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The Honolulu Advertiser
Posted on: Sunday, January 2, 2005

Economy ends year strong

By Sean Hao
Advertiser Staff Writer

Hawai'i's robust economy was expected to end 2004 with an impressive performance built on continued strength in tourism, construction, real estate and government spending.

Bob Hampton of Waikiki Beach Activities notes that the heavy use of beach umbrellas on the sand outside the Hilton Hawaiian Village is one way of measuring the fact that business has been doing well. Tourism is expected to remain strong through 2005.

Bruce Asato • The Honolulu Advertiser

That's the consensus of several local economists, who say that while the pace of economic growth could ease slightly, the outlook remains favorable even as interest rates rise and inflation heats up.

"I think it's going to be a very good year," said Leroy Laney, Hawai'i Pacific University economics and finance professor. "It looks like the momentum will carry into 2005.

"I don't think anyone here sees any major factor on the horizon that will hurt the cycle, but there are signs that the cycle is aging."

Those signs include inflation, which is expected to rise as much as 4 percent and a statewide unemployment rate that for several months last year was the the nation's lowest. While good for workers, low unemployment can make it difficult for businesses to attract and retain employees.

Still those factors aren't expected to constrain economic growth, and the typical consumer should see their purchasing power increase this year by between 1.9 percent and 2.6 percent, according to economists.

Tourism

Following a decade of sub-par growth during the 1990s, Hawai'i's current period of economic growth now appears to have no end in sight. Much of that optimism hinges on Hawai'i' biggest industry, tourism, which is expected to generate a record number of visitors this year.

Already business is booming for those who cater to the nearly 7 million tourists who visit the state annually.

"We're having absolutely our best year," said Bob Hampton, president of Waikiki Beach Activities Ltd., which has run a concession that serves guests of the Hilton Hawaiian Village for 15 years. That business added two jobs during the last four months and plans to add another worker this year. "It's been a good market for us.

"I think it's going to get better. I can't imagine it getting worse," Hampton said.

Hawai'i's $10 billion tourism industry represents about 22 percent of gross state product, according to the Department of Business, Economic Development and Tourism. Barring unanticipated problems such as the breakout of an Asian illness such as severe acute respiratory syndrome (SARS), airline financial troubles and international terrorism, visitor arrival growth this year is expected to slow to between 3 percent and 5 percent, compared with estimated growth of about 8 percent last year.

Underpinning that strength is a weak dollar — which discourages U.S. travelers from going abroad and makes the United States cheaper for foreigners — and relatively healthy economies in the United States and Japan.

"We will break records next year — the 7 million barrier," Laney said. Hawai'i had a record high 6.95 million visitors in 2000 before the Sept. 11, 2001, terrorist attacks set back the industry.

Housing

Given the strong outlook for the state's economy, residents shouldn't expect Hawai'i's high housing prices to decline, though price appreciation may slow, said local real estate researcher Harvey Shapiro.

O'ahu home prices last month were higher than ever with the median price for an existing single-family home reaching $490,000. Overall, the annual median price for a single-family homes was up nearly $100,000 in the past year.

Interest rates, which are expected to rise this year, shouldn't affect sales to a major extent, Shapiro said.

This year single-family median prices may increase only about 20 percent while sales volume should be in line with strong 2004 levels, Shapiro said.

"We're feeling a bit of this due to the high prices," he said. "Every time it increases that eliminates potential buyers from the market."

Energy prices

During 2004, as with previous years, Hawai'i drivers often paid the highest prices in the nation for gasoline. However, 2005 may finally bring relief from high prices if a controversial price cap law scheduled to take effect in September works as intended.

Hawai'i often has the highest gas prices in the nation because of its geographic isolation, high cost of doing business, lack of wholesale-level competition and relatively small market size. As a result, local gasoline prices tend to remain high for longer periods despite drops in crude oil costs.

For example, during the last month, the nationwide average price for regular gasoline dipped about 16 cents a gallon to $1.78. Meanwhile in Hawai'i the average price for regular fell about 4 cents to $2.40 a gallon, according to AAA travel club.

"You haven't seen that there because of the limited competition," said David Hackett, president for oil industry consultant Stillwater Associates. "It will eventually get there."

In an apparent attempt to force down prices, lawmakers passed a law that would cap wholesale gasoline price starting Sept. 1. However, the state Public Utilities Commission said it may not be ready to implement all aspects of the law by then.

Critics of price caps contend they could drive up prices and disrupt supplies. Similar to high housing costs, higher energy costs filter through the economy by not just affecting the price of gasoline but electricity and the cost of goods shipped into the state.

Consumer shouldn't expect a decline in energy prices this year, Hackett said.

"We expect energy prices in 2005 will be high," he said. "We really don't see a return to cheap energy."

Agriculture

After receiving above-average rainfall for much of 2004, farmers can expect to see a drier winter through March resulting from an El Ni–o weather pattern settling over the state.

That could benefit farmers who can irrigate their own fields, but hurt others such as cattle ranchers who rely on rainfall to keep pastures fertile for feeding. Drier weather would come on the heels of relatively high levels of precipitation in many farming areas this year.

For example, through Dec. 26 Waimea on the Big Island received nearly 73 inches of rain, which was up from an average annual total of 60 inches, according to the Hawai'i Agricultural Statistics Service. Similarly in Wai'anae rainfall totaled 29 inches through Dec. 26, versus an average annual total of 20 inches.

While water is a critical component in farming, high rains weren't always timely and in some instances caused fields to flood. That's what happened to Kurt and Pam Hirabara, owners of Big Island Babies, a two-acre farm in Waimea. Spring flooding caused some crop damage resulting in lower sales than during 2003.

Still, expectations at the seven-year-old farm that grows baby lettuce and gourmet greens are high.

"I think that 2005 hopefully should be better than 2004," said Kurt Hirabara. "The potential is there certainly."

Technology

Hawai'i's fledgling tech industry enters 2005 primed with a recent extension of technology tax credits through 2010 and hopes for a state-backed venture capital fund for businesses in need of money to grow.

In the past three years, high-tech jobs have grown in Hawai'i at a faster pace than in the nation overall, driven in part by some of the nation's most generous tax credits and the state's limited participation in the tech bubble of the late 1990s.

As the nation's high-tech work force shrank by 10.5 percent during the past three years, the number of people employed in technology jobs in Hawai'i rose nearly 7.5 percent to about 15,000 people, according to the Bureau of Labor Statistics.

Locally the sector also is helped by a growing defense sector, which in 2003 represented 9.5 percent of gross state product, versus 9 percent in 2002.

Among Hawai'i's growing crop of technology companies is software developer 21st Century Systems Inc. located in the Manoa Innovation Center. The Washington, D.C.-based company, which said it hasn't claimed state tax credits, opened a design center locally 18 months ago and has contracts with the University of Hawai'i and the Department of Defense.

Heading into 2005 the company, which makes decision support software, plans to boost its workforce by as many as eight workers to a total of 20 employees. So far the company has only recruited locally with the intention of providing opportunities first for local residents.

"Everybody we've hired has been living in Hawai'i," said Bob Fishman, a vice president for 21st Century. "We haven't brought people into Hawai'i and I'm not sure we'll ever have to."

Reach Sean Hao at 525-8093 or shao@honoluluadvertiser.com.

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