Introduction to Hawaiʻi’s Economic Forecast
The University of Hawaiʻi Economic Research Organization (UHERO) has released its third quarter forecast for 2025, predicting a mild recession in the islands over the next year. This forecast is influenced by the weakening US economy, which poses a significant threat to Hawaiʻi’s economic prospects. The organization notes that the state’s economy remains vulnerable due to various factors, including poor economic prospects, the impact of US trade policy on key international visitor markets, and the uncertainty of tariffs on the US economy.
Current Economic Conditions in Hawaiʻi
Hawaiʻi is currently experiencing a decline in visitor numbers, stalled job growth, and weak housing activity. Inflation is expected to rise over the next year as the effects of tariffs are felt by consumers. One of the few positive notes is that construction remains a major source of strength, supported by large federal contracts and public projects. However, even this sector faces risks, particularly the potential impact of tariffs on the cost of materials.
Construction: The Only Growth Support
Construction is the sole area of resilience in Hawaiʻi’s economy, with ongoing projects such as military construction, the Skyline work, and the redevelopment of Aloha Stadium expected to sustain industry employment near 40,000 jobs through the end of the decade. The rebuilding efforts on Maui will also contribute to the industry’s stability. However, the sector is not without its challenges, primarily the risk posed by tariffs on material costs.
Weakness in the Condo Market
The condo market in Hawaiʻi is experiencing its weakest period since 2010, largely due to high mortgage rates and surging insurance costs. On Maui, the condo market has seen a significant plunge in activity, with the value of resales down nearly 50% compared to mid-2023. This decline is partly attributed to uncertainty over Bill 9, a proposal aimed at phasing out transient vacation rentals in apartment districts, the fate of which remains uncertain.
US and Global Economic Conditions Worsen
Signs of weakness in the US economy are becoming increasingly evident, with consumer spending slowing down and job growth ceasing in most sectors outside of healthcare. The national unemployment rate remains stable primarily due to the loss of foreign-born workers. Globally, Canada has entered a recession due to tariff-induced export plunges, and Japan’s recovery is expected to slow as exports fall and interest rates rise. These global trends pose a significant threat to Hawaiʻi’s economy, particularly its tourism sector.
Impact on Labor Markets
Hawaiʻi’s payroll job growth has stalled since March, leaving employment 15,000 jobs below pre-pandemic levels. Many sectors are now contracting, led by federal job losses and declines in the tourism sector. The drop in federal jobs is expected to deepen, and payrolls are projected to fall through late 2026 before a slow recovery begins. This downturn will have widespread effects on the labor market, with various industries experiencing significant losses.
Tariffs and Their Impact on Hawaiʻi Tourism
The visitor industry in Hawaiʻi has seen deteriorating conditions, with seasonally adjusted arrivals falling 8% between April and July. International markets have been hit the hardest, with Canadian visitor numbers down 9%. This leaves Hawaiʻi heavily dependent on the continental US market, which is vulnerable to a US recession. The loss of high-profile events, such as the Sentry golf tournament in Kapalua, due to factors like water scarcity on Maui, further exacerbates the challenges facing the tourism industry.
Inflation and Its Effects on Households
Honolulu’s inflation rate has receded to 2.3% as of July, but it is expected to rise to about 4% by the end of next year due to the gradual pass-through of tariffs. This increase in inflation will permanently raise typical household costs by roughly $1,400 annually. While state income tax relief and other measures may help support purchasing power, federal cuts to programs like SNAP and Medicaid will remove benefits from tens of thousands of individuals, hitting the lowest-income families the hardest.
UHERO’s Mild Recession Forecast and Growing Downside Risks
UHERO forecasts a mild recession for Hawaiʻi, characterized by periods of contraction in payroll jobs, real GDP, and personal income, alongside higher inflation. A gradual recovery is expected to begin by late next year. However, risks are now more clearly tilted to the downside, with the potential for a US recession, prolonged high tariffs, stricter immigration enforcement, and deep federal spending cuts that could intensify local economic impacts. Even if the recession proves shallow, the consequences of higher prices and tepid growth will continue to impose costs on Hawaiʻi households.
Conclusion
In conclusion, Hawaiʻi’s economic outlook for the next year is marked by significant challenges, including a predicted mild recession, declining visitor numbers, stalled job growth, and rising inflation. The construction sector remains a vital source of strength, but it too faces risks. The impact of tariffs on the tourism industry and the condo market, alongside worsening US and global economic conditions, poses considerable threats to the state’s economy. As such, it is crucial for policymakers and stakeholders to closely monitor these trends and develop strategies to mitigate the effects of the forecasted recession and support the recovery of Hawaiʻi’s economy.
