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Recession could hit harder on Maui, Kauai

Japanese travel expected to help boost islands, though Maui relies more on domestic market

An American Airlines jet swoops in for a landing in August. A University of Hawaii economist said Thursday that while international travel could help Hawaii weather a potential recession, islands like Maui and Kauai that depend on the domestic market could take a hit if struggling U.S. residents begin to travel less. The Maui News / MATTHEW THAYER photo

The return of Japanese tourists could help keep Hawaii’s economy afloat in the coming months, but islands like Maui and Kauai that rely heavily on domestic travelers could feel the crunch of a “modest U.S. recession” on the horizon, a University of Hawaii economist said Thursday.

Carl Bonham, executive director of the UH Economic Research Organization, said that the “pent-up demand for visits to Hawaii by Japanese visitors” and international spending is expected to offset the decline in arrivals and spending of U.S. residents — though that may not be the case for all islands.

“The negative effects of the U.S. recession are going to be felt most acutely on Maui and Kauai, the two markets that are predominantly U.S. markets,” Bonham said at a news conference Thursday. “The smallest effects will be seen and the best growth will be seen on Oahu and on the Big Island, where you can imagine starting to see businesses that cater to Japanese visitors starting to come back.”

A UHERO report released today forecast a “darkened” economic horizon, with a slowing global economy and a U.S. economy that appears “headed for a mild recession in the first half of next year.”

Hawaii, like most of the nation, is feeling the impacts of inflation. But as its economy improves alongside the quickly recovering travel industry, it’s possible Hawaii could weather the storm without a net loss in jobs.

A graph shows the industries that have seen the biggest changes in hourly wages over the past 12 months. Income growth is expected to slow as inflation erodes wage gains and pandemic relief programs come to an end, according to the latest report from the University of Hawaii Economic Research Organization.' Graphic courtesy of UHERO

“The main story for Hawaii is just that we’re out of sync with the rest of the country,” Bonham said. “There’s kind of an urban myth in Hawaii that when the U.S. economy goes in one direction, six months later Hawaii follows, and that’s not true. In fact, if you look at past recessions, two out of the last four past recessions, Hawaii basically grew right through the U.S. recession.”

During a recession in the early 1990s, for example, the U.S. economy took roughly two years to recover. All the while, Hawaii’s economy was still growing because it continued to have “relatively good tourism numbers,” Bonham said. There was a drop-off in Japanese tourists after the first Gulf War, but overall the tourism and federal dollars and ongoing construction of homes in Kapolei and resorts on the Neighbor Islands helped buoy Hawaii’s economy.

The 2001 recession was similar, “except we had a very sharp contract quickly with the shutdown of air travel.” Hawaii, however, rebounded quickly when the rest of the U.S. economy didn’t.

In 2008 and 2020, however, the state of Hawaii’s economy looked as dismal as the rest of the country’s.

COVID-19, the culprit in the shutdown of the global economy in 2020, is no longer the economic threat it once was. Now, war and inflation are creating the uncertainty.

Globally, high inflation is causing central banks to raise interest rates more sharply than expected, the UHERO report said. Russia’s war with Ukraine, which has dragged into a seven-month affair, has inflicted an energy crisis on Europe, which is on a clear path to recession. Limits on Ukrainian wheat exports are resulting in high food prices in the developing world.

While the U.S. is not yet in a recession, UHERO and other economists have warned that one could be on the horizon. The Fed is expected to make more large interest rate hikes that will sharply reduce spending. Residents are facing high gas prices and climbing mortgage rates that have already caused a downturn in the national housing market — in August, the median price of a home in Maui County dipped below $1 million for the first time in nearly a year, while new listings and closed sales took a dive from August 2021. Businesses are facing higher labor costs and worker shortages.

Inflation in Hawaii is running lower than on the Mainland but is still hurting household budgets and local businesses, the report said. Wage gains that can’t keep up with rising prices and the end of pandemic-era federal support programs are also dragging down real income. Total real income from all sources is expected to drop more than 5 percent this year as a whole and manage just over 1 percent growth in 2023.

Unemployment in Maui County has been hovering around 4 percent. It’s a vast improvement over the pandemic, when Maui and Kauai counties had some of the highest jobless rates in the state, primarily because of their reliance on tourism.

And while the industry has brought back some economic growth and experienced more job increases than other industries in Hawaii, this could slow down as fewer U.S. residents travel with their personal expenses taking a hit.

“Maui is much more of a luxury market,” Bonham pointed out. “We’ve got the highest room rates in the state there. … It’s kind of a double-edged sword. It has the potential to be a problem during a downturn. On the other hand, the higher-spending visitor may weather the recession better than a more typical average household.”

There are also signs that Maui may be experiencing higher inflation than other islands — in its second-quarter report in May, UHERO noted that the asking price of rents on Maui had surged 41 percent, compared to 19 percent on Kauai and 11 percent in Honolulu.

Bonham said he wasn’t sure why Maui rents appeared to be increasing more quickly than other places, though he said it’s possible that more people are choosing to relocate to Maui to work remotely, which would make sense given that the island is a “big U.S. market.” However, it’s all speculation, “because we don’t have the hard data that would tell us this.”

“The inflation data that we have for Hawaii is for urban Hawaii. It’s really Oahu data,” Bonham said. “So to the extent that rents are rising faster on Maui, that means that households on Maui are dealing with a higher rate of inflation than households on Oahu.”

But as a recession potentially approaches, the report said “there are reasons to expect that the coming recession will not be anywhere as severe as the past two.”

“The COVID-19 recession was a deliberate contraction imposed to reduce the spread of the virus,” the report pointed out. “The Great Recession of 2007-2009 followed an unprecedented boom-bust housing cycle. Lax mortgage lending pushed up household debt during the first half of the 2000s, but it proved unsustainable once home prices began to fall. Mortgage defaults contributed to further declines in home prices and widespread losses for financial institutions in a vicious downward spiral. Recovery from the Great Recession was slow, as people were forced to work down their debt and banks restructured.

“This time, we expect a much more modest downturn, in line with many past recessions.”

* Colleen Uechi can be reached at cuechi@mauinews.com.

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