Work continues on the Maui Coast Hotel expansion project Wednesday. The return of tourism and rising construction demands are among the factors helping to keep Hawaii’s economy afloat in the face of a looming recession. The Maui News / MATTHEW THAYER photos

Hawaii’s economic growth will hit a pause in the new year, but the state still looks likely to escape a harsh recession with the return of international travelers fueling the tourism industry and rising construction demands.

Still, the University of Hawaii Economic Research Organization said inflation remains “stubbornly persistent” across the globe as Russia’s war with Ukraine continues, elevating Hawaii’s rates at just under 7 percent — 6.6 percent in Maui County.

The report that was released earlier this month forecast a “darkened” economic outlook, with a slowing global economy and a U.S. economy that appears headed for a mild recession midway through 2023. The good news is that inflation is set to ease significantly in Hawaii as oil prices have reversed all of their 2022 gains.

Overall, not much has changed from the Sept. 23 UHERO report, but fortunately, the recovery of the Japanese visitor market and surging public sector construction, like resort buildings, will prevent a major recession in the islands, the report said.

“Hawaii’s outlook has not changed substantially over the past quarter. As the US enters a mild recession next year, tourism activity will slow, but the gradual return of Japanese visitors will cushion the blow,” the report said. “The higher interest rates and prices that are beginning to drag on the US mainland economy are weighing on Hawaii, too. Their burden on spending will combine with somewhat weaker tourism to cause a year-long pause in job gains in the Islands, before growth begins to edge back onto a positive track in 2024.”

A construction crane is reflected in a mirror posted at the entrance to the Maui Coast Hotel expansion project Wednesday morning. The six-story, 162-room expansion includes construction of a building that is a mirror image of Maui Coast’s current structure. It is scheduled to be completed in the first quarter of 2024. While economists are expecting Hawaii’s economic growth so slow in the coming year, the state may avoid the worst of a U.S. recession amid a strong tourism market and rising construction demands, according to a recent report.

Although inflation has surpassed 6 percent for three consecutive quarters this year, there are signs that price increases are beginning to slow in Hawaii. With declining energy and food costs, this will allow inflation to ease to less than 4 percent in 2023 and cool to roughly 2.5 percent by 2024, according to UHERO.

Still, Hawaii is feeling the effects of the national economic challenges through higher mortgage rates, in particular. Families across Maui County have been priced out of homes, too, as median home sales prices continued to surpass $1 million this year and high borrowing rates discouraged many buyers.

As a result, the housing market has weakened significantly and faces the possibility of a sharper downturn, the report said. Price tags on homes in Maui have already fallen 13 percent since May.

Reduced affordability means that the cost of developments with affordable unit requirements will increase, likely resulting in some project delays or cancellations. However, large federal contracts and new hotel projects will support the construction sector, more than offsetting “softer” residential buildings, the report said.

On the other hand, the hotel industry across Hawaii has continued to see an increase in revenue. In the third quarter, the occupancy rate climbed to 77 percent, or within 5 percent of the rate experienced in the fourth quarter of 2019 before the COVID-19 pandemic hit.

Room rates rose in early summer, but have now stabilized. Since June, the statewide average daily room rate has remained essentially flat, but among the counties, Maui has seen the strongest hotel performance, followed by Kauai.

The growth in visitor spending has been “impressive” throughout the year, even though international visitor numbers — particularly from Japan — are still recovering following the pandemic.

Fortunately, this ongoing recovery will provide support for the tourism industry, and therefore provide economic support for the counties. Total visitor spending, adjusted for seasonality and inflation, has now fully recovered and climbed a couple percentage points above its 2019 level, the report said.

Small and isolated regional economies, like Maui, tend to have specialties, which provide productivity benefits, said UHERO Assistant Professor Steven Bond-Smith on Monday.

“And Maui has specialized in tourism,” Bond-Smith said. “This can be considered a strength, as it provides higher productivity than a smaller tourism industry. But, when external shocks hit the Hawaii economy, like the pandemic or a U.S. recession, any reduction in visitor numbers will be felt more strongly in Maui than more diversified counties in Hawaii, like Honolulu, or more diversified places on the Mainland.”

In the longer term, specializing in tourism can also be considered a weakness because it “makes it difficult for other industries to grow large enough to also get productivity benefits from a larger industry.”

Hawaii’s labor market is not as tight as the Mainland, though, with employment in some sectors still below their pre-COVID level, according to UHERO. The high costs of living coupled with the mild U.S. recession will cause a pause in job growth next year and an uptick in unemployment statewide before growth resumes in 2024.

For Maui County; however, the unemployment rate is expected to drop slightly from 4.5 percent to 4.2 percent in 2023 and then 3.9 percent the following year.

Because oil is the largest source of energy in the islands, UHERO forecasts this will “substantially reduce price pressures.” Food price appreciation is also expected to decline in the new year as global supply conditions continue to improve.

As inflation recedes, real income will make a recovery as well. From its 6 percent drop this year, real personal income will expand by about 1 percent in 2023 across the state, according to the report.

As inflation drops further, and as demand and employment begin to recover, real personal income growth will regain its 2019 level by 2024 and growth will firm to the 2 percent range by 2025.

Hawaii’s economic forecast remains largely unchanged from UHERO’s third-quarter report, but uncertainty around that path has increased as conditions abroad have “deteriorated more rapidly.”

“While we can hope that things go right and worry they could go wrong, we continue to see the middle ground as most likely,” the report said. “Hawaii skates along the growth edge in 2023, slowing, but avoiding a local recession. But even if things were to go wrong, some perspective is essential. As we noted in our last report, economic conditions now are very different from the developments that drove the past two deep recessions. Performance will get worse before it gets better, but a severe downturn — for the U.S. or Hawaii — remains unlikely.”

* Dakota Grossman can be reached at dgrossman@mauinews.com.