Getting back to business
By John Duchemin
Advertiser Staff Writer
Glen Kaneshige feels guilty.
It's only six months since Sept. 11 knocked Hawai'i's economy into what seemed like a deep, dark hole.
Deborah Booker • The Honolulu Advertiser
No industry was harder hit than tourism, and no state's economy was more susceptible than Hawai'i's. But just a half-year later there are surprising signs of resiliency. Still, no one is willing to declare the crisis over.
Normal people's lives were rocked as companies in all sectors, responding to the horror of terrorism and the fear of a drastic reduction in visitors, slashed jobs and cut hours. Shoppers stopped spending money, tourists postponed vacations, some companies closed, and the unemployed lined up by the dozens for each new job vacancy.
As economists whispered "recession," thousands of Hawai'i residents went on welfare — and thousands are still there, claiming unemployment checks every week.
Kaneshige's company, Nordic Construction, isn't supposed to be doing well, is it?
"The weird part is, we're actually kind of busy," said Kaneshige, president of the Central O'ahu-based construction company. "I feel bad saying that. There's lots of new projects coming up in the private sector. Compared to what the tourist-based industries, retailers, restaurant guys, have been going through, we've been doing OK. That's kind of strange, doing well and knowing other people are hurting."
Kaneshige's company is not the only one in that position as the worst economic side effects of the worst shock in recent history appear to be over.
At the end of the first half-year since Sept. 11, many of the major economic indicators have turned upward. An unexpectedly vibrant America is producing a surprisingly large volume of visitors, which may help Hawai'i get out of its economic slump faster than many forecasters had predicted. Sustained low interest rates — another surprise — have fueled home-buying and helped stimulate some construction.
General attitudes toward the economy have improved to the point that the hotel workers' union, which in September was battling just to help preserve jobs for members, is now saying hotels may be trying to skimp on rehiring laid-off workers.
"In our observation, there has been a return to work for many people, but in our belief, hotels aren't bringing people back quickly enough, and that needs to be fixed," said Eric Gill, secretary and treasurer of Hotel Employees and Restaurant Employees Local 5.
The quick rise from the depths — if it continues — could have widespread positive effects. For example, the state government estimated that it is facing a $300 million shortfall in tax collections, according to an official forecast made last fall. But revenues were high enough late last year that several economists on the state's Council on Revenues say the shortfall may be less than expected — meaning the government's belt-tightening efforts, including proposed cuts to the state's beleaguered public schools and university system, may not need to be as severe.
Still, the outlook continues to hold plenty of danger. Economist Byron Gangnes points out that important pockets of the economy are still doing badly, such as shops and hotels depending on the high-spending Japanese visitors who have not returned to Hawai'i at previous levels. While the U.S. economy rebounded faster than expected, Japan is moving slower than anticipated.
And internally, Hawai'i still faces some sticky problems. About twice as many people as normal are still collecting unemployment checks. Recent business confidence surveys show that many think the economy is still stuck near the bottom — an attitude that could bode ill for future capital investment. A Bank of Hawaii survey in January found that 52 percent of businesses think the state economy will do worse this year.
"The biggest issue in the economy is when will people in the hospitality, retail and entertainment sectors start to reinvest, to put new capital into the market," said Denny Watts, chief executive of Dick Pacific, a Honolulu construction company. "Until they see the numbers come back up, they may not do that."
Cautious optimism
While the outlook isn't as grim as immediately after Sept. 11 — when some were predicting thousands more hotel job losses than actually happened, and others warned of a permanent decline of the tourism industry — it's still not out of the woods.
Matt Delaney, chief executive of Marc Resorts in Hawai'i, shared the sentiments of many: He's happy for the progress, but still worried about the future.
"In all aspects for the first quarter, we've exceeded our expectations, which is great," said Delaney, whose chain operates 17 hotels and employs 900 workers in Hawai'i. "But we're really hesitant and concerned about what we see coming in April, May and June."
Since tourism remains by far the most important driver on Hawai'i's economy — pouring $10 billion into the Islands each year and accounting for about a third of all jobs — the state's recovery largely depends on the well-being of Marc and other hotel chains.
So far, visitor levels are healthy enough that the state is preparing to revise its official forecast upward for the year, said Eugene Tian, an economic researcher at the Department of Business, Economic Development and Tourism. DBEDT now thinks the visitor count will rise 3.5 percent from last year's depressed levels, compared to its earlier forecast of 3 percent, Tian said.
Fueling this is a resurgence of Mainland tourism, particularly from the West Coast, where the number of visitors in recent weeks has climbed above or been even with 2001 levels. In February, buoyed by the Pro Bowl, Hawai'i drew 2.8 percent more Mainland visitors than the same month in 2001 — the first such increase since mid-2001.
Lingering pessimism
While not necessarily spending more, Mainland visitors are filling Hawai'i hotel rooms. Seven out of every 10 rooms were occupied in the week ended March 2 — down 4.1 percent from the previous year, the narrowest gap since Sept. 11, according to the latest data by Honolulu-based hotel consulting firm Hospitality Advisors LLC.
