor arrival growth(+0.5%), which leaves some room for betterperformance next year. A somewhat slowerMainland economy, with a turn in the realestate market there as well as other factors,could curb Hawaii tourism growth a littlemore than might otherwise be the case.But barring unforeseen non-economicdevelopments, there is no reason to projecta drop-off in visitors in 2007. Indeed, I wouldexpect growth of about 2.4%.
� Real personal income. Even with highinflation and a cooling economy, Hawaiireal personal income can hold steady atabout 2.0% in 2007. That’s better than justa “soft landing.” It’s still respectable realgrowth. That even builds in a slowdown incurrent dollar growth in 2007, which wecan approximate by adding real growth toinflation in each year. If we do that, we get7.0% current dollar growth for 2006, slowingmarginally to 6.5% next year.
JOB GROWTH DECELERATES, BUT CONTINUES DESPITE LABOR SHORTAGE
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Hawaii Outlook for 2007 (continued from page 1)
Real Personal Income GrowthSlowed by Inflation’s Comeback
Hawaii’s inflation-adjusted personal incomegrowth is one of the broadest measures of ourstate economy. The current expansion has nowreached 10 years, already longer than the last one.If the economy continues to grow in 2007, we willextend that span to 11 years — a pretty good runas economic expansions go. That’s been verywelcome after the anemic years of the mid-1990s,which are also apparent in the chart at right. Withonly a few bumps in the road such as 9/11, theexpansion built momentum along the way.
But inflation, which has now come back witha vengeance, will eat into personal income and makethe inflation-adjusted number lower. With risingshelter and energy prices, there is less left over inhousehold budgets to spend on other things. So areasonable estimate for real personal income growth in2006 is 2.0%, somewhat lower than originally thought.
Job Growth Remains Healthy,But Slowed by Labor Shortage
Job growth, which shows about the same cycle aspersonal income, has continued to be healthy in 2006,although overall growth for the year is likely to slowdown slightly from 2005 (right). That trend is duemore to a shortage of workers to fill open positions thanit is any slowdown in demand. Hawaii’s labor shortage,after years of strong growth, continues to be acute.
Unemployment Rate RemainsAmong Nation’s Lowest
We also see the same economic cycle in the stateunemployment rate (below), plus more evidenceof the tight labor market. Hawaii had the lowestunemployment rate in the nation for 24 straight
months through May 2006. It then dropped tosecond place among the states, but was back infirst place in August. The Hawaii jobless rate alsocontinues to be lower than any time since 1990,the end of the last boom. It should finish 2006 atabout the level of a year earlier. Beyond a certainpoint, it really can’t go much lower.
General Excise Tax RevenuesHolding Up Well During 2006
Below is another measure of the economy —General Excise Tax growth. Because all transactionsare subject to it, it’s a broad gauge, always worthwatching. That growth has also held up well so farthis year, down some from a 2005 surge but still high.
First Hawaiian’s Card SpendingShows Consumer Confidence
Another good indicator of the economy is creditcard spending growth at First Hawaiian Bank’s300 largest merchant customers (chart at right).This figure, which reflects both tourism and localspending, continues to show strength in 2006.
The slight downtick for August is a statisticalaberration. When a month ends on a weekend, as itdid in July 2005, it artificially inflates the readingfor the succeeding month, making year-over-yeargrowth the next year seem lower. However, growthhas broken into the double-digit range in severalmonths of 2006, showing continued consumerconfidence.
Inflation Pressures Build UpEspecially in Housing, Energy
It’s a simple fact that you can’t sustain thekind of growth that Hawaii has been experiencingwithout inflationary pressures building up. Forexample, the labor shortage puts upward pressureon wages, and rising construction material costsare something builders have been noticingincreasingly. Add to that the big effects of higherenergy and home prices, which also feed intorents and property tax valuations, and we startgetting sharply higher readings on inflation.
The Honolulu Consumer Price Index increasefor the first half of 2006 was 5.8% on a year-over-yearbasis, much higher than the 3.8% increase for allof 2005. That was the highest reading in Hawaiisince 1991. (The comparable U.S. average for thefirst half was 3.8%.)
Housing and transportation (mostly due tofuels) led the 2006 Honolulu surge, with increasesof 8.5% and 7.1%, respectively. Even if the firsthalf 2006 number just reflected a one-time jumpthat will diminish some in the second half, theyear 2006 as a whole inevitably will show a bigincrease in inflation — we estimate 5.0%.
