UHERO Forecast for the State of Hawaiʻi: No respite from storms or oil prices

Executive Summary

Hawai‘i’s economy has slowed this year under the weight of war-driven oil prices and an unusually active storm season, including two hurricanes within three weeks. Real GDP growth will fall to about half a percent in 2026, from more than 3% last year, and payroll employment will edge lower. We expect gradual relief as energy prices ease and storm recovery proceeds, with growth and hiring firming in 2027 and 2028. An aging, shrinking population will keep job gains modest. Continued AI investment offers upside potential for incomes, although the extent remains uncertain.

• The US economy continues to grow about 1.5-2%, supported by higher-income households benefiting from AI-related wealth gains and to some extent by the AI buildout. High fuel and other prices strain lower-income families. With core inflation above its 2% target, the Federal Reserve began to raise the federal funds interest rate at their September meeting. Long-term rates have already surged, pushing mortgage rates higher. Growth abroad remains soft, with Canada facing new US tariffs, China growing at its slowest pace since the pandemic, and high oil prices weighing on many trading partners.
• Hawai‘i tourism faced dual headwinds this year from surging fuel costs and a parade of storms. Hurricane Lowell’s September brush with Kaua‘i will cut that county’s arrivals by more than 6% for the year. Statewide visitor arrivals will decline just over half a percent for the year as a whole, while a sharp drop in reported length of stay will pull the average daily visitor census down more than 6%. Maui tourism continues to recover, and we expect modest statewide arrivals growth to resume in 2027 and 2028 as energy prices ease and storm effects fade.
• Hawai‘i’s job growth has stalled, with Maui the only county that will see net gains this year. Weak labor demand, rather than a shortage of workers, is the main story: job postings are down and the unemployment rate has edged up to a still-low 2.7%. Real wage gains have been modest and uneven across industries. Statewide payroll employment will contract slightly this year before a small 2027 rebound, and income growth will slow before recovering.
• Honolulu inflation reached 5.6% over the twelve months ending in July, driven by the energy price surge and continued shelter cost increases. We expect inflation to average 4.8% in 2026, easing to 3.3% in 2027 as these pressures fade.
• Construction remains a significant contributor to the state economy, supported by ongoing large federal military projects, the Honolulu Skyline rail project, the Kapalama port upgrade, and private condominium development. Construction employment has flattened but should remain above 40,000 workers for some years to come, even as the public infrastructure cycle gradually passes its peak. Changes to federal law and a potential new local financing tool will support more housing development.
• Housing affordability remains strained even though prices have stayed largely flat this year. High mortgage rates—now about 7%—have pushed up monthly payments, and Hawai‘i’s already-high condo fees could rise further under new federal funding rules. Rebuilding from this year’s storms adds near-term costs for the State and counties, particularly because of long lags in the release of federal recovery funds.
• Overall, we expect 2027 to bring gradual economic improvement to the state as energy prices and storm effects recede, although the persistent Middle East conflict remains a primary risk, together with election-related policy uncertainty. Slowly declining population will mean a tepid trend employment path, while AI adoption could provide a potential upside income surprise in the years ahead.

Forecast Summary

Third Quarter Hawai‘i Forecast

Hawai‘i continues to feel the effects of the weather and the war. This year has brought a parade of storms, beginning with the Kona Lows of the spring and extending into recent Hurricane Lowell. These have disrupted tourism, interrupted local businesses and schools, damaged hundreds if not thousands of homes, and racked up large recovery costs. At the same time, the war on Iran continues, having driven up energy costs that stifle long-haul tourism and raised consumer prices in the Islands.  Arrivals from many international markets are down considerably, in some cases also held back by adverse sentiment against Trump Administration trade and other policies.

The forecast picture is more uncertain than usual. At present, we anticipate that some relief from high oil prices and a reduction in geopolitical risk will permit a return to modest expansion in tourism activity in 2027 and 2028. Employment, which has seen limited but broad-based losses this year, will also turn the corner, although demographic trends will support only marginal job growth. AI adoption has the potential to support income growth despite this, but how much remains highly uncertain.

The US economy grows, but is vulnerable

US consumer spending, the biggest share of GDP, downshifted from about 3% in 2024 to roughly 2% in 2025 and the first half of 2026. Consumer spending has been driven primarily by higher-income households, whose AI-related wealth gains have supported spending rates well above normal levels. With the savings rate now very low, the possibility of a wealth correction poses a risk to consumption. We will return to this below.

War-related high oil prices remain a burden on consumers. Various studies have come to the conclusion that the higher costs of gasoline and fuel oil have roughly offset the positive income effects of recent federal tax cuts. And there have also been cuts to some important federal social programs. Because of this and their higher dependence on gasoline, high gas and other prices have hit lower-income families disproportionately hard. As a result, overall spending is more reliant on higher-income families than has generally been the case.

AI investment is all there is

Business fixed investment has been dominated by Artificial Intelligence (AI) related activity, particularly of information processing equipment and software. This has accounted for virtually all fixed investment since the second half of last year. Construction growth has also been dominated by the AI buildout. However, a large but hard to measure portion of the equipment and software purchases category is imported (imports have soared as a result), so that the net contribution of the AI buildout to US growth has been more limited than many believe. That is not to say that AI will not have significant effects on medium-term growth as it adds to productive capital and AI tools are increasingly adopted.

