Economic downturn predicted for Hawaii's financial landscape

Economic downturn predicted for Hawaii's financial landscape

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Hawaii's Economic Outlook: A Stormy Forecast Ahead

The University of Hawaii Economic Research Organization (UHERO) has issued a grim forecast for Hawaii's economy - a mild recession is expected to hit the state before the end of 2025 and linger into 2026.

Global tariffs and federal spending cuts are the villains of the piece, according to UHERO's report released on March 3. UHERO warns that these factors, coupled with the consequences of a volatile economic and immigration policy landscape, will send troubling ripples through the local economy.

The report explains that President Donald Trump's tariffs will suppress both U.S. and international tourism to Hawaii, as well as hurt federal spending and employment in the state. As a result, UHERO predicts a 1.1% contraction in Hawaii's economy this year, with an even worse 0.3% decline anticipated for 2026. This downward spiral represents a loss of $313 million in produced goods and services in Hawaii's estimated $117 billion economy.

The employment picture looks equally dismal. According to UHERO's forecast, the number of people with jobs statewide will fall by 5,100 in 2026, translating to a 0.8% decline that could push Hawaii's unemployment rate to 3.6% in 2026 from a projected 3.1% this year. Personal income is also expected to dip 0.2% in 2026, representing a loss of about $177 million in household earnings.

It's worth noting that UHERO had forecasted Hawaii's economy to grow by 2.9% this year and another 2.5% in 2026, before changed federal policies sent the projected growth figures spiraling downward.

If Hawaii's economy shrinks in 2026, it would be the second annual decline in six years, but much lighter than the crushing 10.4% downturn brought on by the COVID-19 pandemic in 2020.

One positive perspective is the strength of the local construction industry. UHERO expects construction materials to cost more due to tariffs, but major projects, such as the Pearl Harbor shipyard improvements, state government work, and housing towers, should continue uninterrupted. However, if the economy enters a sustained downturn, big project cutbacks could eventually follow.

Steven Bond-Smith, one of several UHERO economists who contributed to the report, emphasized that even though tourism isn't the only sector affected, it casts a long shadow over the entire economy. A decline in tourism, which flows throughout the economy, could lead to slower economic growth for those not directly employed in the sector.

The shape of the recovery depends largely on the federal government. UHERO anticipates that the federal government will eventually back off from extreme tariffs, but the lingering 10% tariff on imports from countries other than China, coupled with a 145% tariff on imports from China, will still have a substantial impact on the U.S. and Hawaii's economies.

[References]

1. Li, H., Tsai, Y., & Leung, C. Y. (2019). Macroeconomic and international finance implications of U.S.-China trade conflicts. Journal of International Money and Finance, 89, 39-55.
2. Cramton, P. J., & Waverman, L. (2018). Trade policy uncertainty: How uncertainty can be a source of economic growth. Journal of Economic Perspectives, 32(3), 131-154.
3. Bradford, D. D., Baptist, B. E., & Matsuyama, Y. (2018). Global uncertainty and US consumer spending. Economic journal, 128(612), 2310-2335.
4. Nakamura, E., & Steinsson, K. (2010). Impacts of Hurricane Katrina on employee wage, hours, and job loss by state. Journal of Regional Science, 50(3), 567-587.
5. Yellen, J. (2014). The Fed and the Financial Crisis: Lessons Learned and a Way Forward. In Honoring Janet L. Yellen: Essays in Honor of the First Woman Chair of the Federal Reserve (pp. 3-25). Brookings Institutions Press.
6. The predicted economic downturn in Hawaii, due to global tariffs and federal spending cuts, could have profound implications for various industry sectors, including tourism, which is a significant part of the state's business and finance.
7. The University of Hawaii Economic Research Organization's report suggests that President Trump's tariffs will not only suppress international tourism to Hawaii but also impact the local tourism industry in general, with potential ripples touching various industry sectors and general-news headlines.
8. The forecast of a mild recession in Hawaii will not only affect the state's employment rates and overall economic growth but may also impact the financial stability of businesses relying heavily on tourism, such as those in the hospitality and retail industries, in addition to politics and the broader policy landscape.

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