Vehicle Sales Leveling OffAs Interest Rates Rise
New car and truck sales are a good indicatorto watch for consumer confidence in buying big-ticketitems. The chart on vehicle sales at right also tracesHawaii’s recent economic history very closely, withthe boom after the lackluster 1990s readily apparent.
With the effects of low interest rates and rebatesin earlier years wearing off, some slowdown is
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CREDIT CARD SPENDING GROWTHREMAINS SOLID THIS YEAR
Economic analysis by: Dr. Leroy O. Laney Economics Consultant to First Hawaiian Bank, Professor of Economics & Finance, Hawaii Pacific University
Hawaii Outlook for 2007 (continued from page 3)
evident here. A leveling off in 2005 is likely to befollowed by a slight drop in 2006, one indication thatHawaii’s boom is starting to slow down a little. However,the number is still high relative to historical levels.
Arrivals Growth Levels Off,But Still Likely to Set a Record
After a couple of years of strong growth, Hawaiivisitor arrivals are leveling off in 2006 (chart top right).After breaking into the 7-million-a-year range in2005, any additional growth in arrivals this year willbring us a new record. Visitor spending — up 4.5%through August — shows a better picture thanarrivals, however. Length of stay has been about flat.
Strength is still concentrated on the U.S.domestic side. So far this year, domestic arrivalsare up 2.2%, offset by a decline of 5.4% on theinternational side — especially from Japan.
By island, Kauai leads so far in arrival growth,up 8.3%, followed by the Big Island (the 2005leader), at 5.8%, and Maui at 4.7%. Oahu is down3.1% for the year, due largely to the slump fromJapan. (Chart below.)
Though their numbers are still small relativeto Hawaii’s other visitors, cruise ships are stillshowing dramatic increases. Cruise ship visitorshave grown 37% so far in 2006.
Construction a Major FactorIn Long-Running Isle Boom
One of the biggest factors in Hawaii’s recentboom has been construction, which continues tobe very strong. The chart at middle right showsconstruction completed as reflected in the tax
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KAUAI SHOWS BIGGEST GAININ 2006 VISITOR ARRIVALS
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VISITOR ARRIVALS LEVEL OFF IN 2006,BUT ANY GROWTH WILL SET A RECORD
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CONSTRUCTION IS STILL BOOMING;2006 FAR ABOVE PREVIOUS PEAK
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PRIVATE BUILDING PERMIT DATAHINTS AT A SLOWDOWN TO COME
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base. From available data, 2006 will easily set anew record in current dollar terms.
However, the chart at bottom of page 4 showsa forward-looking indicator in construction, onethat contains premonitions of a slowdown tocome in the industry. Private building permitsdropped slightly in the first part of 2006 from amuch stronger pace in the last part of 2005. Oftotal private permits, the biggest component(about 56%) is still on the residential side. Butthat’s down some from the 65% share last year.
Another important component of constructionpermits is government contracts. So far this year,that’s up from last year, but both 2005 and 2006will be down from the record value of contractsawarded in 2004. (Chart top right.)
On balance, with respect to both privatepermits and government contracts awarded, there’senough in the pipeline to keep the industry goingfor a while — even though the pace has startedto decelerate.
The Boom Appears OverIn Real Estate Market Here
One of the biggest changes in the Hawaiieconomy over the past year has occurred in the realestate market. It’s fair to say that the local realestate boom is about over. The numbers in thecharts at right are just for Oahu, but the pictureis similar on the Neighbor Islands.
The decline in sales of single-family homesthat began in 2005 has accelerated during 2006.At the same time, median prices have continuedto increase, but at a considerably slower pace thanthe heated rises of 2004 and 2005. Speculation ismuch less in evidence, and more buyers justwanting a house to live in are on the sidelines,observing prices more closely.
This is a market that continues to bearwatching in the future. The real estate market inHawaii typically goes through periods of increasingprices, then levels off for several years. Mild declineshave occurred in the past, although correctionshave not been major compared to the previousrun-up.
The real estate market is quite important inan economy like that of Hawaii, not just becauseof the income that the market itself generates inperiods of increasing activity like we’ve just beenthrough. Consumers are inclined to spend moreon other things, and perhaps save less, when theyfeel wealthier because the market value of their
primary asset is higher. As the real estate marketcools, so does that wealth effect. This may playan important role in a slower overall economyhere in the next few years.