Virtually no other fixed investment activity has occurred. This may reflect, in part, a crowding out of funds available for investment because of the voracious demand from the AI buildout. It likely also reflects the adverse cost effects from higher interest rates, energy prices, and tariffs, as well as the persistent policy uncertainty. Residential investment continues to languish as the housing market remains depressed.

Manufacturing appears to have turned the corner after several years of net losses. Orders for durable goods have edged up, and the steady downward trend in employment that began in 2023 may have ended. Purchasing managers report better production conditions, and manufacturing industrial production is now rising. Still, conditions in the manufacturing industry remain soft, and employment in the sector has barely budged from its three year low reached last December.

Data give a very mixed picture of labor market health. After an upward movement earlier this year, the rate of job growth slowed and previous months’ data were revised lower. August saw an upward surprise, but it is too soon to tell if this represents more than a blip. Hiring rates are very low, but so are firings, while there has been a slight increase in job openings. At the same time, the unemployment rate remained at a relatively low 4.1% in August, because of a decline in the labor force related principally to the halt in immigration and increased deportations. Poorer job prospects may explain some reduction in labor force participation by older workers, and recent college graduates are also finding the market challenging.

Direct Contributions of Fixed Investment to US Growth (Half-yearly)

Interest rates will remain high

Inflation continues to be a primary policy challenge. The Personal Consumption Expenditure price index, which has been the Federal Reserve’s preferred measure, showed headline inflation rising by more than a percentage point between March and May, as oil prices surged, before dipping back a little. But higher inflation is not all about oil. The core measure that excludes food and energy has trended up for more than a year, and at 3.3% in July it was well above the Fed’s 2% target. Of particular concern is inflation in the prices of services other than energy and housing, which has been running just below 4%. Until this category recedes, inflation will remain above the Federal Reserve’s target of averaging 2% over time.

Because of concerns about inflation persistence, the Federal Open Market Committee raised the federal funds rate a quarter point at their September meeting. Based on trading in federal fund futures, the market expects the Fed to raise rates further over the coming year.

Market Expectations of Future Federal Funds Interest Rates

Meanwhile, long-term interest rates have skyrocketed. The interest rate on the 30-year US government Treasury bond has been trading at levels not seen in more than a generation. The rise in long rates does not reflect anticipated inflation, but higher real interest rates. This means investors see more risk, likely due to a combination of concerns about the future cost of financing federal government debt and the recent surge in debt financing for AI buildout. Higher rates might also reflect in part increased growth expectations related to AI adoption.

Mortgage interest rates have risen back to early-2025 levels over the past month or so. We expect some moderation so that the rate on a 30-year fixed-rate mortgage averages about 6.7% next year and 6.6% in 2028. This will further delay a recovery of the housing market, where resale volumes remain at very depressed levels. Because of the apparent role of federal borrowing in the global bond market rout, we now expect mortgage rates to eventually settle near 6.5%, a half-point higher than in our previous forecasts.

Our outlook for the US economy is for continued moderate growth in the 2% range for the next several years. Next year will see a slight pullback as the adverse effects of high energy prices and their effects on sentiment continue to be felt. We are hopeful that energy prices will ease in 2027, although the recent resurgence and spread of the Iran war make this speculative.

The AI financial boom, while contributing moderately to growth also represents the biggest downside risk. Equity valuations have risen to levels that have proven unsustainable in past stock market booms. Short-term movements have also proven sensitive to news about prospective AI company fortunes. A swift move away from these stocks could cause share values to plummet leading to a sharp pullback in wealth-driven consumption.

The long-term bond sell-off has been a global phenomenon. This can be seen in higher yields on ten-year government bonds in nearly all major markets. Higher rates will act as a headwind to economic growth across the globe.

Yield on 10 Year Government Bonds

Lagging conditions outside the US

Canada has taken another hit from President Trump’s aggressive trade war. After trade talks failed to reach a conclusion in August, the US Administration imposed a new round of increased tariffs, some as large as 50%. The tariffs were also directed at the automotive industry, which is tightly integrated across the US-Canada border. Canada quickly retaliated with new tariffs on US goods. Even before these tariffs, there were large production losses in the auto industry. Wood products manufacturing has also contracted.

Canada’s measured growth rebounded in the second quarter, rising to 3.3%, the strongest growth since the second half of 2024. However, this relied heavily on a surge in exports, which seems unlikely to be sustained in the face of new US tariffs. Consumer spending growth has firmed a bit, which will be an important support.

For Japan, consumer spending has improved over the past two years, but remains subdued, expanding at just over 1% in the twelve months ending in July. Spending has been particularly weak on non-durable goods, perhaps reflecting the pressure of higher prices on consumers’ wallets. Exports have been an important support for growth, with moderate-to-strong growth across all markets this year, including North America. Because of the declining currency value, export growth is much stronger measured in yen than in dollar terms.

In the second quarter of this year, China experienced its weakest growth since the COVID pandemic, coming in at just 4.3% real GDP growth. Exports have weakened even to the US, despite the robust demand for AI-related technology products, and consumer spending has also slowed. An improvement in capital investment was not enough to offset the drag from these categories. The adverse effects of the real estate bust remain evident. Production of cement has fallen by half since 2022, at the same time that production of integrated circuits has doubled. The effects of overbuilding in the 2010s are evident in both residential and commercial spheres, and the total floor space of all construction is down to just a third of its 2018 volume.

