Posted on: Sunday, December 28, 2003

Real-life economics

By Deborah Adamson and David Butts
Advertiser Staff Writers

Radley Sheldon, 22, left his job six months ago as a driver to become a carpenter apprentice and immediately almost doubled his $7 hourly pay. As the building boom continues, he expects to have job security for years to come.	Bu and Lilly Chen, 80 and 76, have seen the value of their condominium soar. Rising property values and a recovering stock market have lifted their net worth — helpful, because they're on a fixed income.	Marvin Chang, 50, believes business at his travel agency will pick up substantially next year as the effects of SARS and the Iraq war ebb. The president of Dragon Tours & Travel said inquiries for travel in 2004 are up 300 percent thus far.

Ask any kama'aina and many will tell you that last year was a hard scrabble. The Iraq war and onset of SARS sent tourism into a tailspin. The impact was devastating, the ripple effect widespread.

What a difference a year makes.

These days, the state is in a sweeter spot — its economic engine is chugging along faster than the United States as a whole.

In 2003, state job growth sizzled, personal incomes rose and tourism stabilized. Low interest rates boosted home sales and prices, making many Hawai'i residents house rich after a decade of slumping values. Construction was the star of the show and should continue to spur the economy for the next decade, thanks to more than $2 billion in military housing commitments.

It's workers like 22-year-old Sheldon who are living Hawai'i's reversal of fortunes.

Six months ago, Radley Sheldon quit his job as a driver to become a carpenter apprentice. The Sunset Beach resident switched careers because he stands to make at least five times more money than his previous job once he becomes a journeyman. It will take roughly four years, but he is banking on the construction boom providing him job security for many years.

"The money's really good," said Sheldon. On becoming a journeyman, he could earn $30 to $40 an hour.

Outlook: euphoric

Sheldon's confidence in the construction business today speaks volumes about the industry, which slumped in the 1990s after the Japanese building boom ended and deflated interest in the trade as a whole.

Next year, economists see a continuation of the rolling good times.

Hawai'i is expected to again outperform the country in several key indicators: job gains, personal income growth and the unemployment rate. While the risks to the Islands' economy remain the same — another terror attack, the specter of higher long-term interest rates and growing competition in tourism — the forecast remains sunny.

"Hawai'i rules right now," said Paul Brewbaker, Bank of Hawaii chief economist.

The story of Hawai'i's economic rebound and prospects is perhaps best told through the lifting fortunes of Sheldon and others spanning three generations.

Like Sheldon, Marvin Chang expects better days ahead. As tourism stages a steady recovery, the 50-year-old president of Dragon Tours & Travel in Honolulu catering to Asian tourists has seen a 300 percent increase in inquiries for travel in 2004.

"Last year was bad, very bad. This year, it's better. Next year will be much better," he said.

The shadows of SARS and Iraq are receding, Chang said, and Asian nations are more prepared to cope with a recurrence. The United States appears to have gained better military control of Iraq, he said.

Chang is seeing the rebound most visibly among tourists from Taiwan, Indonesia, Malaysia and the Philippines who are returning in growing numbers.

Still, the sluggish Japanese market remains a nettlesome worry for many in Hawai'i's largest industry. The loss of high-spending tourists from Japan continues to weigh down tourism even with the robust Mainland trade. The question for many in the industry is: when will the Japanese arrivals rebound?

Signs point skyward

Next year, economists from the Bank of Hawaii, University of Hawai'i Economic Research Organization, First Hawaiian Bank and the state Department of Business, Economic Development and Tourism expect total visitor arrivals to rise anywhere from 3 percent to 8.7 percent.

Japanese tourists should come back in ever growing numbers and Mainland visitor figures will remain strong, especially for the Neighbor Islands, economists said.

"The big story is the expected recovery on the Japanese side, even though it doesn't bring us back to levels in 2000," said Byron Gangnes, an economist with the university's research organization.

Gangnes is forecasting a 24 percent increase in Japanese arrivals for next year, a sharp improvement over the 13.5 percent decline for 2003. The double-digit increase for 2004 is enhanced because it's coming off a low base. Nonetheless, the signs are clearly positive.

