The pace of economic growth in the state's four counties will continue to moderate this year and next as the impact of tight labor markets, rising inflation and slowing visitor arrivals continue to mount, according to the latest forecast from the University of Hawai'i Economic Research Organization.

"Economic conditions were buoyant in each of Hawai'i's four counties in 2005, but with some evidence that tight labor markets are beginning to act as a brake," according to the report.

While growth is expected to slow, the UH economists are not forecasting an economic contraction.

The healthy economy has been a boon to job seekers, with qualified applicants being snapped up at various job fairs held statewide in the past year. However, labor shortages are a growing problem for many companies already grappling with higher labor and energy costs, said Carl Bonham, UHERO executive director.

"There's low unemployment. That makes it difficult to find workers," he said. "The effect is an excess demand for workers.

"Employers can't find the employees they need when the unemployment rate is at 2 percent. That tends to drive up labor costs."

Still, there are some signs the labor market is beginning to cool on Maui and Kauai, the report said. "We expect slowing on all islands over the next several years," the report added.

The construction sector is forecast to lead job growth this year and next on the Neighbor Islands, and this year on O'ahu, according to the report. Other sectors with healthy job creation this year will be transportation and utilities, trade and other services, according to the forecast.

The forecast calls for significant declines in agriculture jobs on all islands, with the biggest drop occurring on O'ahu, as Del Monte continues to phase out its operations. Government jobs will be about flat on O'ahu and Kaua'i, with modest gains on Maui and the Big Island.

Inflation-adjusted personal income in Honolulu also is expected to slow to 1.9 percent growth in 2007 from 2.8 percent growth this year. The Neighbor Islands should experience slightly faster growth in real income, according to UHERO.

The biggest risk to continued growth is a potential slowdown in the U.S. economy and in Hawai'i tourism. The Federal Reserve continues to raise short-term interest rates amid rising concerns about inflation.

High interest rates could weaken the national economy, which in turn could cut into visitor arrivals, according to the report.

Reach Sean Hao at shao@honoluluadvertiser.com.