Hawai’i Economic Trends, January 2008 (PDF)

HAWAII ECONOMIC TRENDS January 30, 2008 prepared by Paul H. Brewbaker, Chief Economist Bank of Hawaii Economic information is available electronically at https://www.boh.com/econ/ Executive Summary January 22, 2007 The year 2007 for the second year in a row proved to be a year of slow growth for Hawaii’s economy, following a sharp deceleration in 2006 from the decade’s strong years, 2004-2005. High inflation eroded nominal income growth. Decelerating employment growth came from lower housing investment and tourism. Slower growth appears broadly across economic indicators, including Hawaii State tax receipts. • Employment remained high in 2007 but payroll employment growth rates slowed by 2 full percentage points during the year, to 0.9 percent November 2007 over one year earlier. Household survey employment data actually at year-end. Numbers of persons employed declined 1 percent in November from one year earlier, down from +2 percent increases a year ago. (Household employment data include measures of self-employment; large-establishment bias may overstate payroll estimates. Employment indicators are lagging, not leading indicators.) Hawaii’s labor market is still tight, but monthly unemployment rates increased by 1 percentage point—from 2 to 3 percent—during 2007, rising at an accelerating pace. This is because labor force growth also slowed, reversing to −0.1 to −0.2 percent in October and November 2007. During the last three years, labor force growth decelerated in the JulyNovember period, on a year-over-year basis, from 2.9 percent in 2005 to 1.5 percent in 2006 and 0.3 percent in 2007. The deceleration was matched by slower population growth—only +0.7 percent in the year ending in July 2007, down from 1.1 percent in the mid-2000s—primarily because of sharply reduced net domestic in-migration to Hawaii. Despite high and rising energy and commodity prices, lower inflation took hold in Hawaii during 2007. Rising from −1.0 percent deflation during the late-1990s stagnation, Honolulu inflation peaked at +5.9 percent in 2006 but dropped to 5.0 percent in first half 2007. Shelter costs, energy, food and medical care costs all contributed to above average inflation, but the housing component now is expected to diminish its injection to Honolulu inflation. Forecast consumer price inflation in Honolulu is expected to mirror slower growth by falling below 4 percent in 2008. This forecast is undermined in the short-term by higher than expected petroleum prices in fourth quarter 2007. The rise above a forecast range of $70-80 per barrel to more than $90 for petroleum may keep second half 2007 Honolulu inflation closer to 5 percent, as in first half 2007, than to the 4 percent forecast for 2008. Nonetheless, the slowing economy, abating workforce pressures, a stabilizing external commodity price constellation and a flattening local environment for home prices and residential rents should settle the rate of increase of the Honolulu CPI-U in convergence with the national norm, down closer to 2 percent by 2010. Tourism declined slightly in 2007 from record arrivals volumes in 2006, but constant-dollar tourism receipts and total visitor days extended their decreases from 2006 for the second year in a row. (At roughly $12 billion, constant-dollar visitor expenditure today is $2 billion lower than two decades ago.) A combination of softening macroeconomic conditions overseas and lift constraints impeded capture of strengthening foreign travel demand boosted by a weak dollar. Rising petroleum prices and pass-through of higher aviation fuel costs, weighed especially on international travel in 2007, and darkens prospects for 2008. Visitor arrivals declined 1.1 percent through November 2007, and visitor days dropped 1.9 percent as rising hotel room rates trimmed length of stay by −0.8 percent for the year through November. Inbound air lift declined accordingly: seats declined 1.8 percent through November 2007. Year-to-date arrivals decreases from California (−2.2 percent), Atlantic (−2.8 percent) and North Central states (−4.5 percent) dampened domestic volumes, while Japanese travel dropped 2.5 percent through November. A weak U.S. dollar boosted Canadian arrivals 2.9 percent through November while European numbers grew 2.7 percent—together these two markets’ annual totals comprise one month’s domestic visitor arrivals. • • 2 Bank of Hawaii Economic Research Center [www.boh.com/econ] (January 30, 2008) • Other changes beneath the surface of the tourism totals continued as in recent years. For the year through November 2007 the number of visitors planning to stay in a hotel declined 3.7 percent, while the number of visitors planning to stay in a timeshare increased 4.7 percent. Conversion of existing hotel inventory to timeshare and other fractional formats has dominated hotel construction in Hawaii, where the accommodation inventory today is essentially equal to that of 1990. Hawaii cruise ship arrivals were up 18.3 percent for the year through November 