Aloha State News

Increasing interest rates and inflation lower projections

HONOLULU—The Department of Business, Economic Development and Tourism (DBEDT) released its third quarter 2022 Statistical and Economic Report today. DBEDT lowered Hawaii economic growth projections for 2022 and 2023 mainly due to the declining investment caused by the increasing of interest rates and inflation. Hawaii’s economic growth is now projected to grow at 2.6 percent in 2022 and 1.7 percent in 2023, both lower than the projections made in the previous quarter. According to the most recent (August 2022) economic projections by top 50 economic forecasting organizations published in Blue Chip Economic Indicators, U.S. economic growth in 2022 is expected to be at 1.5 percent in 2022 and 0.7 percent in 2023. DBEDT expects that Hawaii economic growth will be better than the nation in the next two years.

Where are We in Economic Recovery?

Tourism Recovery Continues. During the first seven months of 2022, Hawaii welcomed a total of 5.4 million visitors, representing 86.8 percent recovery from the same period in 2019. U.S. visitors were 12.4 percent higher than those who came during the same period in 2019. International visitors recovered 33.8 percent with Canadian visitors leading the recovery at 63.3 percent, Japanese visitors at 6.7 percent, and other international visitors at 52.4 percent.

Through July 2022 and measured in current prices, visitor spending totaled $11.2 billion, representing 5.8 percent higher than the spending made during the same period in 2019.

In July 2022, statewide hotel occupancy rate was at 81.5 percent, just 3.8 percentage points lower than July 2019. Statewide hotel room rate in July 2022 was at $413.57 per night, representing 36.1 percent increase from July 2019. The average room rates increased more than 50 percent on all neighbor island hotels while O’ahu hotels increased 17.9 percent. Reflecting the higher room rate, the state accommodation tax revenue increased 39.3 percent between the two periods.

As currently scheduled, total air seats during the September to November 2022 period will recover 99 percent from the same period in 2019. Seats from the U.S. mainland will be 12 percent higher and seats from international airports will recover 66.4 percent as compared with the same period in 2019. Future flights from Japan are planned to recover 55.6 percent of the 2019 level during the three-month period.

Labor Market Performing Well. Hawaii’s labor market conditions continued to improve throughout the first seven months of 2022 with unemployment rate at 4.2 percent seasonally adjusted and 3.7 percent not seasonally adjusted. As a comparison, the seasonally adjusted unemployment rate was 6.5 percent and not seasonally adjusted rate was 6.3 percent during the first seven months of 2021. Hawaii’s seasonally adjusted unemployment rate during the first seven months of 2021 was the 11th highest in the nation and now dropped to the 15th highest during the first seven months of 2022.

In July 2022, the total seasonally adjusted number of people employed either as payroll employees or self-employed was the highest since March 2020 at 649,550 and represents a 97.3 percent recovery compared to the pre-pandemic period of July 2019. Initial unemployment claims since March 2022 have been stable at 1,218 per week, similar to the same period in 2019 when the average weekly initial unemployment claims was at 1,202.

The seasonally adjusted non-agricultural payroll jobs grew 4.9 percent during the first seven months of 2022 from the same period in 2021 and represent a recovery rate of 91.7 percent of the same period 2019 level. As of July 2022, payroll jobs in all the industries have recovered over 85 percent as compared with July 2019, except real estate, rental and leasing at 82.4 percent, and art, entertainment, and recreation at 72.9 percent.

Hawaii’s civilian labor force (seasonally adjusted) participation rate improved to 60.8 percent in July 2022, the same as in June 2022 and the highest since March 2020. The average civilian labor force participation rate in 2019 was 60.9 percent.

During the first half of 2022, average monthly job openings was 46,200 and the average monthly hires was 28,700, leaving 17,500 positions unfilled. Most of the unfilled jobs were in healthcare and tourism related industries. The average number of positions unfilled during the first seven months of 2019 was 8,300.

State Tax Collections Continue to Rise. During the first seven months of calendar year 2022, state general fund tax revenue reached $6.0 billion, representing 35.1 percent growth from the same period in 2019. As components of the general fund, state general excise tax revenue increased 16.4 percent, individual income tax revenue increased 53.6 percent, and transient accommodation tax revenue increased 30.2 percent. The increase in tax revenues was partially due to the higher inflation rate and partially due to economic growth. Inflation in Honolulu between the first seven months of 2019 and first seven months of 2022 was 11.6 percent.

Construction Activity and Home Sales Declining. The construction industry, as measured by the contracting tax base, grew during 2020 and 2021 with the tax base increasing 1.5 percent in 2020 and 3.6 percent in 2021. During the first four months of 2022 construction increased 6.7 percent mainly due to the 20.5 percent increase in the value of private building permits and 66.9 percent increase in the value of government contracts awarded in 2021. It normally takes a year to start construction payments after building permits are granted, however, the value of private building permits declined 30 percent during the first half of 2022. Construction payroll jobs also decreased 2.7 percent in the first half of 2022. Building material store sales started to see the decline since March 2022 while the sales of building materials had seen increasing sales every single month between February 2020 and February 2022.

Government contracts awarded increased 479.2 percent during the first half of 2022 as compared with the same period in 2021. The big increase was mainly due to federal government awards. Those awards normally take a few years to start and complete with the impacts seen in future years. The most recent award was $945.3 million by the U.S. Navy in June 2022.

During the first half of 2022, there were 11,914 homes sold statewide, which represents a 5.5 percent decrease from the same period in 2021. The average sales price for single-family homes in first half of 2022 was $1,113,242, representing an 8 percent increase from the first half of 2021. The average sales price for condo homes was $717,868, an increase of 9.7 percent from the same period in 2021.

