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Economic Currents

Keep up to date with the latest UHERO news.

GDP Release Adds to Speculation of Further Fed Easing

Posted January 26, 2012 | Categories: Hawaii's Economy, Q&A
Q1. There has been a large amount of economic news this week, can you summarize where things stand?

A1.  This was a busy week.  On Tuesday we found out that Hawaii's unemployment rate rose to 6.6% in December;  on Wednesday the Federal Reserve released their forecast for the US economy and new forecasts of what their policy will look like for several years; and this morning the BEA released data on 4th quarter US economic activity. 

Q2. Lets start with the most recent news, the GDP report.

A2.  The advance release from the BEA estimates that Real GDP grew by 2.8% (annualized) during the fourth quarter  up from an anemic 1.8% in the 3rd quarter of 2011.   Unfortunately,  most of that growth was due to inventory accumulation, which means business will not have to produce as much (and hire as many workers) in the future as they can sell out of inventories.   Overall this was a fairly weak report, and  few economists expect growth to remain this strong  during 2012.  For instance, the FED revised its 2012 GDP forecast downward to a range of 2.2 to 2.7% during its meeting this week.

Q3. You mentioned that the FED released a forecast of its policy plans. Tell us what that means.

A3.  To better communicate its policy position,  the Federal Reserve Board has begun to release the forecasts of Federal Open Market Committee meeting participants (12 Federal Reserve Board Presidents plus the seven Governors) for the future path of the Fed Funds rate.  The majority of participants forecast that the Fed Funds rate would remain unchanged in 2012, with only 2  forecasting that the funds rate would be raised to 1%.   These new forecasts tell us that FOMC participants expect the overall economy to remain relatively weak at least for the next two years so that short term interest rates probably won't begin to increase  until sometime in 2014.

Q4. Thats not very positive, is there anything the FED can do about this?

A4.  Given the weak GDP report, including the low inflation numbers in that report, we will likely see new announcements from the FED in March or April detailing additional "quantitative easing".  In other words the FED will purchase more long-term assets in an effort to drive down long term borrowing costs.  We could yet see mortgage rates move even lower.

Q5. Quickly, why is Hawaii's unemployment rate increasing while the US unemployment rate is falling?

A5. Hawaii's labor market improved fairly steadily from the Summer of 2010 through the Spring of 2011. But beginning in June 2011, the Unemployment rate started rising again as the number of employed persons declined by nearly 800 per month for the second half of 2011. The most likely explanation is the Pause in Hawaii's growth that we described in our Q4 forecast report. The impact of the Japanese Tsunami, rising oil prices, airfares and room rates, dismay over the gridlock in DC and later the debt downgrade.

-- Carl Bonham

Q & A: Council on Revenues Lowers Forecast for FY2012

Posted January 6, 2012 | Categories: Q&A
1. The council on revenues met yesterday and lowered its forecast for State Tax Revenues for 2012. How much was the revision, and why did you lower the forecast.

In the September meeting last year, the Council had forecast tax revenues would grow by 14.5% from FY2011 to FY2012. The council decided to lower its forecast at yesterday's meeting to 11.5% growth, a reduction of roughly $130 million. The reduction was primarily for technical reasons, but also because tax revenues appear to be growing more slowly than originally anticipated.

2. What do you mean by "technical reasons"?

Last fiscal year the tax department implemented new procedures to accelerate processing of tax payments. As a result, tax revenue that would have been counted in FY2012 under the old processing procedures were counted in FY2011. The council estimated that this one time shifting of revenue amounted to roughly two percentage points of growth.

3. Even so, a forecast of 11.5% growth still seems very strong. Is our economy really doing that well?

The economy is improving slowly, some sectors such as tourism rebounding much faster than others, such as construction. The 11.5% growth in revenues would likely be closer to 5% if it were not for the lingering effects of the Lingle administration's refund shifting and a whole variety of tax increases that went into effect this year.

4. We also got some good news for the national economy today.

Thats correct, the jobs report from the Bureau of Labor statistics came in better than expected. The private sector added 212,000 jobs in December, while the public sector continued shedding workers resulting in a net increase of 200,000 jobs. The unemployment rate rate fell from 8.7% in Nov. to 8.5 in Dec. This was a good report relative to what economists expected, but is still very slow job growth relative to the number of unemployed workers. There are still 13.1 million unemployed workers, and 5.6 of them have been unemployed for more than 6 months. For all of 2011, the economy added 1.64 million non-farm jobs (137K per month).

-- Carl Bonham



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Q & A: What Do We Know About Income Inequality in Hawaii?

Posted December 9, 2011 | Categories: Q&A, Blog
1. There’s been so much controversy about income inequality lately. What do the numbers tell us about inequality in the US and Hawaii?

The income numbers tell a simple story: Income inequality in both the United States and Hawaii was stable from the end of WWII until the early 1980s and has been steadily increasing since then.

Let’s look at the United States first. From the end of WWII until 1977, the top 10 percent of US households received a little less than 35 percent of total income. By 2008, their share had increased to about 46 percent.