2007, but this growth is clouded in the forecast impacts of withdrawal of an interisland cruise ship and a recent, unfavorable regulatory interpretation of foreign hulls’ ability to serve the Hawaiian Islands from North America. Construction activity continued to rise in Hawaii through 2007, driven by prior building commitments and the full ramp-up of military housing privatization-related homebuilding. (As the military-related work is non-taxable construction, it shows up in employment data but not in the State’ s contracting receipts tax base.) Building permit authorizations for new private construction adjusted for the increase in construction costs, however, declined slightly through third quarter 2007 after peaking in 2006. Hawaii construction overall has been sustained by relative strength in private nonresidential and federal military housing initiatives. This was forecast to continue for several years, producing a soft landing for the industry with little cyclical subsidence from peak levels in 2007. However, the recent financial market crunch has reduced credit availability for commercial construction projects, putting the construction forecast at greater risk of a liquidity-induced contraction than was forecast before mid-2007. While construction spending and jobs were at all-time highs in 2007, the forecast declines for the next few years could prove steeper than originally anticipated, as adverse balance sheet effects transmit the mainland liquidity crisis through the credit channel to Hawaii’ s relatively strong economy. Sub-prime mortgage exposure in Hawaii is comparatively small. Hawaii’ s mortgage delinquency and default rates remain fractions of national norms, on average and on a cyclically-adjusted basis. Currently, Hawaii has the lowest mortgage delinquency and default frequencies in the U.S. While home sales in Hawaii have been declining since the end of 2004, home values across the Hawaiian islands have remained more stable than mainland counterparts. Hawaii single-family home markets display more vulnerability in a price range of $1-3 million for single-family homes than either below or above that price range, and display more vulnerability in resort markets than in resident markets. Median singlefamily home prices on remain flat on Oahu, and— after some compression during 2006 on Maui and Kauai— have settled to around $625,000 on a seasonally-adjusted basis. Housing production in Hawaii has been in decline since the beginning of 2006. In two previous housing cycles, annual production in Hawaii peaked at 11,165 units in the year ending in fourth quarter 1980, at 10,429 units in the year ending in first quarter 1990, and at 9,802 units in the year ending in first quarter 2006, up from a cyclical low of 3, 331 units in the year ending in third quarter 1983. (A cyclical low of 4,630 units was set in the year ending in third quarter 1984. The all-time production high of around 18,000 housing units permitted was set in 1974 before current regulatory restrictions.) Most recently, statewide homebuilding declined to a four-quarter total of 6,664 units in first quarter 2007, surged with second quarter 2007 building permits to an four-quarter total of 7,605 units by mid-year, and then settled to a four-quarter total of 7,252 units by third quarter 2007. (These comparisons vary slightly from those made with seasonally-adjusted data.) Private new home production is forecast to settle about halfway between peak and trough of the recently concluded cyclical upswing. Military housing replacement initiatives are running at an annual production pace of around 3,000 units (not statistically verifiable as building permits are not required). This is more than enough to compensate for the statewide drop in private housing production for a few years. Since the military housing inventory will not change, its supply impacts are expected to be minimal on the overall Oahu housing inventory, where virtually all the military housing is located. Because Oahu production has declined less than neighbor island homebuilding, some concern about a potential inventory overhang persists on Oahu. However, throughout the islands, multifamily homebuilding— the more affordable alternative— has held up relative to construction of single-family dwellings. • • • • Bank of Hawaii Economic Research Center [www.boh.com/econ] (January 30, 2008) 3 4 Bank of Hawaii Economic Research Center [www.boh.com/econ] (January 30, 2008) Seasonally-adjusted data Hawaii Economic Indicators 2005:1 46.770 5.2 3.2 623.23 605.40 2.8 601.24 784.5 438.9 68.6 259.2 215.6 3,130 1,140 1,990 539.9 232.5 1,857.2 1,341.5 524.4 80.2 172.60 2005:2 47.242 5.2 3.1 628.70 612.14 2.7 606.99 725.7 498.0 80.1 186.9 133.8 3,159 1,161 1,998 570.3 257.3 1,816.8 1,266.2 534.4 80.9 170.59 2005:3 46.945 3.5 4.1 635.37 618.58 2.7 611.87 1,154.8 715.7 335.4 169.9 231.4 3,291 1,189 2,102 611.7 277.8 1,871.2 1,349.5 526.0 81.4 178.57 2005:4 47.449 2.5 4.5 637.75 620.93 2.6 614.12 1,067.2 727.7 68.1 244.3 138.3 3,004 1,117 1,888 630.0 302.2 1,866.9 1,355.8 