But as we have pointed out in the past, somerelief in rising home prices is actually good news
for the economy over the longer term. Unaffordableshelter makes it much harder for those who justlive and work here to make ends meet. It alsoencourages out-migration, discourages in-migration,and aggravates our labor shortage. So currenttrends really aren’t bad news at all.
Economic analysis by: Dr. Leroy O. Laney Economics Consultant to First Hawaiian Bank, Professor of Economics & Finance, Hawaii Pacific University
awaii County continues to share in the state-wide economic expansion, now in its 10thyear. Tourism remains healthy, especially the
exploding cruise ship market. The labor marketis still extremely tight.
But for the first time there are signs of aconstruction slowdown on the horizon. Also, theBig Island’s boom in residential real estate seemsto be over, or at least nearing its final days. As 2006has progressed, there has been a distinct drop inreal estate sales activity across the island. LocalRealtors observe that speculators are gone, whilepotential buy and hold customers are waiting,watching prices closely.
Through June 2006, sales volume in singlefamily residential properties was off 23.2%. Medianprices islandwide were still increasing in the firstsix months of the year, by 17.3% compared withthe same period a year earlier. But that comparesto a 33.5% rise for 2005, and increases in the 20%+range the two years before that.
The island-wide numbers mask big differencesacross the Big Island’s disparate areas, as shown
by the chart above. Median price changes so far in2006 are topped by an increase of 26.4% in Puna.In South Kohala and North Kona, the price risewas much more modest.
One thing is for sure — buyers can no longerautomatically expect a guaranteed immediateappreciation in Big Island real estate purchases.
One favorable development over the past year wasthe overturning of the controversial Hokulia ruling,which cast into doubt the legality of any residentialproperties built on agriculturally zoned land. Withproperty rights more clearly defined, that shadow onreal estate and the investment climate is removed.
Labor Market Getting Tighter and TighterEmployers everywhere on the Big Island are
having a hard time finding employees. As the chartabove shows, the drop in the county’s unemploymentrate has been dramatic. Traditionally, NeighborIsland jobless rates are higher than Oahu’s, butthat gap is almost closed now for the Big Island.
HBig Island Still Sharing in Expansion Despite Slowdown Signs
On the West side, jobless rates are already wellbelow the statewide figure.
Some estimates indicate that Kohala Coasthotels have vacancies for almost a thousandworkers. Making the situation worse is the priceof gasoline, which raises the cost of commuting.
Job growth continues at about the same pace aslast year. When it does eventually run out of steam, itcould be as much because the island is running outof workers as it is because the economy itself is slowing.
Hawaii County has formed a Taskforce onEmployment aiming to increase the supply ofqualified labor through education, training, andrecruiting, as well as targeting employment ofspecial populations — like seniors, the disabled,youth, and rehabilitated ex-criminals.
Big Island Tourism Still HealthyBig Isle tourism remains healthy in 2006,
even though total visitor growth has come backdown into a more normal range (5.8% for the first
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RISE IN MEDIAN HOME PRICES SLOWING IN EVERY DISTRICT
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BIG ISLAND HOUSING MARKETSLOWING NOTICEABLY IN 2006
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Big Island2.8%*
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BIG ISLAND’S LABOR MARKETIS TIGHTENING
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BIG ISLAND JOB CREATIONHOLDING STEADY DURING 2006
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*Estimate*Estimate
Economic Forecast • Page 7
Economic analysis by: Dr. Leroy O. Laney Economics Consultant to First Hawaiian Bank, Professor of Economics & Finance, Hawaii Pacific University
eight months of 2006) after 2005’s surge of 16% .Signs of health in the island’s visitor industry
also are apparent in other measures: a 3.1% increasein the average daily room rate last year, with hoteloccupancies climbing into the 70% range for thefirst time since 2000. Total visitor spending alsogrew almost 17% during 2005.
Other recent developments in tourism:
� Hilo’s Naniloa Hotel got a new 65-year lease,giving its new lessee an incentive to renovatethat aging property.
� The Four Seasons Hualalai, Outrigger Keauhou,and Kona Village have changed hands recently,with the potential for future upgrades.
� The Marriott at Waikoloa is getting a $40-million facelift.