High energy prices continue to take a toll on global growth. On aggregate the estimated effect is not large, perhaps one percentage point off global output. The recent spread of the war and rebound of oil prices may increase the global hit. And of course the effects vary considerably by region, with the biggest drag on the oil exporting regions themselves, followed by developing countries that are heavily reliant on oil imports. For many developed countries and key technology producers, the AI boom is offsetting wholly or in part the adverse effects of higher energy costs.

Turbulent weather and geopolitics stall tourism

The Hawai‘i tourism industry faced dual headwinds in the first half of 2026: a geopolitical oil shock and multiple severe weather events, both acting as constraints on already flat Hawai‘i tourism. The US and Israeli war on Iran, which began in late February, triggered the closure of the Strait of Hormuz. This led to a surge in jet fuel prices, forcing higher surcharges on transpacific routes and contributing to additional capacity cuts from Asia. Higher energy prices also reduced households’ discretionary spending power. Weeks later, two successive Kona Low storms in March affected the Islands, grounded flights, and forced the closure of key attractions.

These compounding headwinds drove up airfares and weakened trip-planning confidence. As a result, travel volume plateaued during the first half of the year. Declining length of stay suppressed visitor census despite modest gains in arrivals, occupancy rates, room revenues and visitor expenditures. The parallel relationship between reported visitor days and arrivals has deteriorated to the extent that these measures are now hard to reconcile. In July, visitor days fell by 13% year over year, while arrivals rose by 1%, implying a 14% drop in average length of stay. Outside the post-Covid reopening period, no comparable radical divergence appears anywhere in the 35-year history of Hawai‘i tourism data.

The ongoing recovery on Maui continued to contribute some positive momentum despite constraints. The county continued to lead on almost all tourism metrics, with year-to-date visitor arrivals up more than 8% and hotel occupancy rates six percentage points higher. Meanwhile, other islands softened, although we saw increased air seats and spending on Hawai‘i Island and Kaua‘i, and higher visitor spending on O‘ahu.

As noted above, tourism data has become increasingly volatile over the past year, which complicates granular analysis and makes it more challenging to evaluate specific market trends at the county level. Therefore we focus here only on state-level developments for the various market segments.

The US visitor census has lost some ground this year, with modest gains from the East Coast failing to offset a sizable decline in the number of visitors from the West Coast. With weaker travel demand from the domestic market, Japanese tourists have been the primary support for industry growth. Though only half of their pre-pandemic levels, the number of Japan visitors grew more than 4% through mid-year, a pickup from the 2025 pace. The Canadian market, which has been declining for the past two years, fell another 3% in the first half of this year. This reflected a broad and continued pullback from the US market tied to exchange rate movements, tariff disputes and cross-border tensions. Other international markets fell at double-digit rates, extending a downward trend observed since early 2025.

Visitor days and arrivals

For international visitor markets, Hawai‘i is doing worse than the US overall. While international arrivals have yet to fully recover to the pre-pandemic level on the US mainland, they are lagging more in Hawai‘i across all major international markets.

Arrivals by air to the US and Hawai‘I (Index, 2019=100)

Weighed down by declining visitor census in the Islands, real visitor spending growth has slowed steadily since the start of the year. In the second quarter, visitor spending adjusted for seasonality and inflation was essentially unchanged from a year earlier. This was a marked change from the positive momentum observed earlier in the year, which reflected in part tourism price increases. While domestic markets continue to anchor overall expenditures, their growth plateaued by late spring. Meanwhile, international recovery remains uneven, with Japanese visitor spending edging up less than 1% and Canadian spending continuing to lag.

Hurricane Lowell, arriving in September, dealt another blow to Hawai‘i tourism. Damage to infrastructure and widespread power outages on Kaua‘i prompted State and County officials to advise potential tourists not to visit the Garden Isle while recovery is underway. For more discussion about the impacts of the recent storms, see the box, “More Hawai‘i storms and more storm-related costs,” and the forecast section below.

More Hawai‘i storms and more storm-related costs

Hurricane Lowell passed about 70 miles west of Kaua‘i as a Category 2 hurricane on the night of September 7. The center stayed offshore, but gusts reached 85 miles per hour, up to 18 inches of rain fell, and the storm surge destroyed oceanfront homes and ground-floor condominiums at Po‘ipū. More than 90% of the island lost power, and some areas of the North Shore could face weeks without service. O‘ahu and Maui also saw high surf and coastal flooding. On Lāna‘i, Kaumālapa‘u Harbor, the only cargo facility for the island’s 3,000 residents, will be out of service for about two weeks. Two lives were lost.

Lowell arrived only three weeks after Hurricane Lala passed just south of Hawai‘i Island, dropping 20-40 inches of rain on Ka‘ū. In that storm, two lives were lost, hundreds of structures were damaged or destroyed, and some 250,000 customers across three islands lost power.

This year’s barrage of storms is not entirely unexpected. NOAA’s May outlook gave a 70% chance of an above-normal Central Pacific hurricane season on the strength of a developing El Niño that the Climate Prediction Center now expects to be very strong, possibly the strongest on record.