518.6 81.7 181.03 2006:1 47.291 1.1 5.4 639.66 623.38 2.4 618.00 824.1 491.0 85.8 229.7 285.0 2,987 1,100 1,887 638.7 312.3 1,841.5 1,339.7 511.2 80.3 182.68 2006:2 47.671 0.9 5.8 641.83 625.46 2.6 621.86 859.9 473.8 120.3 294.5 204.8 2,707 1,020 1,687 637.4 302.1 1,866.8 1,343.5 502.7 80.7 185.61 2006:3 47.602 1.4 5.8 644.53 629.64 2.4 624.77 1,060.1 479.8 258.2 374.6 156.3 2,428 980 1,447 627.5 317.4 1,849.9 1,374.1 477.0 79.4 186.07 2006:4 47.709 0.5 5.8 647.83 634.56 2.0 629.18 1,092.1 393.8 364.5 357.1 246.8 2,341 955 1,386 626.1 312.3 1,857.5 1,393.6 474.8 78.6 185.19 2007:1 48.020 0.9 5.2 651.00 635.20 2.4 632.23 802.7 432.0 75.3 267.1 170.6 2,527 1,008 1,519 633.0 323.3 1,822.7 1,366.4 468.4 74.3 188.64 2007:2 48.400 0.9 5.0 653.73 638.20 2.4 634.33 994.5 672.1 149.5 198.1 361.6 2,471 985 1,486 652.7 324.9 1,863.5 1,379.1 460.6 73.4 187.65 2007:3 2007:4 Real personal income Growth rate Honolulu CPI inflation* Civilian Labor Force Civilians Employed Civilian Unemployment rate Total Wage and Salary Jobs Private building permits Residential Commercial and industrial Additions and alterations Government contracts Oahu home sales Single family: Honolulu Condominium: Honolulu SF Median Price: Honolulu Condo Median Price: Honolulu Visitor arrivals Domestic arrivals International arrivals Hotel occupancy Average daily room rate *nonlinear interpolation billion 2006 $ % y-o-y % y-o-y thousands thousands percent thousands million 2007$ million 2007$ million 2007$ million 2007$ million 2007$ units units units thousand $ thousand $ thousand thousand thousand percent 2006$ 648.04 631.30 2.6 636.24 897.2 418.6 125.3 315.4 2,151 877.6 1,272.9 642.7 327.5 1,854.9 1364.8 491.7 77.2 187.33 645.92 627.84 2.9 637.73 vd Sources: Bureau of Economic Analysis, US Department of Commerce; Bureau of Labor Statistics, US Department of Labor; Hawaii Depatment of Labor and Industrial Relations; Hawaii Department of Business and Economic Development; Honolulu Board of Realtors; Hospitality Advisors, LLC; Note: Personal income, inflation and employment data are seasonally-adjusted by source, all others by Bank of Hawaii. Comparative Hawaii economy 2007-2009 forecasts January 22, 2008 Annual percent changes 1 Jobs 2005 2006 2007 2008 2009 2005 Personal Income (real) 2006 2007 2008 CPI Honolulu 2006 2007 2008 2009 2005 2009 BOH 2 3 3.1 2.7 2.5 2.6 1.9 2.1 1.9 2.0 1.3 1.6 1.5 1.0 0.9 2.9 4.6 0.9 1.1 1.8 1.6 1.8 1.0 2.2 1.9 1.8 1.5 2.1 4.0 3.7 4.6 5.1 4.6 5.0 4.5 5.0 3.8 3.8 3.8 4.0 2.8 UHERO DBEDT Laney 6 4 1.3 1.9 3.4 Actual(p) 3.0 2.4 Total Visitor Arrivals 2.9 0.2 Domestic (UHERO: US) Arrivals 3.8 5.9 International (UHERO: Japan) Arrivals Annual percent changes 1 2005 2006 2007 2008 2009 2005 2006 2007 2008 2009 2005 2006 2007 2008 2009 BOH 2 3 4.2 6.7 -0.5 0.4 -1.6 -1.1 -0.8 -0.5 1.6 0.3 1.0 1.5 2.1 2.9 6.9 1.7 2.4 -0.1 -0.8 1.7 -0.2 2.2 7.2 3.4 -5.9 -8.6 -5.3 -3.4 1.2 -0.6 1.8 UHERO DBEDT Laney 6 4 1.5 1.8 8.5 3.3 1.9 1.9 5.0 -4.8 4.5 3.8 3.4 Actual(p) 7.3 0.6 Total Annual percent changes 1 2005 2 Visitor Expenditures 2006 2007 2008 2009 2005 Construction5 (UHERO ; see footnote) 2006 2007 2008 2009 BOH (June 2006) UHERO (07Q3) UHERO (07Q1) UHERO (06Q3) DBEDT 4 5 9.6 8.9 -1.2 5.3 -6.0 -0.7 -3.5 -3.2 13.5 6.3 2.0 9.6 4.0 4.0 5.0 10.75 8.4 10.0 4.4 -1.9 Actual(p) Notes: 1 2 3 9.2 2005-2006 "forecasts" are taken from last published forecasts prior to end of each year Paul Brewbaker, Chief Economist, Bank of Hawaii; June 2006 construction forecast is unpublished Professors Carl Bonham and Byron Gangnes (University of Hawaii Economic Research Organization) December 11, 2007; "Cooling Economy Faces U.S. Headwinds;" sponsor' forecasts extend beyond 2008. Testimony of Pearl Imada Iboshi at an informational briefing of the legislature 11 Jan 2008 "UHERO Annual Hawaii Construction Forecast: Despite Credit Concerns, Soft Landing Expected" (September 7, 2007) by Carl Bonham, Byron Gangnes (UHERO) and Paul Brewbaker (BOH) (http://www.uhero.hawaii.edu/eis/eis_forecastarchive.html) "Hawaii Economic Forecast For 2008" (November 7, 2007) Professor Leroy Laney, Hawaii Pacific University (http://fhb.com/hm_news110707.htm) 4 5 6 Note: data were compiled by Bank of Hawaii but users are encouraged to refer to orginal sources. Bank of Hawaii Economic Research Center [www.boh.com/econ] (January 30, 2008) 5 Hawaii real total personal income growth through second quarter 2007 (percent change, year-over-year) Hawaii monthly total payroll employment growth November 2007 5 4 (percen change, year-over-year and H-P filter trend) 8 6 4 2 0 US recession shaded 3 2 1 0 -1 -2 -3 97 98 99 00 01 02 03 04 05 06 07 US recession shaded -2 96 98 00 02 04 06 08 Hawaii employment, household survey (persons) and establishment survey (payrolls) (thousands, s.a., log scale, through November 2007) Hawaii monthly employment totals through November 2007 (thousands, s.a., log scale, with H-P filter trends) 660 640 620 600 580 560 540 520 90 92 94 96 98 00 02 04 06 08 Persons employed Occupied jobs US recessions shaded 650 640 630 620 610 600 590 580 