� New tourism retail space is part of the buildingboom at The Shops at Mauna Lani and theQueen’s Marketplace in Waikoloa.
Hawaii got another mega-cruise ship this year,which will further accelerate the dramatic increasein cruise visitors shown by the chart below.
Despite all this activity, upgrades to harborinfrastructure lag far behind and there is an urgentneed for improvements. Hilo can now take only onelarge and one smaller ship at the same time. The lastpier constructed at Hilo Harbor was in 1927. In Kona,tenders bring passengers in from the anchored ship.
The proposed SuperFerry plans to dock atKawaihae Harbor, but only after Maui and Kauaiservice begins, probably in 2008 or early 2009.
Big Island Construction Slowdown LikelyPreviously permitted construction projects —
both residential and non-residential — are nowcoming out of the ground all around, tangibleevidence of the continuing Big Isle construction
boom. Higher paying jobs in this sector are makinglife harder for employers in other sectors.
But those close to the industry, such as majorbuilding suppliers, see emerging signs of somecooling off in the future.
Work continues on the Saddle Road connectingthe two sides of the island, which will make it easierfor workers in East Hawaii to commute to moreplentiful West Hawaii jobs. A $59-million contractfor future phases of the road was awarded in May.
Astronomy Industry Has Keck SetbackThe Big Isle’s astronomy sector got bad news
when NASA’s budget eliminated Keck’s $50-millionOutrigger telescope project. The immediate cause wasa redirection of NASA funds toward the space shuttle,but had the project not encountered prolongedcultural and environmental objections it could havebeen underway long before.
Big Island astronomers have long felt acancellation would be catastrophic for the futureof the astronomy industry in Hawaii; other worldlocations such as Chile or the Canary Islands arenot quite as good as Mauna Kea, but are quiteadequate. The project is not completely dead, ifsufficient private or foreign funds can be raised.But that is unlikely.
Astronomy is moving toward a new generationof larger telescopes, and there now exists anotherpossibility for Hawaii — a Thirty Meter Telescope(TMT) being proposed by Gemini. Whether it canproceed, given the Outrigger’s fate, is somethingthat will be closely watched by the industry.
In February, the $28-million Imiloa AstronomyCenter was opened to the public. It features astate-of-the-art planetarium and exhibits.
Ocean Thermal Energy Back in the ForefrontSkyrocketing oil prices have caused the Natural
Energy Lab (NELHA) at Keahole Point to refocus itsefforts on alternative non-fossil fuel energy sources,its original 1974 mission. NELHA announced that
it will partner with a Honolulu company to builda 1.0-megawatt ocean thermal energy conversion(OTEC) demonstration plant. This technology wasdiscontinued in 1993, after oil prices fell so lowthat it made OTEC uneconomical.
The manufacture of desalinated deep seawater for export also continues at NELHA. Thereare now four firms in operation, with three otherpossible entrants. Most of the water still goes toJapan, but the U.S., Korean, and perhaps othermarkets are being investigated.
Big Isle Agriculture Prospering In 2006The agriculture sector is more important to
Hawaii County than any other county in the state.This year it’s mostly good news:
� Macadamia nut production has been good,with favorable weather. Lower production onthe world market also contributed to higherprices. Some smaller producers are exiting theindustry in favor of coffee.
� The 2005-2006 season yielded a large coffee crop,but a smaller crop next year is likely becauseof lower rainfall during the flowering period.Prices to farmers should remain about stable.
� There are now over 30 aquaculture farms onthe Big Island. Combined revenues are about$20 million annually.
� Beef prices are expected to remain strong inthe near future. Some ranchers are looking atniches like grass-fed beef, which commands ahigher price.
� Construction has begun on the Pacific BasinAgricultural Research Center, a $60-millionfacility being developed on a 30-acre site at UHHilo’s University Park of Science and Technology.
� The story at Parker Ranch is its return toprofitability and its decisions about what todo in the future with its vast land holdings.
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GROWTH IN BIG ISLAND ARRIVALSREMAINS HEALTHY IN 2006
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CRUISE SHIP PASSENGER TOTAL CONTINUES TO EXPLODE IN 2006
Economic analysis by: Dr. Leroy O. Laney Economics Consultant to First Hawaiian Bank, Professor of Economics & Finance, Hawaii Pacific University
aui County continues to do well thisyear, and the outlook for 2007 is brightfor most sectors. However, Maui can
expect a slowdown from the heated pace of thelast several years.
