Expansion Shifts Into Higher Gear

2012 marked a transition to healthier growth. Room for rapid tourism gains is now limited, but other sectors will pick up the pace.

UHERO State Forecast Update, Public Summary February 15, 2013 (excerpts)

… Japan has experienced two consecutive quarters of real GDP decline, with the likelihood that the fourth quarter will also come in negative. Japanese Prime Minister Abe has proposed a new set of expansionary policies to fight the prolonged deflationary conditions, and the Bank of Japan has signaled a commitment to further expansion toward that end. It is too soon to tell whether policy makers will carry through on this commitment; past efforts to deal with deflation have been short lived and ineffective….  We expect the US economy to expand by 2.2% this year, while Japan manages just 0.2% growth.

Despite an exceptionally mediocre global economic environment, the Hawaii visitor industry had a phenomenal year in 2012. Total arrivals grew by more than 9%, exceeding their previous 2006 peak by more than 300,000 visitors. Expenditures rocketed upward more than 18%. This surge reflected both the higher visitor census and also higher hotel room rates, which were 7.7% higher than in the first three quarters of 2011. Statewide occupancy rates approached 77%, their highest level since 2006.

Tourism activity was strong across all major market areas. Arrivals from the US mainland and from Canada posted healthy gains of 5.5% and 4.3% respectively. The quick recovery of Japanese arrivals after the great Tohoku earthquake in 2011 turned into a more sustained expansion, climbing 17% in 2012.  The number of visitors from Japan is now within sight of levels seen in the mid-2000s. Air carriers have optimistically boosted scheduled seats from Japan, although in our view yen depreciation and higher room rates will act to limit further Japanese market gains.

Non-traditional markets—that is markets other than Japan, Canada and the US—continue to flourish with greater than 20% arrivals growth in 2012. Notable has been the steadily rising market share of Asia and Oceania. The total number of arrivals from China and Korea grew 40% (an increase of 34,000 and 44,000 visitors respectively). Arrivals from Australia increased by over 30%, an additional 64,000 visitors. And these visitors are big spenders: expenditures by visitors from non-traditional markets grew an astounding 50% last year….

Based on planned air capacity and other early indications, we expect another impressive year for Hawaii tourism in 2013, if off last year’s blistering pace. But we are now entering the final phase of what has been an exceptional period of recovery and expansion.  With occupancy rates averaging near 85% on Oahu in 2012, industry capacity constraints will begin to bite over the next few years. Room rates and other costs will rise, deterring some potential visitors, and growth in new markets will crowd out visitors from others.  After 6.5% expansion in arrivals in 2013, we expect a tapering of growth to 2.1% in 2014 and 1.5% in 2015….

Private building permits were up a robust 42%, but more than one-half of this surge was still driven by additions and alterations, which in turn owe a significant fraction of their strength to photovoltaic system installation. Residential building permits grew by more than 20%, and commercial and industrial permits declined by 5%….

Of course the other factor that will drive construction on Oahu is Honolulu Rail Transit. The project has been on hold….

Before we turn to aggregate  measures of Hawaii activity, some consideration of state finances is in order. The State Council on Revenues expects General Fund tax revenues to grow by 5.1% in fiscal year 2013, and by 6.8% in fiscal 2014. Pointing to recent positive budget balances in his state of the state address, Governor Abercrombie proposed new discretionary spending, including a modernization of the state’s technology infrastructure, creation of a preschool program, and increased funding for senior care programs. He also proposed to start funding the state’s unfunded pension and health care liabilities, requesting an allocation of $100 million in 2014 and $105.5 million in 2015 for this purpose. The Governor also floated the idea of raising additional revenue from a further increase in the transient accommodation tax from 9.25% to 11.25% sometime in the second half of the decade. These tax and spending measures, along with possible modifications of the state’s tax credits for photovoltaic installations, will be key areas of debate during the current legislative session….

Growth will ease somewhat over the next two years, as a tapering off of visitor industry gains offsets expansion in construction and continued recovery in public sector employment…..

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