Now let’s look at the top 1 percent of households in the United States. From 1946-1982, the top 1 percent received about 9-11 percent of total income. By 2007, their share had increased to about 18 percent.

2. What about the share of the top 10 percent and 1 percent in Hawaii?

From 1945 to 1985, the top 10 percent of Hawaii households received about 30-32 percent of total income. By 2005, their share had increased to about 43 percent.

Now let’s look at the top 1 percent of households in Hawaii. In 1975, the top 1 percent received about 7 percent of total income. By 2005, their share had increased to about 20 percent.

The bottom line is that inequality in Hawaii is changing much like it is on the mainland: Inequality is growing rapidly and almost of all this is due to the huge increase in the share of income received by the top one percent.

3. So why the increase in income inequality in Hawaii?

One is the decline and virtual disappearance of the unionized sugar and pineapple sectors that paid pretty good wages to blue collar workers.

Another is the effect of globalization (international trade, migration, and investment flows) on the wage rates of workers with an average education.

Another is the effect of globalization (international trade, migration, and investment flows) on the wage rates of workers with an average education.

But the biggest culprits are probably the new digital technologies. Upper-income managers who have learned how to reshape organizations to use them effectively have reaped huge gains.

-- Sumner Lacroix

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Q & A: Super Committee Decisions Due Next Week

Posted November 18, 2011 | Categories: Q&A, Blog
1. We have been hearing about the Super Committee and their work on a deficit reduction plan due next Wednesday. What is the Super Committee?

The Super Committee is the Joint Select Committee on Deficit Reduction that was established by deal reached last July to raise the federal debt ceiling. That deal called for reducing the deficit by $2 trillion over 10 years with $1.2 trillion in that deficit reduction to be decided on by a new bipartisan committee of six Democrats and six Republicans. The plan due from the committee on November 23rd is supposed to be voted on by congress with an up or down vote, no filibusters or amendments are possible.

Q2. Has the committee released any details of its plan?

Well the committee meetings are private, so we are only seeing limited releases at this point. The Democrats on the committee initially offered a plan that was similar to President Obama's "grand bargain" to cut 2.5 to $3 trillion by slowing the growth of medicare and medicaide along with more than $1 trillion in new tax revenues. Of course republican members of the committee immediately rejected that plan because of the increased tax revenues.

Q3. So the committee is stuck in the same rut that the entire congress was in last summer?

Not entirely, republicans have recently released a plan that would allow for 2-300 billion in new tax revenue over the next 10 years, so there may yet be room for compromise. But the devil is in the details, Democrats do not like the republican proposal because it makes the Bush tax cuts permanent meaning that top tax rates are permanently lower. The latest moves have been to agree on the amount of new revenue to be raised, and then force the tax committees of congress to figure out how to raise that revenue through what could be a major revision to US tax code.

What happens if they do not reach an agreement

If the committee does not come up with a plan, or if both houses do not approve their plan by Dec. 23, automatic spending cuts would kick in. Those cuts would include roughly 500 billion in cuts to military spending and a similar amount from non-military spending. Medicaid and other safety net spending would be exempt. An unfortunately consequence of automatic spending cuts is that they are likely to occur earlier and in larger amounts than would be true of any deficit reduction plan. In other words, larger cuts in federal government spending in early 2013 when the US economy is likely to be in a weak position from the coming Euro area recession.

-- Carl Bonham

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Q&A: UHERO Forecast Update Released Today

Posted November 4, 2011 | Categories: Q&A
1. UHERO released the fourth quarter update to its Hawaii forecast this morning. The title is “Hawaii in Pause Mode.” What do you mean by that?

This is something we’ve been talking about for several months. After strong gains in tourism and to a lesser extent in employment in 2010, the state economy has moved mostly sideways since then. Arrivals and spending have been flat or slightly down for most of the months since January. Job gains have also stalled, with the unemployment rate moving back up to 6.4% in September.

2. How much of this is due to the problems with the US and global economies?

Certainly this has played a major role. As the US has struggled, mainland arrivals growth has stalled. Lack of job growth and debt concerns at home and abroad have undermined traveler confidence. Of course the Japanese earthquake was also a major disruption. High oil prices also raised travel costs.

3. Are there bright spots in the local economy?

Yes, some areas like professional and business services are growing jobs, and construction losses appear to have ended, at least on Oahu. Japanese arrivals are fully recovered from the earthquake now, and September actually showed surprising strength in most markets. Plus APEC will provide some lift this month.

What are prospects for 2012?

Well, despite the weakness we have seen this year, we do expect limited improvement in 2012, both in the visitor industry and across the economy. But this will not be strong enough to rapidly bring down unemployment. And we are still worried about the potential for the European debt crisis and US Congressional inaction to tip the economy back into recession.

-- Byron Gangnes
Dept. of Economics and University of Hawaii Economic Research Organization

Watch UHERO discuss this topic on KITV's Project Economy. UHERO faculty and research fellows appear on this segment weekly. Visit our media section to view previous appearances

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