� The pluses for Maui: healthy tourism, a continuingconstruction boom, active development plans bykama‘aina companies.
� The minuses: an extremely tight labor market,harbor overcrowding and a slowdown in realestate sales and price increases.
Arrivals Up Again in 2006;Spending Rises Even More
Maui visitor arrivals were up 4.7% throughAugust 2006, but visitor spending was up a muchstronger 20%. This was far higher than any otherisland in the state. For some years now, Maui hasbeen closer to capacity than other islands, and ithas been targeting higher spending visitors ratherthan just more bodies. That strategy seems to bepaying off.
Although Japan business is down, Europe andAustralia have been strong. U.S. East Coast visitorscontinue to pick up, although Maui’s bread andbutter remains repeat visitors from the Western U.S.
The average daily room rate rose almost 10%in 2005, after a 4% climb the year before that.
Hawaii got another mega-cruise ship this year,bringing the total to four on the inter-island circuit.Three are U.S. flagged, so they can go directlybetween Hawaii ports rather than having to stop ininternational waters. Cruise passengers passed the100,000 mark in 1999, broke 200,000 in 2002,300,000 last year, and this year will exceed 400,000.
In 2007, current bookings alone show the 500,000milestone will be passed. A cruise ship is in KahuluiHarbor six days a week now.
Maui’s Construction IndustryStill Booming During 2006
Previously permitted construction projects —both residential and non-residential — are nowcoming out of the ground, tangible evidence thatthe Maui construction boom is continuing. Thissustains the demand for construction jobs, andhigher paying jobs in this sector are making lifeharder for other employers.
Builders universally report that the permit andentitlement process is getting longer and harder,a sign of increased anti-growth sentiment on Maui.After the prolonged expansion, a greater focus onthe negative aspects of growth isn’t surprising.
The biggest residential development in centralMaui now is Maui Lani, which has built more than750 homes with the potential for about 3,700.Nearby Kehalani could add another 2,000.
MPace is Slowing, But Maui County’s Outlook for ’07 is Still Bright
A&B still plays a big role in Maui development:
� Redevelopment of the Kahului Shopping Centeris underway after the fire.
� Phase II of the Maui Business Park will add 179acres of fee simple light industrial lots by 2008.
� In the Haliimaile area, 63 acres has been zonedfor residential use, and a planned 160+ unitsare slated.
� In Wailea, two smaller subdivisions and a75-unit condo project are planned.
� A&B has revived plans for a much-neededbusiness hotel adjacent to Costco, pursuing apartnership with Courtyards by Marriott.
� A $21-million, 400-bed student housing projectfor Maui Community College. More than 90% ofMCC students are from Maui County, but non-resident student enrollment is increasing andthe college is poised to market to the Mainland.
Maui Land & Pine has gotten PlanningCommission approval for its 882-unit project inWest Maui. It now goes to the County Council.Pulelehua will include 450 houses and apartmentsthat meet affordable housing guidelines.
Maui Builders WatchingMainland Housing Trends
The chart above, from an outlook survey ofmembers of the National Association of HomeBuilders, indicates that the national building boomis over. Most economists agree.
This change in expectations obviously hasn’thit Maui’s construction industry yet, and somebuilders believe that second-home demand froma retiring baby-boom generation will make Maui
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GROWTH IN MAUI ARRIVALSREMAINS HEALTHY IN 2006
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MAUI VISITOR SPENDING GROWTHBY FAR #1 IN STATE THIS YEAR
Economic analysis by: Dr. Leroy O. Laney Economics Consultant to First Hawaiian Bank, Professor of Economics & Finance, Hawaii Pacific University
different. Also, there is no doubt that we have ahousing shortage here, and increasing supply isthe only viable way to help control astronomicalprices that are out of reach for residents.
Still, it would be foolish to believe that Mauiis totally insulated.
Maui Real Estate MarketCooling During 2006
So far in 2006, single-family sales volume hasdeclined a dramatic 27%; median prices are stillrising, but by a much more realistic 6.4%. That’sto be expected after the unsustainable run-up inprices over the last several years. During 2005, Mauimedian single-family prices rose 23%.
This year the speculators are gone, and thosewanting to own a home to live in are more on the side-lines, watching price trends closely. If this cycle followspast ones, a mild decline in prices next year wouldnot be surprising. Slumping prices on Maui last timelasted four years — a 16% decline from 1993 to 1997.
