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Economic Currents

Keep up to date with the latest UHERO news.

Q & A: Annual Hawaii Forecast: Tourism Hot, But Broader Growth Still Elusive

Posted July 27, 2012 | Categories: Q&A
1. UHERO released its annual Hawaii forecast today with the title, "Tourism Hot, But Broader Growth Still Elusive."  This has been the story for quite a while, right?

Yes,  tourism continues to expand at an impressive rate, and in many ways has more than recovered from the 2008-2009 downturn.  But with a few exceptions, the rest of the local economy is going nowhere.  Job growth in the year to May was just 1%, and it was just 0.2% if you exclude the booming accommodation and food service sector.  There was a little more progress in June, but still we are just not seeing a whole lot of action outside the visitor industry.  For this year as a whole, we estimate that there will be more than 9% growth in visitor arrivals but just 1.3% growth in the economy-wide job count.   

2. Why is that?

 In part, this reflects the contractions that have occurred in the construction industry and to a lesser extent in the public sector.  These are offsetting some of the growth coming from tourism.  But it is also likely a reflection of the kind of caution that is affecting the US as a whole.  People may be holding back on spending while they wait for confirmation that jobs and income are becoming more secure.  Consumer and businesses are still nervous about spending, and their caution can have broad impacts.  Of course election uncertainty also plays a role.  In our full forecast report we look at how Presidential elections are affected by economic conditions. 

3. So is there hope for 2013?

Yes.  And of course also some big risks.  We do expect some pickup in growth across a number of sectors of the local economy as the economic and political picture resolves itself and as tourism activity continues at a high level.  Homebuilding conditions are the best they have been in years, with prices firming on Oahu, limited inventory here, and mortgage rates that continue to plumb record lows.  Together with large public projects like the Oahu sewer work, and assuming that rail proceeds as planned, construction should begin to turn up next year.  So moderate strengthening of growth appears in the offing.

4.  But you mentioned risks...

Well the big ones are no secret:  Europe's mess and the looming "fiscal cliff" in the US.   The never-ending European debt crisis is already dragging down growth in much of the world.  So the question is how that will unfold and whether Hawaii's ability to tap new emerging tourism markets will offset weaker conditions elsewhere.   For the US as a whole, the question is whether the government can avoid the huge fiscal shock that is set to occur in early 2013 when Bush tax cuts and other stimulative programs expire and the spending cuts negotiated last summer kick in.  Some compromise seems likely, but the ugly ongoing debate is probably already hurting consumer confidence and spending.  So let's keep our fingers crossed and hope that reason finally prevails in Washington. 



-- Carl Bonham



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Q & A: Europe's slow moving train wreck

Posted June 8, 2012 | Categories: Q&A
1. By Friday of last week, US stock's had given up all of their 2012 gains, but then the market rallied by almost 3% in the first three days of this week. Whats going on?

US stocks peaked this year in early April, but then weak economic news caught up with the market.   A string of weak US jobs reports, increased concerns about recession in Europe, the likelihood of Greece leaving the EURO and the deteriorating situation in Spain has led investors to seek safety again, primarily in US government bonds. The 10-year Treasury Bond yield fell below 1.5% at the end of last week, and US 30 year mortgage rates hit a record low 3.67%.

2. I thought the Greek bailout this Spring calmed markets.

That; true, anytime there is a hint of coordinated policy efforts to stem the slow moving European train wreck, the market responds with optimism and overreacts a bit. Last March the EU, ECB and IMF engineered a Greek default on the majority of its debt and a second bailout package with new austerity promises attached.  But the budget cutting going on in Greece, UK, Spain and elsewhere has worsened the economic outlook and as the EU tips back into recession,   governments have fallen across Europe and there is a renewed push for pro-growth policies rather than just blind austerity measures.  The Greek rescue package was supposed to keep the government funded until June, but they are reporting that they may still be short of cash because of falling tax revenue as the economy goes through a deep recession with the unemployment rate hitting 21.9% in March.  So in essence the market overreacted with optimism to the original deal and the strong US  jobs numbers for January and February, and is now overreacting a bit to the bad news.

