Business optimism is at its lowest point since early 2002.

A Business Banking Council survey of 403 Hawai'i business managers and owners showed optimism has steadily declined since early 2005.

"There certainly is a softening of opinion," said Barbara Ankersmit, president of Qmark Research and Polling, which conducted the survey sponsored by American Savings Bank. "It's clearly inching downward."

The survey's "optimism index" has fallen from a high of 138 in 2005 — when tourism, real estate and construction was booming — to 117 last month.

Despite the drop in optimism, local economists expect Hawai'i's economy will continue to expand over the next few years, though at a slower pace than recent years because of softening job and income growth, the home-building slowdown and near-flat visitor arrivals.

The state Department of Business, Economic Development and Tourism projects that the local economy next year will grow 2.5 percent adjusted for inflation.

Mark Jolly, a 16-year Hawai'i resident who's been a real estate agent for nine years, doesn't foresee anything that will destabilize the local economy. "I think we're going to continue to get better," he said.

BUSINESS COSTS FEARED

The survey showed that companies increasingly fear the general cost of doing business would be the most likely cause for a local economic downturn, with 31 percent of respondents saying so. Another 23 percent believe the price of gasoline will be the most likely cause of a downturn, followed by product costs (9 percent), rising interest rates (6 percent) and business taxes (5 percent).

Only 24 percent of companies surveyed believe the local economy will improve next year — the lowest response since mid-1999 when 20 percent shared the same belief.

Pessimism has steadily risen, with 18 percent predicting worse conditions for the economy next year, up from 17 percent a year earlier and the most since 24 percent in early 2002.

Before you read too much into these numbers, it should be noted that Hawai'i businesses tend to give pessimistic responses.

During the 10-year history of the survey, which is conducted twice a year, only three times out of 20 did optimists outnumber pessimists — once in 2005 and twice in 2004.

In the past, the survey hasn't been a good predictor of economic activity or business prosperity, as most companies believed the economy would remain flat or worsen in years that actually produced robust growth and healthy revenue and profit growth.

The survey randomly interviewed companies from June 5 to 29. The sample was balanced to fairly represent the state's mix of small, medium and large businesses based on their number of employees. The sample size has a margin of error of about 5 percentage points.

Among the 403 firms surveyed were 100 construction companies, a sector that has been responsible for a significant part of Hawai'i's economic expansion in recent years.

CONSTRUCTION THRIVING

As a group, construction companies reported better performance and optimism compared with all businesses.

Some 41 percent of construction firms said revenue increased more than 5 percent, and another 26 percent said revenue growth was about 5 percent.

Only 8 percent reported growth under 5 percent, while 10 percent reported no growth and 11 percent reported lower revenue.

"It's still one industry that's thriving," Ankersmit said.

Karen Nakamura, executive vice president of the Building Industry Association of Hawai'i, said optimism levels among contractors varies depending on the line of work they perform.

For instance, there's less optimism from some residential developers compared with contractors working on commercial or government projects. But overall confidence is strong.

"There's a lot of work here, and companies need to be more targeted in that work," she said.

Local economists predict that the construction industry will peak this year and begin to tail off as reduced residential construction outweighs continued commercial construction growth.

An April report by the University of Hawai'i Economic Research Organization predicts that construction activity, measured in 2005 dollars, will rise this year by 4.4 percent to $6.6 billion, but then decline roughly 3 percent in each of the next two years.

If the UHERO forecast is correct, such a construction sector decline would not stop overall state economic growth.

Reach Andrew Gomes at agomes@honoluluadvertiser.com.