2004 2005 2006 2007 2008 Persons employed Occupied jobs Hawaii monthly unemployment rate, 1990-2007 (thousands, s.a., log scale, through November 2007) Hawaii monthly unemployment rate, 2004-2007 (thousands, s.a., log scale, through November 2007) 7 6 9/11 4.0 3.5 3.0 2.5 US recessions shaded Gulf War 5 4 3 2 1 90 92 94 96 98 00 02 04 06 08 SARS 2.0 1.5 2004 2005 2006 2007 2008 6 Bank of Hawaii Economic Research Center [www.boh.com/econ] (January 30, 2008) A top-down view from Hawaii State revenues One interesting reflection of statewide macroeconomic activity is present in Hawaii State government tax and nontax revenue streams. Hawaii’s broad-based gross business receipts tax, the general excise taxes, captures business activity equally across goods-producing, services-producing and information-producting sectors, with few exemptions. Hawaii’s income tax has a broad payroll base, and is augmented by individuals’ quarterly filings and the corporate net income tax. While payrolls and witholding from payrolls moves more slowly, like the underlying employment base, individuals’ quarterly filings and corporate net income taxes display much more cyclical sensitivity. Indeed, a good guide to the business cycle’s impact on State government revenue is observable in the movements of this smaller, portion of the total. At the same time, this smaller portion is a interesting proxy for the Hawaii real estate and business cycle generally. All indications now are for slower growth in the near future. Hawaii real total general fund tax revenues 1200 US recession shaded (million 2006$, s.a., log scale, through third quarter 2007, with Hodrick-Prescott filter trend) Hawaii general excise tax revenue 54.3 percent of the general fund in the 2000s 700 650 600 US recession shaded (million 2006$, s.a., log scale, through third quarter 2007, with Hodrick-Prescott filter trend) 1100 1000 550 500 450 900 800 1996 1998 2000 2002 2004 2006 2008 400 1996 1998 2000 2002 2004 2006 2008 Hawaii real witholding from payrolls, 31.3 percent of the general fund in the 2000s (million 2006$, s.a., log scale, through third quarter 2007, with Hodrick-Prescott filter trend) 360 350 340 330 320 310 300 290 280 1996 1998 2000 2002 2004 2006 2008 US recession shaded Hawaii real corporate net income taxes, individuals’ quarterly estimated taxes and payments with returns, net of refunds, 14.3 percent of the general fund in the 2000s (million 2006$, s.a., log scale, through third quarter 2007, with Hodrick-Prescott filter trend) 240 200 160 120 80 40 0 1996 1998 2000 2002 2004 2006 2008 US recession shaded Bank of Hawaii Economic Research Center [www.boh.com/econ] (January 30, 2008) 7 Tourism declines two years running For the second year in a row, real Hawaii tourism receipts declined. Though exact magnitudes will not be certain until the second half 2007 Honolulu CPI-U is published in February 2008, using consensus estimates of 4-5 percent inflation during 2007 (first half inflation was 5.0 percent), the decrease in real visitor expenditure in Hawaii was in a range of 3-4 percent for the year. Tourism receipts declined 1.5 percent in 2006, adjusted for inflation. Tourism is Hawaii’s largest export, with a value-added contribution in a range of 15-20 percent of gross product for the Hawaii state economy. The 2007 visitor spending total was, in constant dollars, about 2 percent higher than the total in 1987. Real visitor spending has been declining in much the same pattern observed prior to the 1990-91 US recession and the 2001 US recession. The 2001 recession was a technology investment-led recession, punctuated by the 9/11 terrorist attacks. The earlier recession of the two also had a precursor decline in residential investment, although in the end it was a collapse in personal consumption expenditure that was the proximate cause of the recession from July 1990 to March 1991. That these dates roughly match those of Iraq’s invasion of Kuwait at one end, and the conclusion of Operation Desert Storm at the other, is not coincidental. Many analysts are concerned that the recession in US residential investment that began in 2006 and continued in 2007 would spread to an economy-wide phenomenon, especially after the market for sub-prime mortgage-backed securities collapsed and precipitated an extended period of stock market volatility in the fall of 2007. While consumers are somewhat sensitive to changes in the value of wealth, and the declines in home prices and stock prices nationwide are reflective of a broader pattern of compression in housing-related economic activity, US real GDP growth remained positive through the end of 2007. Unlike Hawaii, whose principal export has been declining along with the housing sector, national export growth has been very strong during the same period in which residential investment has been declining. A weak US dollar in currency markets has enhanced the purchasing power of foreign Hawaii total visitor days, domestic plus international through December 2007 Hawaii real total visitor expenditure through 