Commercial real estate is a little differentbecause it’s driven more by income. Maui brokersreport the tightest industrial market in 20 years,with 800,000 square feet of space coming on line inthe foreseeable future, compared to an estimated3 million square feet of demand. Warehousingcosts are likely to rise as a lot of break-bulk activitywill be displaced by the SuperFerry. A&B’s MauiBusiness Park Phase 2 will help.
Maui’s Labor MarketRemains Extremely Tight
Though the state’s labor market is tight, Maui’sis even tighter, to the point where not being able tofind employees is an increasing business problem.Traditionally, Neighbor Island jobless rates arehigher than Oahu’s. But that’s no longer the case.This is one of the biggest constraints on growth— for the state, certainly, but especially for Maui.
Maui job growth has actually acceleratedsome in 2006, despite the shortage of workers.When growth does eventually taper off, it’s likelyto be as much because Maui is running out ofworkers as it is because the economy is slowing.
Kahului Harbor Lacks SpaceTo Meet All the Coming Needs
Kahului Harbor likely has more problemsthan any harbor in the state when it comes toaccommodating cruise vessels and the new SuperFerry.There simply isn’t enough space and, with theSuperFerry supposed to begin operations in 2007,not much time to fix things.
Plans are for the ferry to dock at Pier 2 in theharbor, with cruise ships and cargo vessels continuingto tie up at Pier 1. Cars will debark via a widenedroad next to First Hawaiian’s Kahului Branch, andembark from parking lots nearby. The ferry cancarry up to 260 cars, and about 900 passengers.
For those who have the time, it will be cheaperthan air travel. Families can travel with their cars,school groups can travel together in buses or vansand all kinds of equipment can be brought along.Fresh produce and other perishable items can be
shipped. Losers will include car rental companiesand other leisure rentals such as surfboards, diveequipment and kayaks.
Maui’s High-Tech SectorContinues Its Growth
The center of the Maui tech sector remains theResearch and Technology Park in Kihei. There,the Maui Economic Development Board movedinto its new 32,000-square-foot building and thesector continues to grow, offsetting recent layoffs byBoeing. High-tech now employs about 1,300 people.
Maui’s HC&S PlantationHas Good Future Outlook
Maui’s remaining sugar plantation, HC&S,has a good current position and future outlook.This year, production will be about 200,000 tonsof sugar, around 10% lower than they would like.Production is still being affected by earlier droughtyears, but sugar prices are up some.
The plantation is also selling more power toMaui Electric, so higher energy prices are actuallya net positive for HC&S. Its ethanol productionefforts are still being pursued, even though thatendeavor has fallen short of earlier goals.
The real future of Maui agriculture is in smallerniche operations. That can be tricky. Paradise FlowerFarms is feeling the effects of Thai competition onits lei production. But Alii Kula Lavender in Kula isa current example of an operation that has founda popular niche. It partners with other producersto make and sell everything from lavender tea,lemonade, and scones to soap and shaving cream.Last year’s sales increased 70%, and it expectsanother 50% increase in 2006.
Another operation that has proven its stayingpower is upcountry Ulupalakua Ranch and itsTedeschi Vineyard. Visitor traffic has exploded overthe years to around 1,000 a day.
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MAUI HOUSING PRICE GROWTH COOLING NOTICEABLY IN 2006
Economic analysis by: Dr. Leroy O. Laney Economics Consultant to First Hawaiian Bank, Professor of Economics & Finance, Hawaii Pacific University
Job growth has decelerated in the last coupleof years, simply because workers are harder to find.That will continue to be one constraint on thecurrent expansion.
Kauai Visitor Arrival GrowthContinues, Along with Spending
Kauai visitor growth has been accelerating inthe last few years. In early 2006, the industry washit by the heavy rains in the spring and publicitysurrounding the Kaloko dam tragedy, but the summermonths have been quite strong.
Visitor spending has been keeping pace witharrivals. It was up 7.8% last year and 7.7% throughthe first half of 2006.
Kauai must be doing something right. Onceagain this year, Travel+Leisure magazine rankedKauai as the best island destination in Hawaii,and second best in the world.
Other tourism-related developments:
� Independent vacation rentals are a much moreimportant component of the Kauai visitorexperience than on other islands. A recentsurvey identified 763 such units island-wide.