3. But Greece is a very small country, how can it have such a large impact on US markets?

Markets are globally connected.  The fear is that the contagion will continue to spread from Greece to Spain to Italy and France.  Spanish 10-year government bond rates have reached 6% and their unemployment rate has topped 24% as austerity measures and the continued fallout from a burst housing bubble makes Spain the next target for an IMF or EFSF rescue package.    And if Greek elections on June 17, usher in a government that reneges on the deal made for the last rescue package, Greece will leave the EURO and no one really knows what the repercussions will be on global financial markets.  When Greece drops out of the euro, how will contracts be settled,  will there be bank runs in Spain and Italy?  With much of Europe in recession, any large financial disruption would be particularly damaging to the real economy and the US markets are worried about that.

4.  So why the rally this week?

Primarily because of statements from the ECB and some FED presidents that have led markets to believe there is a greater chance of additional central bank easing. If Central banks act decisively as the ECB did with its Long Term Refinancing Operation (LTRO) last spring, markets will likely rebound, and no one wants to miss out on that!

-- Carl Bonham

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Q & A: Data Deluge!

Posted June 1, 2012 | Categories: Q&A
1.This was a very busy week for economic news. Lets start with the Hawaii news?

Yesterday the Hawaii Tourism Authority released the April visitor numbers, and the string of strong visitor spending continues. April 2012 visitor spending of $1.17 billion was a record for the month of April, and after adjusting for seasonal variation we have now seen 24th straight months of spending increases. While visitor spending is being bolstered by the comparison with low levels last spring after the Tsunami, other Asian visitors increased their spending by almost 90% vs last year.

2. So are these very strong spending numbers a surprise or are they inline with expectations?

Right now visitor spending is coming in a little stronger than expected, with year-to-April growth of almost 17% compared with UHERO's forecast of 14% for the first quarter of 2012 and 15% for the first half of the year. The real question is whether spending can continue to grow at anywhere near these rates. UHERO's forecast for full year spending growth is just below 13% followed by near 7% in 2013.

3. So with the visitor industry recover going gangbusters, what prompted the Council on Revenues to lower its forecast on Tuesday?

The Council actually left its forecast for this fiscal year ending in June unchanged, but lowered its forecast for FY2013 by a little more than 100 million. The reason for the lower revenue projection was not because of any pessimism about the economy, rather it was completely due to revised estimates of the effect of tax laws. Specifically, the Tax Department came up with a revised estimate of how much revenue would be generated by Act 105 which suspended some GET exemptions such as the exemptions for subcontractors. The Tax Department originally estimated that ACT 105 would generate roughly 200 million in FY 2013, but experience in FY 2012 suggests that the revenue increase will be closer to $70 million. The other issue that led to a reduction in the forecast is a more pervasive problem. The use of tax credits to incentivize activities, in this case the renewable energy tax credit, introduces significant uncertainty about actual revenue collections. Preliminary data suggest that the number of tax credits claimed in 2010 may have doubled over 2009, and we know that the number of permits for solar installations has grown rapidly from 2009 to 2011. The council decided to adopt a larger number for the renewable energy tax credits for FY 2013 and will likely revisit this issue in future meetings. This is just one of the many problems with using tax credits to incentivize activity. The costs are very difficult to estimate or contain. In contrast to an expenditure where you know exactly how much is being set aside for a specific purpose, the only limit on the dollars paid out in renewable energy credits is the number of roofs, and the number of installations HECO will permit. A similar problem arose with the "High Technology tax credits" provided under ACT 221. The council adjusted its forecasts repeatedly during the 2000s as ACT 221 credits grew. See http://www.uhero.hawaii.edu/products/view/172 for more information.

4. And today we got some pretty bleak news for the US economy, the Bureau of Labor Statistics released the May Employment Situation.

Right, another weak jobs report. The economy added only 69,000 non-farm payrolls in May after a gain of only 77,000 in April. Both March and April jobs estimates were revised down. The consensus forecast was for 150,000 jobs, so this was much weaker than expected. And, along with the downward revisions to March and April estimates, this report will change the story a bit from — unseasonably warm weather in January and February led to hiring that normally would have happened in the spring, to slowing in job creation as the slow motion train wreck in Europe and the higher winter gas prices acted to slow the economy.