But the improvements mask several areas of concern. The rise in Mainland visitors has not been matched by a corresponding increase in Japanese visitors, whose numbers remain greatly reduced.
A deepening recession — gross domestic product dropped for the third straight quarter in fourth-quarter 2001, the Japanese government reported last week — and a weaker yen, which reduces visitors' purchasing power, bode ill for Hawai'i in the short term, said economist Gangnes.
"The U.S. may be ahead of what we expected, but Japan is a little weaker — and those two things net out, so really we're pretty close to what we expected," said Gangnes, , who is an economics professor at the University of Hawai'i at Manoa. He and his colleague Carl Bonham predicted a state recession lasting from October through this month.
Also alarming is an exceptionally uncertain outlook for the spring. The rebound of Mainland visitors has been led by bargain-hunters — impulse travelers who have booked trips on short notice, often taking advantage of reduced air fares, tour rates and other discounts. While such discounts have invoked a surprisingly strong response, Marc's Delaney said, they haven't done much for hotel revenues. Luxury hotels have been hit hardest.
That shortened "booking window" — the time between a visitor booking a room and coming to stay — means hotels have little idea what will happen in the spring months, which are usually slow anyway, Delaney said.
"The forecasts just aren't there."
Shifting priorities at Defense
Also sending mixed signals is the U.S. Department of Defense, another important source of economic activity here.
An increased defense budget has already led to some promising talks between military branches and local firms, from high-tech research firms to construction companies. Some continuing projects — including the local phase of a $6.8 billion nationwide military Intranet upgrade, led by contracting firm EDS — are also employing hundreds of civilian workers.
But the Bush administration, in putting new priorities on defense technology and weapons, wants to cut military construction. The president's proposed fiscal 2003 budget slashes the Hawai'i military construction budget from about $380 million this fiscal year to $200 million next year.
This worries local construction companies, many of whom rely on military contracts for much of their business.
"When the federal government says they'll cut their construction in half, that could have huge short-term effects, not only on ourselves, but on the peripheral industries," said Bruce Coppa, executive director of Pacific Resource Partnership, a joint organization of Hawai'i unions and contractors.
In the long run, Coppa and others say, military spending in Hawai'i will still lead to more work for local companies, even if Bush's proposed "milcon" cuts get by Hawai'i Democrats Sen. Daniel Inouye and Rep. Neil Abercrombie, both on key defense committees in Congress.
Watts, chief executive of construction firm Dick Pacific, said military construction will fuel a 15 percent increase — about $60 million — in his company's revenues in 2003. Dick Pacific is landing defense jobs not only in Hawai'i, but in U.S. bases and embassies around the Pacific, and the increased activity could mean 15 to 20 new jobs at Dick's downtown Honolulu headquarters, Watts said.
Jobs outlook improving
In most cases, Hawai'i's job count is still down. In January, companies were supporting about 4,000 fewer jobs than last year — a 0.8 percent drop. In the last week of February, more than 15,000 people were claiming unemployment benefits, up from about 9,000 in late February 2001, according to the state Department of Labor and Industrial Relations.
The job outlook appears to be slowly improving — in mid-December, almost 20,000 people were getting unemployment checks. UH's Gangnes and Bonham said the post-Sept. 11 job losses, though severe, haven't been as bad as they expected last fall.
Gangnes and Bonham in November forecast a 16 percent drop in hotel jobs, and severe losses in other sectors. They made that prediction several weeks after the bankruptcy of American Classic Voyages, layoffs at Aloha Airlines and Hawaiian Airlines, and cuts at hotels and Waikiki retail outlets left thousands of people without work.
Aside from that first wave, hotels and retailers have proven surprisingly adept at keeping people employed, Gangnes said. In December, hotels employed 36,900 workers — down about 2,400 from December 2000, but far better than the UH forecast of a 6,400 job drop.
"Based on the way hotels behaved in the past, we predicted huge job losses, but this time they acted differently," Gangnes said. "It appears hotels have been cutting hours for lots of employees rather than outright cutting jobs."
New forecast coming
Recently, hotel workers' hours have risen, Local 5's Gill said. He bases that on union dues collections, taken from workers' paychecks, which were up significantly in February and March after being 25 percent to 30 percent below normal in the fall.
Unemployed hotel workers are now having some success at finding jobs, Gill said. At its peak, the union was helping manage medical benefits for 1,000 laid-off workers compared with about 500 now.
These bits of hope may figure into the debate over the state's budget, which has widespread economic implications as legislators discuss proposed cuts.
The Council on Revenues, which meets Thursday, will plug the latest data into its revenue forecasting model. Several council members said they won't be surprised if state tax revenues are higher than previously expected.
"I don't think everything's telling us our forecast was low. But if we're looking at better-than-expected numbers this year, one could make the assumption that we'll come out with higher numbers," said Michael Sklarz, council chairman. "Probably the most hopeful thing is how well tourism has recovered; that could translate into higher revenues."
Reach John Duchemin at jduchemin@honoluluadvertiser.com or 525-8062.