Storm recovery costs stack up

Hawai‘i County’s estimate of damage from Lala is approaching $100 million, and the Governor has put total losses in the hundreds of millions. Lowell’s damage assessments are only beginning, but the Governor has put its cost in the hundreds of millions, with road repairs alone potentially in that range. He asked the President on September 9 for an expedited major disaster declaration, which bypasses the usual joint damage assessment, arguing that the simultaneous loss of power, transport, and other essential services demonstrates need without a dollar tally.

Federal support for Lala has so far been limited to emergency response. A presidential emergency declaration on August 25 reimburses 75% of eligible response costs in Hawai‘i County, and the US Department of Transportation has made available an initial $6 million in quick-release highway funds. The major disaster declaration that would fund long-term rebuilding awaits completion of damage assessments. In addition, the May 22 Kona earthquake received its own major disaster declaration on September 1, more than three months after the event. Together with the March Kona Low storms, Hawai‘i Island is now recovering under three separate federal disaster programs.

Daily passenger counts

Kaua‘i’s farm losses from Lowell have not yet been tallied. Farm losses from Lala have been modest ($3.4 million across 79 farms) but badly timed: Lala hit Ka‘ū coffee at the start of harvest, and growers expect little marketable crop this year.

Each storm brings a dip in visitor numbers as tourists cancel or delay travel. This will be felt most on Kaua‘i after Hurricane Lowell, when the airport closed, and visitors were asked to postpone trips or switch islands.

Two Kona Lows and three named storms in six months mean a growing share of 2026 state and local public spending is going to recovery efforts. The State is financing its response to both storms from the $100 million hurricane-relief appropriation enacted at the end of this year’s legislative session and the Major Disaster Fund, with the $10 million single-event cap suspended through November. The appropriation was sized for one event, and Lowell’s public costs will likely exceed it, leaving the State carrying costs up front while it awaits federal reimbursement. While rebuilding will add to construction and government spending over the coming year, it replaces destroyed capital rather than adding to welfare.

Hurricanes add to insurance woes

The Hawai‘i hurricanes stand to impose large costs on some homeowners. Issuance of a hurricane warning shifts wind damage claims onto separate hurricane policies. But Kaua‘i County was the only county under a hurricane warning for Lowell, as the Big Island was for Lala. And some homeowners lack insurance altogether. The larger gap is flooding, which accounts for much of this year’s damage. Outside mapped flood zones, few households carry flood insurance, so FEMA individual assistance is the main recourse.

A further round of insurance premium increases is now possible. Standard homeowner premiums rose 13% in 2024, and the separate hurricane policies most owners carry have risen even faster. State Farm, the largest underwriter in the state, raised hurricane and wind rates by an average of about 29% last November across its 99,000 policyholders, with some facing increases close to 50%. In May, the company stopped renewing hurricane coverage altogether for single-wall rental homes.

The State reactivated the Hurricane Relief Fund in 2025 to cover condominium associations, and the Insurance Commissioner surveyed insurers this spring on whether to extend it to single-family homes. Further storms this year will make that question more pressing.

Hawai‘i job growth has stalled

The number of jobs in Hawai‘i is essentially flat. Over the past year, nonfarm payrolls have declined slightly, with little net change in recent months. Across the counties, Honolulu and the Big Island have each experienced declining payrolls over the past year, losing a combined nearly 3,000 jobs. Meanwhile, Maui County and Kaua‘i have seen limited payroll growth of roughly half a percent over the same time period.

Looking across sectors, construction—which has been a bright spot in Hawai‘i’s labor market—is beginning to show signs that the cycle is peaking. In the early benchmark estimates we are reporting here, the sector’s employment has fallen by about half a percent over the past year. Payroll growth has instead been concentrated in state and local government, which added more than 1,400 jobs. Accommodation and food services and health care and social assistance also posted modest gains. Every other major industry, however, recorded year-over-year job losses, weighing down total nonfarm employment. The federal government has shed the most jobs because of the federal downsizing program, but that has now likely run its course.

Payroll job growth, year-over-year July 2025 to July 2026

The prolonged stall in job growth appears to reflect weak labor demand rather than a lack of available workers. Job postings have continued to trend downward, falling 7% from a year ago according to the Indeed Hiring Lab. Hawai‘i’s labor force expanded by 2,200 workers during the first seven months of the year, but this was not accompanied by employment growth. Instead, the number of unemployed workers rose by roughly 3,100, while the number of employed workers declined by 800. In other words, the labor market added workers without generating enough employment opportunities to absorb them. This resulted in a modest uptick in the unemployment rate. Even so, at 2.7%, unemployment remains low by historical standards.

In addition to stagnant job growth, wages are only modestly outpacing inflation. In July, real average hourly earnings were only 1% higher than a year earlier. At the industry level, the largest gains were concentrated in financial activities, professional and business services, and retail trade, where real hourly earnings increased 2-5%. However, the wage growth in retail trade likely reflects Hawai‘i’s minimum wage increase from $14 to $16 per hour in January, rather than a broader strengthening of wages across the industry. By contrast, real hourly earnings declined in wholesale trade, accommodation and food services, and construction. These figures capture hourly earnings only and do not account for changes in other forms of compensation, such as employer-sponsored health insurance and retirement contributions.