-- Carl Bonham



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Q & A: Positive Outlook on Hawaii Economy

Posted May 11, 2012 | Categories: Q&A
1.UHERO released its second quarter State forecast update—"Visitor Industry Still Leading Recovery". How strong is the visitor industry recover?

In the first quarter of 2012, the total number of visitors to the state surged 8.5% above previous-year levels. Visitor days rose more than 9%, and spending is up more than 14%. We are forecasting a little more than 5% arrivals growth and almost 13% spending growth for the year. We expect arrivals growth rates to slow in part because of headwind from high energy prices, but also because late in the year we will be making comparisons to the very strong Fall and Winter of 2011.

2. Thats good news, but your report points out that most of the growth in the state is confined to the visitor industry?

That is true, accommodation and food service jobs have seen the strongest growth. Jobs in the sector were up 4.6% in the first quarter, with strength in both the lodging and restaurant components. We expect this sector to grow by almost 4% during 2012, coming very close to the 2007 peak of 98,400 jobs. The other sectors linked most directly to tourism have seen much smaller gains; retail trade and transportation and warehousing were up just 0.7% and 0.8%, respectively. Just like the national picture, Federal, state and local government sectors continue to shed jobs. Tourism continues to be the primary engine of that recovery, and this will continue to be a source of growth, supported by the recent resurgence of non-traditional markets. As the two millstones around Hawaii’s neck—construction and government— lighten this year, employment gains will strengthen and touch more sectors of the local economy. Overall, we are forecasting non-farm job growth of 1.5% in 2012 and similar growth for real personal income. By 2013, the economy should be growing between 2 and 3%, and the unemployment rate approaching 5% by the end of the year.

3. You continue to report that you are also looking for improvement this year. Why is that?

The main reason is that we are seeing signs of strengthening in the US economy. The private sector has had an uninterrupted streak of job gains for the last two years (check out the UHERO website for an interesting blog post on this topic), and that is contributing to rising consumer confidence, and reasonably strong consumer spending despite the relatively high energy prices and the slow motion train wreck in Europe. Last year, US recovery faltered because of high oil prices, Washington gridlock, and supply disruptions from the Japanese quake. While this spring and summer we still face high energy prices and a drag from the European recession, the US economy is stronger and will support continued recovery in mainland visitor travel. Better overall consume confidence in Hawaii will also help to spread the visitor gains to other sectors.

-- Carl Bonham



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Q & A: Legislative recap

Posted May 4, 2012 | Categories: Q&A
1. So what does the state have planned for the next two fiscal years?

A review of the budget shows three main points:

--Increased spending on education, medical, other state services.

--Big increases in spending on capital projects.

--Important state reserve funds have not been replenished.

2. Let’s look at each one of these. What’s allowing increased spending on state government services?

Increased government revenues:

--From tax increases enacted by the 2011 legislature, in particular the termination of exemptions for the general excise tax.

--Important state reserve funds have not been replenished.

State is using the increased revenues to restore some of the budget cuts made to state departments over the last few years.

3. What about the big increase in state capital spending? Is this a good thing for the state?

State capital spending is financed by borrowing. This is a great time to borrow, with long-term interest rates at historic lows and the state enjoying a good credit rating. There is a backlog of important maintenance projects and new infrastructure projects. Starting these projects will help to employ construction workers who are still suffering from a high unemployment rate and will also improve Hawaii’s infrastructure—roads, ports, schools, mountain trails—that support both businesses and families.

4. The Legislature also decided not to replenish two reserve funds, the Rainy Day Fund and the Hurricane Relief Fund.

The Legislature’s decision not to start rebuilding these funds is a big mistake. The State used revenues from both funds last year to help make up a huge budget shortfall. But with state tax revenues recovering, it’s important to rebuild state reserves. Low levels of reserves can impair the state’s bond ratings. This would raise interest rates paid by the state at a time when the state is borrowing more to finance increased capital spending.

Rebuilding the state’s reserves is tough: it means either less spending or higher taxes—but operating the state without necessary reserves could lead to even tougher times during an emergency. Just think hurricane, earthquake, tsunami, military actions in Iran, or more European economic problems …

-- Sumner Lacroix



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