2007 (billions of constant 2007 dollars, assuming a 4.6 percent increase in the Honolulu CPI-U during 2007 (first half 2007 actual increase was 5.0 percent)) 15 14 13 12 11 10 9 8 1990 1995 2000 2005 2010 US recessions shaded buyers of US goods, services and information at a time when those overseas economies are generally growing at a much stronger pace than the US. Curiously, international travel to Hawaii has not responded as much as other US exports have to the weak dollar, suggesting that certain structural impediments, such as lift, and the emergence of competing destinations is limiting the stimulative impact on Hawaii tourism of a depreciating US dollar. While the weak dollar makes foreign destinations more expensive to Americans, the “income” and “wealth” effects of recent US economic trends have weighed more heavily on domestic travel demand than the “substitution” effects of Hawaii’s increasing relative appeal as a destination. Higher oil prices have also sapped demand and increased travel cost. While Hawaii tourism’s volume metrics (arrivals and days) have remained fairly stable, the consensus forecast is for continued low growth rates. Hawaii monthly domestic and international visitor arrivals through December 2007 (thousands, s.a., log scale, with H-P filter trends) (monthly in millions, s.a., log scale, with H-P filter trend) 6.0 5.5 5.0 US recession shaded 650 US recession shaded 600 550 500 4.5 SARS SARS 450 4.0 9/11 9/11 400 99 00 01 02 03 04 05 06 07 08 98 99 00 01 02 03 04 05 06 07 08 8 Bank of Hawaii Economic Research Center [www.boh.com/econ] (January 30, 2008) Rising demand against a relatively fixed supply The growth of travel demand during the early-2000s brought a welcome return to profitable hotel performance after the slowdown associated with the bursting of the technology bubble and the shock of the 9/11 terrorist attacks. With Hawaii’s visitor accommodation inventory essentially unchanged since the early 1990s, the growth in demand boosted hotel utilization and put upward pressure on real hotel room rates. Tourism growth in the 2000s was strongest in the domestic segment, whose 10-day stay length more than offset the effects of decreases in the international segment, with its 6-day stay length. Room rates rose a rates significantly higher than inflation, and room revenues rose so much faster than visitor expenditures overall that there is now some speculation that nonhotel visitor expenditure has been declining in real terms for much of the decade. Whether or not that is true, the rising cost of occupancy eventually began to shave stay length off the domestic visitor behavior pattern. At the same time, significant numbers of rooms under renovation and being converted to timeshare first reduced the inventory and then partially restore it. All these factors contributed to declining occupancy in 2006, a partial recovery in 2007, and a flattening of real hotel room rates as growth in real hotel rental revenues began to fade. Hawaii monthly domestic and international visitor arrivals 2002 through December 2007 (thousands, s.a., log scale, with H-P filter trends) 520 Domestic (right scale) International (left) 480 440 400 200 180 160 140 120 2002 2003 2004 2005 2006 2007 2008 360 320 300 250 200 150 Hawaii monthly domestic and international visitor arrivals 1989 through December 2007 (thousands, s.a., log scale, with H-P filter trends) 500 Domestic (right scale) International (left) 450 400 350 9/11 300 250 SARS 100 90 Gulf US recessions shaded 92 94 96 98 00 SARS 9/11 02 04 06 08 Hawaii quarterly hotel peformance indicators (as noted, through third quarter 2007) Occupancy (%, right scale) Room rate (2006$, left) 200 190 180 170 160 2002 Pre-Ira Pre-Iraq/ SARS Hawaii real hotel revenues (tax base basis) (million 2006$, s.a., log scale, through third quarter 2007, with Hodrick-Prescott filter trend) 84 80 76 72 68 64 400 US recession shaded 200 2003 2004 2005 2006 2007 2008 100 96 98 00 02 04 06 08 Bank of Hawaii Economic Research Center [www.boh.com/econ] (January 30, 2008) 9 Construction at its peak, holding strong Despite a multi-year decline in Hawaii homebuilding, overall Hawaii construction continued to display strength during 2007. Although the peak for the current construction cycle may well have been last year, the University of Hawaii Economic Research Organization construction forecast (Google “UHERO”) calls for a soft landing in construction spending and employment, with only modest declines on construction activity during the remainder of the decade. Nonresidential private construction activity has been particularly strong, and across most commercial real estate segments, from office to industrial to wharehouse and retail space, ultra-low single-digit vacancy rates and rising rents, in some cases accelerating rises, are creating a positive outlook for commercial construction. These opportunities are balanced, however, by rising land costs and the continued push upward in construction materials costs from the ongoing global commodity price