For many in the tourism industry who last year saw their jobs cut or their hours trimmed, the news is more than welcome.

Hawai'i should see job growth ranging from 1.8 to 2 percent, according to the economists' forecasts. Contrast that to the national growth forecast of 1 percent, according to economists surveyed by the Philadelphia Federal Reserve.

Leroy Laney, a Hawai'i Pacific University economist and consultant for First Hawaiian Bank, said interest rate-related industries should continue to provide better job opportunities. They include construction, mortgage lending, real estate sales, escrow services and consumer lending.

Growth in the state's personal income, after adjusting for inflation, is expected to range from 2.7 to 4 percent, local economists said. The UCLA Anderson Forecast projects U.S. real personal income increasing by 2.9 percent in 2004.

Hawai'i also is expected to outpace the rest of the country in its jobless rate. Economists forecast unemployment of between 3.5 to 3.7 percent versus 5.8 percent for the country as whole, according to Blue Chip Economic Indicators.

"We are not used to seeing Hawai'i outperform the U.S. Mainland," said Gangnes and fellow economist Carl Bonham in a recent economic report. "Yet that is precisely the unusual situation we now find ourselves in."

Real estate soars

Retirees Bu and Lilly Chen, 80 and 76, don't benefit directly from any job growth but like many homeowners, they have hit paydirt in real estate. The market value of their condominium in Hawai'i Kai have risen by 40 percent since they bought it in 1986. Next year, they are looking to sell their home at a premium and make plans to move to Kahala Nui, a new senior living community.

Rising home prices as well as the improving stock market has helped their net worth. Both are important because the Chens live on a fixed income.

"My wife and I, we are basically very frugal, and we are mindful of budgeting," Bu Chen said.

The upturn in Hawai'i's real estate market has lagged the Mainland's. While real estate values in the state turned soft throughout most of the '90s as the Japanese bubble burst, the United States began to see a pickup in home prices propelled by low interest rates.

The housing market here only began moving up in recent years when the Mainland's housing gains started to peak.

This time, instead of a market driven by Japanese investors, it's local and Mainland buyers who are fueling Hawai'i's nonspeculative housing boom, making the present demand more stable and sustainable.

Hawai'i at a premium

Statewide, the construction and mortgage industries exploded this year, creating jobs and lowering the unemployment rate. At the same time, low interest rates prompted a refinancing flood that put money in homeowners pockets. Moreover, the continued influx of big-box retailers held down prices for residents whose dollars are going further.

Throw into the mix the steady growth of healthcare and financial services jobs plus increased federal spending in Hawai'i, and one begins to understand the resiliency of the state's economy despite setbacks in tourism since Sept. 11.

But tempering the economic bullishness are several still-bearish fundamentals.

Local companies continue to be acquired by out-of-state firms, mom-and-pop stores close because they can't compete with Mainland chains, kama'aina tired of holding multiple jobs continue to flock to cheaper states like Nevada, and job opportunities for high-paying positions pale in comparison to those of other states. Still, many who left for more lucrative Mainland jobs still pine for the Islands.

Just ask David Gorman, who graduated from Punahou in 1996 and the University of Hawai'i in 2001 with a degree in economics. The 25-year-old now works in New York at Capital IQ, a financial services firm.

In his industry, "a kid coming out of school" gets $60,000 to $65,000 a year with a possible $20,000 to $40,000 year-end bonus in New York, he said. "In Hawai'i, you're looking at $28,000 and a gift certificate from Macy's."

Of course, the cost of living is higher in New York, and many Wall Street jobs leave little room for family life. Working 60 to 70 hours a week is common.

It is not a lifestyle that appeals to Gorman for the long term. He hopes to save enough money in New York to eventually return to Hawai'i and open a restaurant.

The great unknown is whether Hawai'i can sustain its economy at a pace to make it worthwhile for the Gormans of the world to come home.

Reach Deborah Adamson at dadamson@honoluluadvertiser.com or 525-8088, and David Butts at dbutts@honoluluadvertiser.com or 535-2453.