Isles brace for slowing economy

By Bob Golfen
Special to The Advertiser

There are some in Hawai'i who call the 1990s the "lost decade."

While the U.S. Mainland enjoyed boom times, with rising stock markets, burgeoning personal wealth and the increasing influence of high technology, Hawai'i sat on the sidelines, its economy reeling after the Japanese economic bubble burst. Residents and businesses struggled with job losses, a high cost of living and minimal economic growth or progress.

But for the past 18 months or so, Hawai'i has felt strong again, fed with a burst of money from tourism and investment from the West Coast, where the newly affluent have looked Westward as the place to travel and build businesses and homes. Economic growth in 2000 was the strongest in years, personal income rose, construction surged, and the booming tourism business set several records.

In the past month, though, the mood has turned more cautious. After weeks of turmoil in the U.S. stock market, the implosion of California's high-tech industry, and more general signs that Japan's recovery is faltering and the Mainland economic expansion is fading, Hawai'i's recent prosperity feels rather precarious.

From Honolulu executive offices to Maui construction sites, there's the queasy feeling that the larger distress in Japan and the Mainland will inevitably make its way to Hawai'i, casting its shadow over everything and returning the state to those tougher times of not so long ago.

"It's kind of like, brace yourself," said Paul Kosasa, president and chief executive of the ABC convenience store chain. "With the east Asian economy and the California economy having a rough time, it seems really logical that Hawai'i will have a rough time."

Despite strong sales so far this year, Carol Ai May, vice president of Hawai'i-based City Mill home improvement stores, said her company also is watching for impending trouble.

"We're concerned even though many people in Hawai'i are very optimistic about the economy," May said. "Given what the stocks have done in the past week, yeah, we're concerned. This will affect tourism, which affects the whole economy."

While first-quarter reports are not in yet, recent indicators suggest a slowdown of some sort is indeed ahead for Hawai'i. Last week, the state Department of Business, Economic Development and Tourism released figures showing that nearly all of Hawai'i's leading economic indicators had fallen off in December, suggesting slower economic growth later this year. The drop was blamed on a decline in consumer confidence, fueled by concerns about growing weakness on the Mainland and in Japan.

"Our leading economic indicators have been going down based largely on the lower prospects of growth in the United States overall," said economic analyst Pearl Imada Iboshi, the department's economics research administrator. "That tells us that the economic growth will slow from what it has been."

But it won't be terrible, Imada Iboshi said. Growth should be in the 3 percent range, maybe not up to the growth of the past 18 months, but not bad. "We don't expect it (growth) to drop dramatically," she said. "We just expect it to grow more slowly than in 2000."

Still, concern is spreading, including in the tourism industry. The stock market's recent drop has wiped out an estimated $5.1 trillion in personal wealth since its peak last year, affecting the consumer confidence and discretionary spending that helps fuel visitor arrivals. The economy continues to stumble in Japan, the second-largest supplier of Hawai'i tourists after the Mainland. And on Friday, a key hotel occupancy survey showed the first monthly decline since January 2000.

"While it is not completely unexpected, with recent talk of the U.S. economic slowdown and the recent drops in the stock market, it does provide a warning of what the future may hold for Hawai'i's hotel industry," said Ernie Watari, PKF-Hawai'i chairman and chief executive.

Economists say much of what happens in the months ahead will center on consumer confidence, that hard-to-measure quality in which people make spending decisions based on events that often have little to do with them personally, or that don't effect them immediately.

Bad economic news from New York, Tokyo or Southern California results in closed wallets in Honolulu as people fear the future impact on their own employment and cost of living. Everyone in Hawai'i may not have money in the stock market, but they feel that hard times spread more quickly and widely than the good ones.

And a lack of consumer confidence causes people to put off buying big-ticket items, such as automobiles or home-improvement projects, or taking expensive vacations. Last week, the annual American Express Retail Index concluded that most consumers "appear cautious" about discretionary spending in 2001. Twenty percent of those surveyed said they would spend less on discretionary items this year.

"It's the self-fulfilling prophecy," Imada Iboshi said. "Everybody is worried, but if they put their money under the pillow, then it (recession) is going to happen."

Henry Wong, chief economist for City Bank, said Hawai'i's tourism industry could suffer in the near term because of the stock market decline and something called the "wealth effect."

"When you feel wealthy, even if it's only on paper, your whole outlook is different," Wong said, noting that those feelings of well being often translate to Hawai'i vacations or investment. "If you lost $100,000 in the stock market, you say, what happened? It affects the decision."

For some businesses, the effects of such decisions are already being felt.

Kailua new car dealer Mike McKenna said his business was robust until recently, when sales unexpectedly fell off.

"I can't tell you what's going on because I can't figure it out," McKenna said. "The stock market (downturn) does concern us."

McKenna said he's also worried because of what he sees going on in California, including the energy crisis. He says he can tell what's coming up in Hawai'i's economy by business trends in dealerships he owns in California. Generally, whatever happens there happens in Hawai'i seven or eight months later.

"Mainland sales are down 20 percent," he said. "That's happened within the past six months."

Still, McKenna said it may be too soon to tell exactly how Hawai'i's economic future will play out. "In my opinion, it's still too early," he said. "In 60 days, we should be able to tell basically what's going to happen. Then if we see a downturn, we'll make some adjustments."