Change in the labor force, employed, and unemployed populations, January to July 2026

County budgets flatten

All four counties adopted fiscal 2027 budgets in June. Honolulu’s budget fell to just under $5 billion, less than last year, with the capital program cut about 13%, as assessed values rose just 1.1%, while labor costs rose and federal funding shrank, leaving less room for new projects. Honolulu also closed the Office of Economic Revitalization. Hawai‘i County’s operating budget grew to almost $1 billion, but its capital budget was reduced by about $260 million after last year’s one-off funding of the Hilo wastewater plant inflated the FY2026 total. Maui’s $1.6 billion budget is up 3.5%. Kaua‘i’s $500 million plan raised operating spending by 5%, but also trimmed capital expenditure, as economic uncertainty lowered its revenue expectations. With tighter county budgets, the recent growth trend in county employment looks set to stall.

On revenue, Hawai‘i and Maui Counties cut property tax rates for owner-occupants and long-term rentals, while raising them for second homes and vacation rentals. In addition to Maui’s moves to ban many existing short-term vacation rentals, the two counties are using property tax as a housing policy to try to redirect investor-owned homes toward the local resident market. With assessed values falling on Maui, the rate increases also make up some of the lost revenue. On Hawai‘i Island, where values rose, the homeowner cut roughly offsets higher assessments, while the new investor tiers add revenue.

Home prices are flat, but affordability challenges rising

Home prices have remained largely flat this year. Statewide, the median resale price of a single-family home was up slightly in the first half of 2026, while condo prices ticked down 3%, after being largely flat for most of 2022–2025. The number of single-family home transactions was unchanged from 2025 levels in the first half of 2026 and down 2% for condominiums.

While price growth was modest, housing affordability still deteriorated in 2026. Affordability has been strained in part by rising mortgage interest rates. Inflation concerns, a global bond market selloff, and expectations of Fed rate hikes have pushed mortgage rates higher. After dipping below 6% in the first quarter, the average rate on a 30-year fixed-rate mortgage climbed to 6.7% in August. Even small rate increases meaningfully affect what households can afford. The monthly cost of financing the current median-priced single-family home ($1.03 million) with a 20% down payment and a conventional 30-year fixed-rate mortgage has risen $270 in 2026, from $5,025 to $5,295. For the median-priced condo, rate increases have added $140 to the typical monthly payment.

Monthly Mortgage Payment for a $1 Million Hawai‘i Home

Rising condominium fees present an additional barrier to affordability, particularly in Hawai‘i. The graph shows median condo fees paid by residents of multifamily housing, as reported by the US Census Bureau. The median condo dweller in Hawai‘i pays more than $800 per month in fees, 50% above the US median. And condo fees in Hawai‘i have increased 60% in real terms since 2000. High and rising fees are common for both new and existing housing stock. While new units often charge higher fees to maintain better building amenities, older stock must devote a larger share to maintenance.

In recent years, rising insurance premiums have added to condo association costs. Newly released rule updates from Fannie Mae and Freddie Mac could further add to condo fees. While condo buildings could previously fulfill federal rules by setting aside a minimum of 10% of homeowner association dues for future maintenance, this threshold will increase to 15% in 2027. Condos will also be given less accounting flexibility to meet these targets. To this point, condos have been able to avoid the 10% set aside by presenting a cashflow analysis that predicts a positive balance. This option, which was popular in Hawai‘i, will be removed. The new rules also require a more stringent approval process to establish compliance.

The changing regulations will require increases in HOA fees for many buildings, and the increase may be particularly acute in Hawai‘i, where the median condo unit was constructed in the 1970s, meaning many buildings have a backlog of underfunded maintenance issues. Federally backed mortgages would be unavailable to units in buildings that fail to comply with the new rules. Higher HOA fees and barriers to securing mortgages could both chill condo demand and contribute to lower prices.

Median monthly condominium fee

A development financing tool may RISE to the occasion

Voters in the upcoming November 3 election will decide whether to authorize counties to use a new infrastructure financing tool for transit-oriented development, RISE bonds. The financing instrument closely resembles tax-increment financing (TIF), which is widely used on the mainland. In practice, a county would establish a local district where they would like to concentrate development, borrow the money to build needed infrastructure by issuing a bond, and then direct future property tax revenue from the district towards repaying bond holders. The program could be particularly impactful around Honolulu’s Skyline train stations, where there is a significant need for new infrastructure combined with a large potential for higher-density development that would ultimately result in higher local property tax receipts. 

And a new federal law promises a ROAD to new housing

A major bipartisan housing bill became law in July. The 21st Century ROAD to Housing Act includes a wide variety of regulatory changes, competitive grant programs, and commissioned studies, with the aim of increasing housing supply and affordability. Among the most significant provisions is the elimination of the permanent chassis requirement for manufactured homes, making them difficult to distinguish from site-built homes. Entire homes could potentially be flat-packed and shipped to Hawai‘i as a kit. To take full advantage of this change, the Hawai‘i State Legislature would need to pass a conforming bill in the 2027 session.

The Act also brings significant changes to the Community Development Block Grant (CDBG) program, enabling up to 20% of a county’s CDBG allocation to be used for the construction of affordable housing. All counties must also publish a searchable, publicly accessible online database of the undeveloped land that they own. In addition, Honolulu’s CDBG allocation will now be tied to the number of net new housing units added each year. If it falls behind other cities, funding will be cut by an estimated $900,000 (10%) per year beginning in 2029. While HUD has not yet finalized its methodology for measuring growth rates, Honolulu may be at risk. Average annual building permits have dropped from about 2,400 units a year in 2015-2019 to about 1,800 in 2020-2025, as the Kaka‘ako condo tower boom has begun to wind down.