� Reinforcing a continuing trend in the industry,more hotels are converting to time-share andcondotel. Time-share is far more important forKauai than elsewhere in the state. The KauaiBeach Hotel & Resort on the east side is goingcondotel, and plans are now for the rebuilt CocoPalms to be mainly time share and condos
� Hawaii got another mega-cruise ship this year,bringing the total of such vessels to four onthe inter-island circuit. A ship’s presence inNawiliwili Harbor can’t be overlooked whenover 2,000 debarking passengers hit theisland. Concerns continue to exist about howthe harbor will accommodate both the cruisevessels and the coming Superferry.
� The major beneficiaries of cruise vessels are thevarious island activities and tourism retailing.
Kauai Construction Boom Continuing,With Project Work Visible Everywhere
The construction industry imparts most ofthe cyclicality to the Kauai economy. Previouslypermitted construction projects — both residentialand non-residential — are now coming out ofthe ground all around, tangible evidence that theKauai construction boom is continuing. Thissustains the demand for construction jobs, andhigher paying jobs in this sector are making lifeharder for employers in other sectors.
Increasingly, another hurdle — higherconstruction material costs — gets attention,which makes bidding on projects much harderand adds upward pressure to final prices.
There seem to be enough projects in thepipeline to sustain the industry for at least thenext several years. A few of the projects underway:
� The 150,000-square-foot Costco adjacent toHome Depot.
� The 190-unit Waipouli Beach condo project.
� Grove Farm closed on 91 lots earlier this yearin its Pikake Phase II subdivision, after theearlier 88 lots in Phase I. Other Grove Farmprojects are in the pipeline.
he Kauai economy exhibits continuedstrength again this year:
� Visitor growth continues to accelerate, alongwith spending.
� Construction projects already in the pipelinepromise continued activity in this sector foryears to come.
� The Missile Range at Barking Sands remainsa strong economic force.
� There are plans for a new ethanol productionplant.
However, the Garden Island is not totallyproblem-free:
� There are signs of a slowdown in the realestate market, with sales off dramatically inthe first half of 2006.
� The flip side of the long expansion is that ithas created an extremely tight labor marketthat makes it hard for employers everywhereto find people to hire.
‘Help Wanted’ — But Hard to Find —For Kauai Employers Everywhere
Everyone everywhere on Kauai mentions notbeing able to find employees. We’ve been drawingattention to this problem for several years now,but it only seems to get worse. Kauai’s rate dropin unemployment has been even more dramaticthan the state as a whole. Traditionally, NeighborIsland jobless rates are higher than Oahu’s, butthat gap is closed now for Kauai.
TTourism, Construction Strength Lead Kauai County Economy
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GROWTH IN KAUAI ARRIVALSACCELERATES IN RECENT YEARS
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KAUAI’S LABOR MARKET ISGETTING TIGHTER AND TIGHTER
� In Princeville, the 102-unit Brookfield projectand the 200-unit Bali Hai expansion.
� Work continues on the bypass road relatingto the 1,500-unit A&B and DMB Associateshigh-end project on the south side.
� The 75,000-square-foot Koloa Town Centerretail development in Koloa town by KnudsenTrust is also in the wings.
Residential Real Estate Market:Booms Don’t Last Forever
In times of frenetic construction activity, wesometimes lose sight of the fact that constructionis always a very volatile industry; building boomsdon’t last forever. The chart above showing Kauaisingle-family residential permits tells the story ofconstruction over more than two decades. A recentslowdown is noticeable. Along with a slower permitprocess, interest rates have risen some.
The Kauai real estate market has seen a bigchange over the past year. In the first half of 2006,single-family sales were down almost 30% from thesame period a year earlier. Some of this reflectedlower inventory, but that certainly wasn’t the wholestory. The speculators are mostly gone — andthose wanting a home to live in have been on thesidelines more, watching prices closely.
Median prices have continued to rise, but ata much slower pace — up just 13% in the firsthalf of 2006, after annual increases of over 28%in 2005 and 37% in 2004.
Usually real estate markets rise in price andthen plateau for a few years, without drastic declinesthat sometimes occur in other asset markets. Butmild drops do happen; from 1990 through 1997on Kauai, for example, there was a cumulative11.6% drop in median single family prices.