Of the homes sold during first half of 2022, 8,833 units or 74.1 percent were sold to local buyers and 3,801 units or 25.9 percent were sold to out-of-state buyers. Of the homes sold between 2008 and 2021, 25 percent of them were sold to out-of-state buyers.

Honolulu Consumer Inflation Leveling Down. Inflation in the Honolulu area, as measured by the Consumer Price Index for All Urban Consumers (CPI-U), averaged 6.8 percent during the first seven months of 2022. Though it was the highest since 1991 when the annual rate was 7.2 percent, there was a downward trend from 7.5 percent in March to 7 percent in May and down to 6.8 percent in July. The increase in inflation was partly driven by energy prices, which jumped 35.6 percent due to an increase in crude oil prices. Supply chain disruptions also contributed to the higher inflation rate with an increase for commodities in Honolulu at 12.2 percent in July 2022.

In fighting the high inflation rate, the Federal Reserve Bank increased the Federal Funds target rate by 50 basis points (0.5%) in May 2022 and again by 75 basis points (0.75%) in July with more rates hikes expected in the following months. Higher interest rates have negative impact on investments, especially on home sales.

New COVID-19 Cases Declining and International Tension Increasing

New COVID-19 cases in Hawaii have been decreasing since the beginning of June. At the time this report is written, the average daily new COVID-19 cases were at 317 for the week ending August 24, 2022, while at the end of May the daily new COVID case count was at 1,260. As of August 24, 2022, Hawaii had 22 cases of monkeypox.

While the Ukraine War currently has no end in sight, tensions are rising in Asia and the Middle East that will impact the supply chain further and drive-up inflation, especially the construction costs that affect the building of high-rise buildings.

Forecasting Results

In the current report, DBEDT predicts that Hawaii’s economic growth rate, as measured by the percentage change in real gross domestic product (GDP), will increase 2.6 percent in 2022 over the previous year. In 2023, Hawaii’s economic growth is expected to slow down further, to 1.7 percent, due to the expected global slow down. U.S. economic growth is expected to grow only at 0.7 percent in 2023 with more than 50 percent possibility that the U.S. economy will be in recession according to Blue Chip Economic Indicators. In 2024 and 2025, Hawaii’s economic growth will be coming back to the normal growth at about 2 percent.

Visitor arrivals are projected to be 9.2 million in 2022, which is about the same number in the 2nd quarter economic forecast. Arrivals are projected to increase to 9.8 million in 2023, 10.2 million in 2024, and 10.5 million in 2025, which is at full recovery to the 2019 level. Visitor spending is projected to be $19.1 billion in 2022, which is more than previously projected, due to the higher than expected average visitor daily spending. During the first seven months of 2022, daily visitor spending increased 19.8 percent from the same period in 2021. Total visitor spending is projected to grow at 9.2 percent, 5.1 percent, and 4.9 percent, respectively for 2023, 2024, and 2025.

Non-agriculture payroll jobs are forecast to increase by 4.2 percent in 2022, lower than previously projected due to the slowing down in construction. Job counts will increase by 3.2 percent in 2023, 2.2 percent in 2024, and 1.9 percent in 2025. For the current forecasting period (up to 2025), non-agriculture payroll jobs will recover to the pre-pandemic (2019) level by 2025.

The state unemployment rate will continue to improve as economic recovery continues. The rate (not seasonally adjusted) is projected to be 3.8 percent in 2022, 3.6 percent in 2023, 3.2 percent in 2024 and will finally decrease to 2.9 percent in 2025.

During the pandemic, personal income surged due to government transfers related to unemployment insurance payments and other CARES Act funds. As government support was reduced in 2021, personal income is expected to decrease in 2022 by 0.9 percent, and then grow between 2.5 and 3.0 percent for the following years until 2025.

As measured by the Honolulu Consumer Price Index for urban consumers, inflation is expected to be 6.3 percent in 2022, still lower than the projected U.S. consumer inflation rate at 8.1 percent. Hawaii consumer inflation will increase at rates between 2.2 and 3.2 percent in the following years until 2025. These inflation projections are higher than those projected last quarter (2Q 2022).

Statement by Director Mike McCartney:

The State’s economy has performed well during the first seven months of the year. As of July 2022, compared to 2019 (seasonally adjusted numbers), our labor force recovered 98.9 percent, employment recovered 97.3 percent and payroll jobs recovered 93.1 percent. Our daily visitor count recovered at 91.9 percent.

We are now facing a few new challenges: (1) slowdown in construction and real estate activity and the labor shortage; (2) the wars and upheavals among world regions and worldwide inflation due to supply chain interruptions and drastic energy price increases; (3) the continuation of COVID-19 worldwide; and (4) slowing economic growth worldwide, especially in the U.S. economy. These will all impact our recovery progress and add uncertainty to our economy and our daily lives however, we expect the impact to Hawaii to be less than the rest of the world’s economies.

Along with the challenges comes the opportunities to develop new skills, business models and processes. For tourism, the reopening of international flights, especially from Japan, Oceania and Korea, will change the mix of guests and help local businesses. Hawaii’s economy is showing momentum and continues to move forward positively as evidenced by more jobs and strong tax collections. Our economic growth rate is expected to be higher than the U.S. economy at 1.7 percent versus 0.7 percent in 2023.

In 2023 we are expected to exceed $100 billion in GDP for the first time ever.

The full report is available at: dbedt.hawaii.gov/economic/qser.

Original source can be found here.