Of particular interest to Hawai‘i, Congress also authorized the Community Development Block Grant Disaster Recovery (CDBG-DR) program for three years. Previously, Congress had to vote individually after each disaster to authorize this type of grant. Partisan gridlock has made these votes less certain and less timely. For example, Maui County received $1.6 billion in CDBG-DR grants for housing and infrastructure recovery from the August 2023 Lahaina and Kula wildfires, but the funds were not approved until December 2024. Multi-year authorization could greatly accelerate the release of future disaster relief.

Construction activity remains at a high level

Construction contracts continue to drive a significant portion of economic activity in the state. The industry currently represents about 6% of the overall state economy. Hundreds of millions worth of contracts continue to flow towards the completion of the third phase of the Honolulu Skyline rail system, even as the system’s completion date falls further behind schedule. The connection to Kaka‘ako is now unlikely to be completed before 2032. Ridership of the incomplete system has been rising, averaging more than 10,000 trips per day, triple where it stood one year ago. Separately, the $555 million upgrade to Kapalama Container port is nearing completion, with the installation of container cranes scheduled for the coming months.

Condominium construction in central Honolulu continues to provide a significant source of construction activity. The 1,005 unit Kuilei Place development is well into vertical construction, with an anticipated completion date of late 2027. Several other large projects are at various stages of planning and permitting, with many clustered in the Ala Moana neighborhood. In Hawai‘i County, Nan Inc. announced plans for 1,000 units of modular housing on a plot near the Kona International Airport. The State also moved forward with plans to encourage redevelopment along Banyan Drive in Hilo. Legislation was adopted to designate the area as a community development district, which will allow HCDA to facilitate long term planning and development financing.

Hawai‘i Construction GDP

The Hawai‘i Outlook

The energy price surges associated with the launch of the war on Iran have had a significant adverse effect on the Hawai‘i economy. Inflation is higher this year, and real incomes lower than would otherwise have been the case, both because of the adverse effects on tourism and the hit to purchasing  power.

The question for 2027 is whether there will be a return to more “normal” external conditions and firmer Hawai‘i tourism and growth. We think gradual relief from energy prices and from macro uncertainty will occur, although recent war developments make this impossible to call. Higher interest rates will challenge consumers, both from Fed rate hikes and the effect of bond weakness on mortgage rates. 2027 will be stronger than 2026 for much of the economy, but perhaps not dramatically so.

AI battles high oil prices for overall growth effect

In most respects, prospects for the performance of the external economy have not changed materially since our last report. The war with Iran cooled during the summer, but US and Iranian attacks have resumed, and Houthi and other militias have launched damaging attacks on Saudi oil facilities and a key pipeline. After a dip to the $70 per barrel range in early July, spot oil prices have moved back above the $120/bbl level, meaning continued high energy costs for consumers and businesses, and higher airfares creating budget challenges for potential visitors. US consumer spending growth has remained in the 2% year-over-year range, with monthly ups and downs, much lower than the roughly 3% pace seen in 2024 and early 2025.

The biggest change in the US economic backdrop for this forecast is further demonstration of the extent and persistence of the AI buildout. As we noted above, the net effect of this rapid investment is not as large as one might think, because of the large volume of imported components and materials. Still, it causes us to raise our forecast for the US economy somewhat for the next few years. We now expect next year’s real gross domestic product growth to come in at 2%, only slightly weaker than this year’s growth pace.

The direct and indirect effects of higher energy costs, along with persistent inflation in many service categories, will boost US consumer price inflation to 3.5% for this year as a whole. Together with already-accelerating inflation pre-War, the surge in oil prices increased pressure on the Federal Reserve to raise interest rates. They hiked rates a quarter point at their most recent meeting, and a further rise is likely.

Higher oil prices act as a tax on economic production and demand, but also have the potential to raise US growth over the medium-term through increases in oil patch investment. That could help to strengthen the economy as we move into 2028 and beyond, particularly if oil prices remain elevated. 

Growth and inflation prospects over the next several years will be poorer for other major economies that are important visitor markets. Japan and many other Asian economies are heavily dependent on oil imports from the Middle East and so will face significant inflation and growth risks, even as they benefit from strong semiconductor sales to fuel US AI investments. The US-led trade war and policy uncertainty will continue to weigh on global economic conditions.

Tourism softness will continue through next year

This year’s storms and the adverse impact of higher energy costs have taken a bite out of Hawai‘i tourism. The trade war with Canada has also hurt. Most recently, Hurricane Lowell hit Kaua‘i and caused property damage and widespread power outages.

In the aftermath of Hurricane Lowell, authorities have asked people who had intended to visit the island soon to delay their vacations or shift them to another Hawaiian island. While they have not said how long this guidance will last, we assume the loss of roughly three-quarters of Kaua‘i visitors for the remainder of the month, gradually recovering to normal levels by Thanksgiving. That will mean a significant loss for the year overall, with Kaua‘i arrivals down more than 6% for the year as a whole.

Anticipated effect of Hurricane Lowell on Kaua‘i visitor arrivals

Before considering the hurricane effects, we were working with a forecast of a very small drop in total visitor arrivals this year for the state overall. The temporary downturn on Kaua‘i now means we see a little over half a percent drop in statewide arrivals for the year as a whole.

