Hawai‘i Outlook: Fallout from Sept. 11 and Recovery Prospects

Presentation for Credit Rating Agencies

Honolulu Convention CenterWednesday, January 23, 2002

Rating Agencies, January 23, 2002 http://www2.hawaii.edu/~UHERO

Terror and Recovery

• September 11 caused wide-spread damage to an already-slowing global economy

• Hawaii effects large because of reliance on air travel and tourism

• Relative strength prior to attacks provides support• Many unknowns make forecasting difficult• I’ll talk about a preliminary UHERO assessment

and forecasts for the next two years• These results are in part excerpted from a

November report to DBEDT.

Rating Agencies, January 23, 2002 http://www2.hawaii.edu/~UHERO

U.S. Cooling Before 9-11

200120001999

10

8

6

4

2

0

-2

Percent

US Real GDP Growth

Rating Agencies, January 23, 2002 http://www2.hawaii.edu/~UHERO

Japan Was Falling Fast

NOVSEPJULMAYMARJANNOVSEPJULMAYMARJAN20012000

110

105

100

95

90

Industrial Production

Rating Agencies, January 23, 2002 http://www2.hawaii.edu/~UHERO

and Japanese Unemployment was at post-war record levels

NOVSEPJULMAYMARJAN2001

5.60

5.40

5.20

5.00

4.80

4.60

Percent

Unemployment Rate

Rating Agencies, January 23, 2002 http://www2.hawaii.edu/~UHERO

But Hawaii Was in Pretty Good Shape

2001199919971995199319911989

6

4

2

0

-2

-4

Percent

Real Income Real Gross State Product

2001 figures are pre-9/11 forecasts

Rating Agencies, January 23, 2002 http://www2.hawaii.edu/~UHERO

Then the World Changed

13 6302316 9 2251811 4282114 7302316 9JANDECNOVOCTSEP

40

20

0

-20

-40

-60

-80

-100

-120

Percent

Domestic Flights International Flights

Rating Agencies, January 23, 2002 http://www2.hawaii.edu/~UHERO

Outlook Worsened Across the Board

• US Enters Recession* Disruptions pushed economy over edge to recession* Consumer confidence takes a hit, but spending holds up* Quick Fed and some Federal gov’t action

• Japan’s prospects turn even worse* Hoped-for export-led recovery down the tubes* Government unable or unwilling to do much

• Hawaii tourism hammered* Passenger counts, ocup. rates fell well below 2000* Spillovers to broader economy limited

Rating Agencies, January 23, 2002 http://www2.hawaii.edu/~UHERO

Hawaii Jobs Destroyed Fast

Initial Unemployment Claims attributableto Sept. 11 Attacks,Weeks ending Sept 22 through Oct. 16Hotels and related enterprises 5,359

Transportation 1,431

Eating and DrinkingEstablishments

945

Other Retail 1,340

Other 2,308

Total 11,383Source: UHERO estimates from DBEDT data.

Rating Agencies, January 23, 2002 http://www2.hawaii.edu/~UHERO

Job Market Situation At Year End

Jan-SepAverage

Oct-DecAverage

Total Non-Ag. Jobs 1.7% -1.5%

Trade 2.2 -2.7

Services 2.5 -2.3

Construction 0.5 -0.3 Finance, Insur, Real Estate

0.7 -0.1

Percent Change in Jobs over 2000

Rating Agencies, January 23, 2002 http://www2.hawaii.edu/~UHERO

• Prospects for US, Japanese recoveries will play

key role* Econometric modeling captures HI response to external

developments

• But worst risks aren’t economic * Prospects for War on Terrorism* Evolving attitudes toward vacations and air travel

• Policy uncertainties* How much more from Feds?* Chances of significant State Legislative action

• Spillovers and unrelated bad luck* Dengue fever scare over?

Assessing the Forecasting Environment

Rating Agencies, January 23, 2002 http://www2.hawaii.edu/~UHERO

Macro Effects Explain Only Part of Visitor Decline

Rating Agencies, January 23, 2002 http://www2.hawaii.edu/~UHERO

The Gulf War As Guide?