This price deceleration is actually welcomenews; no market can sustain those steep increasesyear after year, nor would we want it to, becauseit makes it impossible for those who just live andwork here to afford shelter.
Economic Impact of Missile RangeOften Underestimated on Kauai
The Missile Range on the west side got someattention when North Korea test-launched itsmissiles. The Range’s economic importance toKauai is often underestimated, but it has an annualbudget of $150 million and a high-tech sector onKauai would be virtually non-existent without thesub-contractors there. Kauai Economic DevelopmentBoard counts about 30 such contractors now.
There are 880 workers associated with therange, mostly contractors or government civilians.Only 75 are active-duty military. The range’s strategicimportance comes from two major programs:
� Building and testing the Navy’s Aegis ship-basedmissile defense system.
� In 2007, the base becomes the primary testingrange for the Terminal High Altitude AreaDefense, a ground-based missile defense system.
Agriculture Sector ContinuesTo be Important for Garden Isle
Agriculture traditionally has been an important
sector of the Kauai economy, but in recent years ithas gone through a dormant period. That may changesome when the Tropical Fruit Disinfestation Facilitynear the airport gets started again, hopefully byearly 2007. The main beneficiary will be papayas,but other tropical fruits could also benefit.
Another thing that could stimulate Kauaiagriculture — as well as other smaller localindustries such as crafts, apparel, and jewelry —is the newly launched “Kauai Made” program.This program gives an official stamp of approval toproducts made on Kauai that meet certain standards.
Skyrocketing Oil Prices FocusMore Attention on Ethanol
Skyrocketing energy prices have focused morenational attention on ethanol as a fuel. Somecontroversy still surrounds ethanol. At today’s highand rising oil prices, it is cheaper than gasoline,but less efficient. And some studies have shownthat it takes more energy to make ethanol thanthat ethanol itself provides.
Sugarcane is much more efficient than corn as afeedstock, and it’s likely to reduce greenhouse-gasemissions more. Brazil expects to be energy-independentthis year because it produces ethanol from cane.
Hawaii’s sugar plantations have been consideringethanol production for several years now, but this yeara couple of developments involve Kauai.
� Grove Farm is partnering with Maui Land &Pine and Kamehameha Schools to research thebest types of crops, production processes andfeasible timelines to bring this fuel to Hawaii.
� Gay & Robinson is joining PacWest LLC to builda 12 million gallon per year ethanol plant usingsugar as a feedstock, possibly on-line by early 2008.
� Leveling off of real estate prices is reducingconsumer willingness to use home equityas a source of income.
Some key elements of the U.S. economy:
Inflation never rests. Consumer PriceIndex inflation is now above 3% and expected toremain in that range through 2007. The Fed’sparamount policy concern is inflation. So far,the data do not indicate that inflation is out ofcontrol. Hence, the Fed has probably finishedincreasing short-term interest rates. Look forsome easing, but not until well into 2007.
California real estate. The California realestate market is a good example of how nationalmonetary policies affect local businesses. Thesignificant rise in short- and medium-termrates has brought a slowdown in market activityand a leveling of prices. To the extent that wein Hawaii see a spill-over effect from thesemarkets, we will experience some slowing ofour own.
Oil markets. Even without regional supplyissues, the U.S. Energy Information Agencyforecasts that demand will exceed supplythrough most of 2007. In spite of temporaryswings, experts expect prices will remain inthe $60-70 per-barrel range through 2007.This creates a continuing drag on economicgrowth both nationally and in the Islands asconsumers spend more on gasoline and haveless for vacations in Hawaii.
“Twin deficits.” The twin deficits in thefederal budget and international trade reflectfundamental economic imbalances in the U.S.The federal government has to borrow nearly abillion dollars a day. Because U.S. consumersand businesses are buying more from overseasthan we are selling abroad, we have to borrowmore than $2 billion per day from foreigners. Atsome point this has to stop.
World economic growth is expected to remainstrong in 2006 and 2007 with real growth exceeding4%. Clearly, Asian nations (especially China, at9-10% annually) are leading the way, while Europecontinues to lag with growth in the 2% range.
Japan has spent much of the last 15 yearslimping along economically. However, theeconomic rebound that began in 2002 seemsto be firmly established. The Nikkei is above16,000 (from its low of 7,500 in 2003).
UU.S. Economy: Good Times, But Not Great, Into 2007