rise. Minerals and metals prices, along Hawaii real contracting receipts, through second quarter 2007 (excludes military facilities) (Billion 2007 dollars, seasonally-adjusted, log scale) with energy and other raw materials prices, have been pushing upward the costs of building materials. Although the rate of increase in construction costs is expected to taper off, and although construction wage increases have been far more muted, the rising cost of development and building has partially dampened the favorable implications of strong commercial real estate market conditions in Hawaii. Overbuilding in some of Hawaii’s Neighbor Island resort areas also raises uncertainty, particularly where offshore condominium investors were a driving force before the US housing recession. The cost of capital also has increased sharply, and access to liquidity has diminished, as a result of the credit crunch that has accompanied the recent US sub-prime mortgage meldown. Strong lending institutions also have had to reaffirm or tighten their underwriting guidelines. A glimmer of hope that public construction might finally be poised to increase, adds back a bit of optimism recently shaded by US capital markets. Hawaii construction payroll emploment through third quarter 2007 (includes military facilities) (thousands, seasonally-adjusted, log scale) 40 2.0 35 30 25 Jobs (NAICS) Jobs SIC) 1.0 20 0.5 65 70 75 Work stoppages 15 95 00 05 10 Work stoppages 80 85 90 65 70 75 80 85 90 95 00 05 10 Hawaii real total private building permit values through third quarter 2007 (Million 2007 dollars, seasonally-adjusted, log scale) Real government construction contract values in Hawaii through third quarter 2007 (Million 2007 dollars, seasonally-adjusted, log scale) 1600 800 Permit values Trend 400 800 200 400 100 Contract values Trend 65 70 75 80 85 90 95 00 05 10 65 70 75 80 85 90 95 00 05 10 10 Bank of Hawaii Economic Research Center [www.boh.com/econ] (January 30, 2008) Hawaii residential building permit values through third quarter 2007 (Million 2007 dollars, seasonally-adjusted, log scale) Hawaii total housing units authorized by building permit through third quarter 2007 (Thousands, seasonally-adjusted, log scale) 4.0 800 Values Trend 2.0 400 1.0 200 Units Trend 1980 1985 1990 1995 2000 2005 2010 0.5 1985 1990 1995 2000 2005 Hawaii commercial and industrial building permit values through third quarter 2007 (Million 2007 dollars, seasonally-adjusted, log scale) Hawaii building permit values for additions and alterations through third quarter 2007 (Million 2007 dollars, seasonally-adjusted, log scale) 400 400 Values Trend 200 200 100 Values Trend 50 1980 1985 1990 1995 2000 2005 2010 100 1980 1985 1990 1995 2000 2005 2010 Bank of Hawaii Economic Research Center [www.boh.com/econ] (January 30, 2008) 11 Oahu housing units authorized by building permit through third quarter 2007 (Quarterly, seasonally-adjusted, log scale) Neighbor Island housing units authorized by building permit through third quarter 2007 (Quarterly, seasonally-adjusted, log scale) 1600 1600 800 800 400 Units Trend US recessions shaded 400 Units Trend 200 1985 1990 1995 2000 2005 1985 1990 1995 2000 2005 Quarterly single-family housing units authorized by building permit through third quarter 2007 (Thousands, seasonally-adjusted, log scale) Quarterly multifamily housing units authorized by building permit through third quarter 2007 (Thousands, seasonally-adjusted, log scale) 1.6 US recessions shaded US recessions shaded 1.00 0.8 Units Trend 0.4 1985 1990 1995 2000 2005 0.10 Units Trend 0.01 1985 1990 1995 2000 2005 12 Bank of Hawaii Economic Research Center [www.boh.com/econ] (January 30, 2008) US montly housing starts through December 2007 and conditional annualized volatility (million units at annual rates, seasonally-adjusted) (million national housing starts at annual rates and thousand Hawaii housing units at quarterly rates, seasonally-adjusted) US montly housing starts and Hawaii housing unit authorizations through third quarter 2007 2.4 2.0 1.6 1.2 0.8 Housing starts Volatility 4.0 US recessions shaded 2.0 1.0 US recessions shaded 0.4 0.0 60 65 70 75 80 85 90 95 00 05 10 0.5 US housing starts (mil) Hawaii unit permits (thou) 1985 1990 1995 2000 2005 Third quarter 2007 nationawide mortgage delinquency rate ranking by state, all loans (percent 30 days or more past due) Mississippi 10.60 percent US 5.81 percent Hawaii 2.68 percent 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Mississippi 10.60 Michigan 8.34 Georgia 7.93 Indiana 7.88 Louisiana 7.79 Tennessee 7.63 West Virginia 7.27 Alabama 7.26 Ohio 7.24 Texas 7.21 Florida 6.47 South Carolina 6.46 Missouri 6.40 Arkansas 6.23 Kentucky 6.23 0 2 4 6 8 10 Percent of mortgages with past due monthly payments Selected sub-prime mortage delinquency rates by state (percent 30-days or more past due) 1 2 3 4 5 6 7 8 9 10 27 28 Mississippi Michigan Georgia Missouri Tennessee Massachusetts West Virginia Rhode Island Alabama Louisiana Virginia District of Columbia 23.64 22.62 19.47 19.43 19.33 19.28 19.23 