91: 791: 190: 790: 1

30.0

20.0

10.0

0.0

-10.0

-20.0

-30.0

-40.0

Iraq Invades Kuait Aug 2, 1990

Gulf War

Eastbound Westbound Total

Rating Agencies, January 23, 2002 http://www2.hawaii.edu/~UHERO

External Assumptions

• US economy will resume growth this quarter* Accelerates toward 3+% rates by year end as monetary

(and some fiscal) stimulus kick in* Interest rate environment will continue to support

spending• Japan growth will not resume until late in the year

* Will not touch 2% growth until 2003* Yen will remain about 120 for next several years

• Further improvement in security environment supports continued tourism recovery

Rating Agencies, January 23, 2002 http://www2.hawaii.edu/~UHERO

UHERO Forecast Highlights

• Visitor arrivals fell 8-9% last year* Japan travel weakness means only 2% growth in 2002* Mainland drives 7.4% growth in 2003

• Job losses for state will top 14,000* More than 6,000 in hotels* Only slow job recovery

• Unemployment will rise to 5.6%• Hawaii has entered a moderate recession

* Real income will fall 1.5% before beginning recovery next year

Rating Agencies, January 23, 2002 http://www2.hawaii.edu/~UHERO

Westbound Arrival Recovery Continues

20032002200120001999

1250

1200

1150

1100

1050

1000

15

10

5

0

-5

-10

-15

000's Percent

Westbound Arrivals Growth Rate

Rating Agencies, January 23, 2002 http://www2.hawaii.edu/~UHERO

Eastbound Visitors Will Take Much Longer

20032002200120001999

650

600

550

500

450

400

350

300

60

40

20

0

-20

-40

-60

000's Percent

Eastbound Arrivals Growth Rate

Rating Agencies, January 23, 2002 http://www2.hawaii.edu/~UHERO

Tourism Job Losses Will Persist

20032002200120001999

40

38

36

34

32

15

10

5

0

-5

-10

-15

-20

000's Percent

Hotel Employment Growth Rate

Rating Agencies, January 23, 2002 http://www2.hawaii.edu/~UHERO

Overall Job Losses Will Be Less Severe

20032002200120001999

590

580

570

560

550

540

530

520

4

3

2

1

0

-1

-2

-3

000's Percent

Pre911 BaseBase Growth Rate

Rating Agencies, January 23, 2002 http://www2.hawaii.edu/~UHERO

A Moderate Recession in Real Income

20032002200120001999

36500

36000

35500

35000

34500

34000

33500

33000

5

4

3

2

1

0

-1

-2

Mil $ Percent

Real Personal Income Growth Rate

Rating Agencies, January 23, 2002 http://www2.hawaii.edu/~UHERO

Unemployment Rate will Rise

20032002200120001999

6.5

6.0

5.5

5.0

4.5

4.0

3.5

Percent

Unemployment Rate

Rating Agencies, January 23, 2002 http://www2.hawaii.edu/~UHERO

Inflation Will Cool

20032002200120001999

2.0

1.5

1.0

0.5

0.0

Percent

Inflation Rate

Rating Agencies, January 23, 2002 http://www2.hawaii.edu/~UHERO

Risks and Mitigating Factors

• Risks of Further Fallout* Bankruptcy risks for Japanese-dependent retail firms* Slower pickup in global economy

• Factors supporting growth* Federal and state tax cuts * Income creation from home refinancing and sales * Renovation tax incentives

Rating Agencies, January 23, 2002 http://www2.hawaii.edu/~UHERO

The Numbers

2000 2001 2002 2003 Real Personal Income (%) 2.3 1.5 0.8 3.5 Non Agriculture Jobs (%) 3.1 0.7 -0.9 1.8 Unemployment Rate (%) 4.3 4.6 5.5 5.4 Inflation Rate, Honolulu (%) 1.8 1.5 0.9 1.5 TOURISM DETAILS (000's) Total Visitors 6976.0 6435.3 6562.1 7046.3 % Change 3.5 -7.8 2.0 7.4 Eastbound Visitors 2345.8 1993.0 1997.2 2230.1 % Change 1.5 -15.0 0.2 11.7 Westbound Visitors 4630.7 4452.2 4564.9 4816.1 % Change 4.5 -3.9 2.5 5.5

Rating Agencies, January 23, 2002 http://www2.hawaii.edu/~UHERO

Rating Agencies, January 23, 2002 http://www2.hawaii.edu/~UHERO

High-Low Scenarios

20032002200120001999

1250

1200

1150

1100

1050

1000

950

HawaiiWestbound Visitors (000s)

Base High Low

20032002200120001999

650

600

550

500

450

400

350

300

250

HawaiiEastbound Visitors (000s)

Base High Low

Rating Agencies, January 23, 2002 http://www2.hawaii.edu/~UHERO

High-Low Scenarios

20032002200120001999

6.5

6.0

5.5

5.0

4.5

4.0

HawaiiUnemployment Rate (%)

Base High Low

Rating Agencies, January 23, 2002 http://www2.hawaii.edu/~UHERO

High-Low Scenarios

20032002200120001999

37000

36000

35000

34000

33000

HawaiiReal Personal Income (Mil $)

Base High Low