With or without the hurricane effects, all broad market areas have weakened this year, with a very large drop in visitors from international markets other than Japan. The visitor count from these countries will decline nearly 9% this year.

The visitor average daily census is coming in even weaker than the arrivals numbers, because of large reported declines in length of stay. Overall the daily census will fall by more than 6% this year. The unusually violent swing in reported length of stay numbers suggests potential measurement problems in the official data. Still, these are the numbers we have to work with.

We expect a return to modest growth in visitor numbers as 2027 progresses, after Kaua‘i tourism recovers, and as energy markets eventually improve and we get past this year’s US and global spending slowdowns. Arrivals will expand by about 2% next year, accelerating to 2.5% in 2028. Growth will gradually trend lower thereafter as capacity constraints bite and aging populations keep a lid on demand.

Visitor spending adjusted for inflation will fall by 1.6% this year before a bounceback in 2027. As we have seen for decades now, real visitor spending will see only marginal medium-term growth, and it will begin to decline early in the next decade. A path of inflation-adjusted visitor spending that is weaker than trend average daily visitor census is consistent with its historical underperformance.

Uncertainty about the prospects for the ongoing Iran war, oil prices, and therefore the likely course of the Hawai‘i economy remains considerable. Despite following a different path than we anticipated, the average oil price over the first three quarters of 2026 ($91/bbl) has ended up very close to the baseline case in our second quarter forecast. Following the resumption of US and Iranian strikes and the war’s spread, the spot price for Brent crude surged to above $120/bbl. If this persists, then that will mean a bit higher inflation this year and less relief in 2027, as well as potentially weaker tourism next year.

Visitor Expenditures and Average Daily Census

As always, there are differences in the visitor industry forecast across the four counties. We discussed the impact of Hurricane Lowell on Kaua‘i above. We expect only limited substitution of visitors to other Neighbor Islands because of strong Kaua‘i preferences, its large time share population, and the anticipated quick recovery for much of the tourism infrastructure on the island.

Maui is seeing by far the strongest 2026 growth as its recovery from the post-wildfire losses continues. As recovery becomes more complete, arrivals growth will dip from almost 5% this year to about 2% in 2027. Hawai‘i County is experiencing moderate net growth in visitor arrivals this year, as a stronger US market offsets sizable losses in international visitors. Some substitution of would-be Kaua‘i visitors adds to growth. This will then drop back in 2027 before firming in 2028. Honolulu County, with its relatively heavy dependence on international visitors, will see total arrivals 2.6% lower for the year as a whole, firming to about 2% growth next year. As we have noted, average daily census figures have been much weaker than arrivals this year but will move up sharply in most counties in 2027 as length of stay recovers.

High inflation will ease in 2027 as energy prices (hopefully) recede

This year’s war-related jump in oil prices has contributed to increased inflation in the Islands. This comes on top of a high baseline level of inflation relative to the US mainland. For the twelve months ending in July, Honolulu consumer prices were 5.6% higher than a year ago. The energy price surge lifted inflation by 1.2 percentage points, with shelter contributing 2.5 percentage points. Higher energy prices act as a tax on businesses, consumers, and the traveling public. That force exerts some drag on the local economy.

We expect a bit of cooling in the coming months, so that inflation will average 4.8% for 2026, dropping to 3.3% in 2027, based on our expectation that energy prices will average much lower than today. And Hawai‘i’s delayed shelter cost inflation hump will also ease into the new year. Local inflation will then converge to its long-run 2.5% path in the final years of the decade.

Honolulu inflation rate forecast, year-over-year change

Construction boom has legs

The Hawai‘i construction industry has been a substantial contributor to growth in the half-decade since the pandemic. This has been supported by a very high level of federally funded projects on military bases and locally funded activity such as the Honolulu rail transit buildout as well as ongoing private residential and nonresidential building. Maui recovery and now rebuilding following multiple storms and an earthquake are adding to the mix.

This year saw an unexpected flattening of the construction job count, but not a pullback. We expect the sector to remain at a high level of activity for the next several years, even as the government infrastructure cycle moves past its peak late in the decade. Construction employment will remain above 40,000 workers through 2031.

Rates of construction cost inflation will moderate after a bump this year. We estimate that these costs have risen nearly 30% since the beginning of 2020, slightly more than Honolulu consumer prices. The future path will depend on the state of trade policy, including US tariffs on Canadian lumber and protections for US metals manufacturers. Both drive up prices for key construction materials.

Conditions for the housing resale market have deteriorated, as mortgage rates have headed back up to about 7%. Because we expect rates to remain above 6.5% for the foreseeable future, there will continue to be headwinds for market recovery. But affordability will gradually improve as household incomes grow and home price gains fall below inflation, permitting slow market progress, barring another step up in long-term interest rates.

The real contracting tax base—a broad measure of industry activity—will reach a peak just above $15 billion next year. Activity will remain high throughout the forecast period, with this aggregate measure remaining near the current level throughout the forecast period. Construction will continue to play a somewhat larger role than normal for some time to come.

Average interest rate on a 30-year fixed-rate mortgage

Labor market weakness followed by flat conditions

The adverse impact of higher oil prices on consumer demand and production costs had already reduced our forecast for job growth. Downward data revisions and tepid tourism have caused us to mark down our estimate of annual job growth for this year and our forecast for 2027. The total nonfarm payroll job count will contract by 0.2% this year and manage just 0.2% growth in 2027.