19.20 18.70 18.41 15.77 15.63 29 30 31 38 40 42 46 47 48 49 50 51 Connecticut New Jersey California New York Arizona Colorado Washington Utah Wyoming Oregon Hawaii Alaska 15.58 15.42 15.20 13.78 13.53 12.51 10.97 10.38 10.30 10.28 10.14 7.66 Source for delinquency data: Mortgage Bankers’ Association. The US sub-prime mortgage delinquency rate in third quarter 2007 was (seasonally-adjusted) 16.31 percent Bank of Hawaii Economic Research Center [www.boh.com/econ] (January 30, 2008) 13 Oahu sales of existing single-family homes and condominiums through December 2007 (Monthly units, seasonally-adjusted, log scale) Oahu months of inventory remaining at current sales rates through December 2007 (Months of inventory remaining, seasonally-adjusted) 28 24 800 20 16 Single-family Condominium US recession shaded 400 US recession shaded 12 8 4 200 96 98 00 02 04 06 0 96 98 00 02 04 06 Seasonally-adjusted Oahu home prices Unlike on the US mainland, where average home prices are falling, home prices on Oahu are fairly stable. Data published by the Honolulu Board of Realtors are seasonally adjusted by Bank of Hawaii using the US Census Bureau’s X-12 ARIMA filter. Prices in thousand dollars during the second half of 2007, after adjustment for seasonalSF Condo s.a. ity, are shown. The drop in housing 2007.07 622.691 326.937 demand has 2007.08 636.371 325.937 resulted in a slight 2007.09 648.544 327.172 pile-up in invento2007.10 644.943 323.450 ries, exacerbated to 2007.11 623.772 315.246 recent stock market 2007.12 628.412 320.708 turbulence. Median existing home sales prices through December 2007 (thousand dollars, seasonally-adjusted, log scales) 400 Single-family (right scale) Condominium (left) US recession shaded 700 600 500 400 200 300 100 00 01 02 03 04 05 06 07 Oahu existing single-family home sales volumes and inventories through November 2007 (Units and months remaining, s.a., log scale) Oahu existing condominium sales volumes and inventories through November 2007 (Units and months remaining, s.a., log scale) 450 400 350 300 10 8 6 4 2 2003 2004 2005 2006 2007 Sales (units, right scale) Inventory (months, left scale) Trends 250 200 6 5 4 3 2 1 2003 2004 2005 2006 2007 Sales (right) Inventory (months, left) Trend 800 700 600 500 400 300 14 Bank of Hawaii Economic Research Center [www.boh.com/econ] (January 30, 2008) Arbitrage and Hawaii’s “lag” Once upon a time, urban legend in Honolulu was that if something happend in the mainland economy, you would wait a couple years for it to arrive in Hawaii. Today, with capital markets globally integrated, a high degree of capital mobility, and with real estate markets increasingly globalized, the lag between home price movements between the mainland and Hawai is shrinking. Technology has reduced the information asymmetry that used to put out-of-state investors at a disadvantage, and allowed more aspects of investors’ search process in real estate to be efficient. Still, the historical data suggest that movements in Hawaii home prices lag those of their California counterparts by as much as one year, and are even less statistically significant as you move the comparison eastward. The lag may be shrinking however, and the next cycle may be a more contemporaneous one than those in the past. OFHEO same home “constant quality” home price indexes through secondquarter 2007 1000 Massachusetts California Hawaii Iowa (Index, 1980Q1 = 100, log scale) 100 1975 1980 1985 1990 1995 2000 2005 2010 Response of Hawaii home price changes to California home price changes, OFHEO indexes (VAR impulse response to one standard deviation shock) .03 .02 .01 Comparative percentage variations around longterm single-family median home price trends (quarterly, percentage deviation from log-linear trend) 40 20 Oahu Orange Co. CA California leads Hawaii .00 -.01 -.02 -.03 1 2 3 4 5 6 7 8 9 10 California home price movements (log changes in OFHEO same home price indexes) hit Hawaii with a statistically significant 3-quarter lag (1975 through 2007Q2) 0 -20 -40 75 Valuations cycle about s30-40 percent around the long-term trend (1981 through 2007Q2) Quarters after initial impulse in VAR 80 85 90 95 00 05 10 Comparative median single-family home prices, Hawaii and California, through third quarter 2007 800 700 600 500 Oahu Maui SF Bay Area Orange Co. San Diego LA Area 2003 2004 2005 2006 2007 2008 (thousand dollars, seasonally-adjusted., log scale) Comparative median single-family home prices, quarterly, 1975 through third quarter 2007 1000 (thousand dollars, seasonally-adjusted., log scale) 400 100 300 Oahu Maui SF Bay Area Orange Co. San Diego LA Area 1980 1985 1990 1995 2000 2005 1975 Bank of Hawaii Economic Research Center [www.boh.com/econ] (January 30, 2008) 15 Real Hawaii retailing receipts 7000 6500 6000 5500 5000 (quarterly in million 2006 dollars, s.a., through 07Q2) Real Hawaii services receipts (quarterly in million 2006 dollars, s.a., through 07Q2) 2600 2400 2200 2000 1800 1600 1998 2000 2002 2004 2006 2008 1996 1998 2000 2002 2004 2006 2008 4500 1996 Real Hawaii contracting