Hawai'i's economy will hit a soft patch this year on a slight dip in visitor arrivals, according to a University of Hawai'i economic forecast released today.

That should be followed by a return to moderate growth next year as visitor arrivals rebound slightly, said the University of Hawai'i Economic Research Organization. The forecast is generally in line with expectations of other local economists, who generally predict slowing economic growth but no recession for the state.

The cooling comes as both the construction and tourism sectors plateau after an exceptional run-up during the past several years.

"We're looking at a pause, plateau or soft spot, then more growth in '08 and '09," said Carl Bonham, an economist at UH-Manoa.

Despite slowing, or even stagnating economic conditions, Hawai'i is still expected to face tight labor markets and relatively strong job growth, Bonham said.

However, a slowing of Hawai'i's $12 billion tourism industry puts the overall economy at greater risk of a recession should there be an unforeseen shock to the state's economy.

"There's an increased risk, certainly," Bonham said. "It doesn't take much to push things over the edge. But we're not forecasting any kind of turn to the negative."

So far the visitor industry has gotten off to a poor start, while the outlook for the rest of the year is tempered by weak conditions in the U.S. economy, according to UHERO. Visitor arrivals, which were previously expected to rise 0.8 percent this year, now are projected to fall 0.2 percent followed by 1.6 percent growth in 2008-09. Visitor days, which take into account length of stay, are expected to decline by 0.5 percent this year before strengthening to a bit more than 2 percent growth in 2008-09.

In addition to visitor arrivals, a key concern going forward will be whether Hawai'i's high inflation rate will continue to rise or begin to settle down. The purchasing power of Honolulu residents took a major hit last year as the inflation rate jumped to 5.9 percent, the highest rate in 15 years. UHERO is forecasting a 4.8 percent rise in inflation this year, followed by a further 3.8 percent rise in 2008.

Overall economic performance among Hawai'i's four counties should be comparable, with the pace of slowing varying depending on the relative stage in the construction cycle, health of each county's tourism market and other factors, according to UHERO's annual county forecast, which also was released today.

"The overall outlook for Hawai'i's county economies is for continued slowing along a path that has been evident since at least the middle of 2005," according the the report.

Kaua'i and Hawai'i counties will see the strongest visitor growth this year, but off a bit from last year's strong performance. Cyclical slowing in construction will occur on all islands, but not at a uniform pace, UHERO said.

On O'ahu and the Big Island, the construction job base will slow significantly this year and become slightly negative in 2008.

On Maui, strong 2006 permitting activity suggests expansion will continue longer.

On Kaua'i, moderate job gains are expected to continue through 2009, based both on strong recent permitting activity and the significant number of visitor industry construction projects in the pipeline, according to UHERO.

Reach Sean Hao at shao@honoluluadvertiser.com.