And we really don’t see much job growth thereafter. We are now moving into the period of flat or declining labor force as the Hawai‘i population ages and in-migration remains a drag for the rest of the decade. More on this below.
Nearly every broad sector that we forecast is seeing poorer labor market conditions this year than last. Wholesale and retail trade and the finance, insurance and real estate sector have now shed jobs for three or more consecutive years, the first likely reflecting in part tepid tourism, but both also reflecting structural changes that reduce employment demand in these sectors. This year, considerable job shedding is occurring in transportation and utilities, primarily driven by a reduction in local transport of goods.

By far the biggest drop of course is in federal government employment, down a cumulative 2,500 jobs (7%) since the beginning of 2025. That has likely now run its course. State and local governments added jobs. Despite the downturn in average daily census, the accommodation and food service sector is seeing a small job gain, as is our broad “other services” category.

Looking to 2027 and beyond, only very modest job growth is expected across nearly all sectors, reflecting both weak near-term tourism conditions and slower trend growth. Health care, which, despite this year’s pullback, is a perennial growth leader in our aging society, will return to growth of a bit more than a half-percent annually.

As we noted above, Hawai‘i’s unemployment rate ticked up a bit this year and will average 2.5% for the year overall, compared with last year’s very low 2.3%. We expect continued gradual upward movement in this measure of labor market slack to about 2.7% by 2030, primarily reflecting convergence toward—but still a bit below—long-run average performance. Lower trend unemployment is consistent with tighter labor markets in a slow labor growth economy.

As always, we see some differences in labor market performance across counties. Because of recent volatility in county data, we will largely limit our discussion of prospective developments to the macro level.

Hawai‘i County will begin to claw back jobs lost this year in the trade, transportation, and utilities areas, while Honolulu will post positive 2027 growth as we get beyond the federal downsizing drag. Kaua‘i’s job growth will firm over the next several years post Lowell, and Maui will lead the pack as the drawn-out post-wildfire recovery continues. Between now and the end of the decade, Maui and Kaua‘i will see job growth above the statewide average, as has generally been the case for Neighbor Islands in the past, while the Big Island and O‘ahu experience slower growth.

Percent Change in Payroll Jobs

Inflation spike will reduce income growth

This year’s unexpectedly large surge in inflation is undercutting real income gains. Inflation-adjusted income from all sources will grow just 1% this year, less than half of last year’s pace. Income growth will firm in 2027-2028 as we move beyond the impact of the inflation surprise and as modestly stronger job growth resumes.  But prospects for trend income growth mirror those of the labor market, as we move onto a very flat population-driven growth path.

As we discussed in some detail in our last report, Maui is seeing much stronger income growth than the state overall because of payouts from compensation funds related to the 2023 wildfire damages. While the bulk of the $4 billion global settlement is counted as household transfer income when the settlement becomes legally binding, we assume a reasonable path of payouts over the next four years. In our model, this raises total transfer income on Maui by nearly a third of the 2025 level. This explains the 6% jump in Maui income that we are observing this year and the above-average additional income growth through 2027.

Real gross domestic product, our broadest measure of economic activity, will slow to 0.6% this year after a strong 3%-plus showing last year, aided by a number of public-sector wage hikes. Real GDP growth will recover to just above 1.5% in 2027-2028, before settling near 1% in the out years. Again, this is consistent with slower trend growth across the economy in the years to come.

Hawai‘i real GDP And Inflation

Years of living dangerously

This year we have felt the effects of the Iran war on two fronts: energy prices have reduced purchasing power, and tourism has taken a hit from higher travel costs. The results have been a big bite from inflation-adjusted income growth and a sharper-than-expected drop in visitors from many international markets.

For now, we continue to expect these adverse effects of the war to recede over the coming year. This is taking longer than we had hoped, and the recent flare-up of US-Iranian attacks and advances of the Houthi rebels on the Arabian Peninsula show that major disruption to global oil supplies may last for an extended period. Should that happen, the rebound of travel and tourism will be delayed, and near-term Hawai‘i growth will continue to languish. Energy prices remain the primary risk to our forecast.

And in many ways, uncertainty remains the name of the game. The fall elections represent a massive new source of uncertainty, adding to the already-high policy uncertainty that has been present since the beginning of the Trump Administration. That uncertainty has held back business investment in anything other than AI, as we saw above. It may also be weighing on consumer sentiment, acting as a headwind on top of the direct economic costs of inflation and soft labor markets. The outcome of the fall elections is up in the air, but a shift in control of one or both houses of Congress to the Democrats could mean a very different policy environment.

There are longer-run uncertainties as well, which we have discussed to some extent above. For Hawai‘i, as for the US and many other countries, we have the combination of a downside uncertainty around the timing and extent of population and labor force decline. On the upside of course is uncertain returns from the adoption of AI technologies. For the latter, estimates range from the dubious (0.1% bump in annual US growth) to the sublime (1-3%) to the ridiculous (7%-plus). Some of the large estimates draw on past fundamental technology changes, such as electrification, that may be poor analogies. A number closer to an annual US growth boost of 0.5% strikes us as reasonable, although this is clearly an occasion where we need to  acknowledge that there are huge uncertainties that will take years to resolve. In any event, we think that AI will serve as a meaningfully positive offset to slower underlying growth from a stagnant or declining labor force.