receipts 2400 2000 (quarterly in million 2006 dollars, s.a., through 07Q2) Real Hawaii hotel rental receipts 900 800 (quarterly in million 2006 dollars, s.a., through 07Q2) 1600 700 1200 600 1996 1998 2000 2002 2004 2006 2008 500 1996 1998 2000 2002 2004 2006 2008 Real Hawaii commission receipts 350 300 (quarterly in million 2006 dollars, s.a., through 07Q2) Real Hawaii non-hotel rental receipts 1350 1300 1250 1200 (quarterly in million 2006 dollars, s.a., through 07Q2) 250 1150 1100 200 1050 1000 150 1996 1998 2000 2002 2004 2006 2008 950 1996 1998 2000 2002 2004 2006 2008 16 Bank of Hawaii Economic Research Center [www.boh.com/econ] (January 30, 2008) Real Hawaii retailing receipts 7000 6500 6000 5500 5000 4500 4000 3500 1980 1985 1990 1995 (quarterly in million 2006 dollars, s.a., through 07Q2) Real Hawaii services receipts (quarterly in million 2006 dollars, s.a., through 07Q2) 2000 1000 2000 2005 1980 1985 1990 1995 2000 2005 Real Hawaii contracting receipts (quarterly in million 2006 dollars, s.a., through 07Q2) Real Hawaii hotel rental receipts 900 (quarterly in million 2006 dollars, s.a., through 07Q2) 2000 800 700 600 1000 500 400 500 1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005 Real Hawaii commission receipts 350 300 250 200 (quarterly in million 2006 dollars, s.a., through 07Q2) Real Hawaii non-hotel rental receipts 1400 1200 (quarterly in million 2006 dollars, s.a., through 07Q2) 1000 150 800 100 1980 1985 1990 1995 2000 2005 600 1980 1985 1990 1995 2000 2005 Bank of Hawaii Economic Research Center [www.boh.com/econ] (January 30, 2008) 17 [percent; r = Fed Funds rate, p = core CPI inflation, target p* = 2, y = real GDP growth rate, y* = real potential GDP growth rate (CBO); r* = 4.5 + (0.5)(p - p*) + (0.5)(y - y*)] A Taylor Rule and effective Fed Funds rates 10 8 6 4 2 0 1990 1995 2000 2005 Forecast Fed funds rate Taylor Rule (higher inflation weight) Taylor Rule (equal weight) This time, the Fed won’t go ‘too far” A recent working paper by Stanford University’s John Taylor, presented at last year’s Jackson Hole meetings, repeated an increasingly widely-held view that-notwithstanding disinflationary risks in 2003--an excessively low federal funds rate target at that time provided too much stimulus to residential investment, turbo-supercharged by financial innovation, relative to a “Taylor Rule” benchmark for the federal funds rate target. Asignificant growth recession, rather than outright decline in production and employment (an NBER recession) remains the consensus expectation for US real GDP growth in 2008, but the risk of recession is high. Under such a scenario, a modestly stimulative monetary policy posture, combined with surgical intervention (e.g. the Term Auction Facility), avoiding excessive ease relative to the benchmark, would be the policy recommendation. The Fed must walk a fine line between exerting modest stimulus and generating too much risk of future inflation. Daily closing values of the S&P 500 Index (1941-43 = 100, through January 22, 2007) Conditional volatility of the S&P 500 Index (annualized threshold autoregressive conditional heteroskedasticity (TARCH) standard deviations) .28 1550 .24 1500 .20 1450 .16 1400 1350 1300 07:1 07:2 07:3 07:4 08:1 .12 .08 .04 07:1 07:2 07:3 07:4 08:1 Volatility: transitory or persistent? it matters Though stock market volatility has been rising on trend since 2006, the recent pattern of daily conditional volatility is instructive because of its persistent, high levels. Consider the S&P 500 index during the last year. Following Alan Greenspan’s remarks in Shanghai at the end of February 2007, in which he mentioned potential risks associated with extant U.S. subprime mortgage lending, the stock market experienced a sudden stop that lingered for several weeks into mid-March 2007. Similarly, the more substantive unravelling of hedge fund positions in subprime mortgage-related structured investment vehicles, and the corresponding collapse of the asset-backed commercial paper market in late-July and early-August 2007, generated another sudden stop, this one also accompanied by a relatively transitory burst of conditional daily stock market volatility. Volatility abated as a series of Federal Reserve interventions revived investor confidence. The S&P 500 reached an all-time high in mid-October 2007. Subsequently, however, a seemingly never-ending, ongoing series of information events associated with writedowns of sub-prime mortgage related assets across a wide array of financial services providers, has not only weighed on stock market valuations generally, it has generated a persistent high level of conditional daily stock market volatility that continued into January 2008. As a measure of uncertainty, conditional volatility--having nearly tripled from levels one year ago--now suggests that confidence has been severly impaired. 18 Bank of Hawaii Economic Research Center [www.boh.com/econ] (January 30, 2008) Federal Reserve primary credit (discount) rate and federal funds rate through January 3, 2008 (percent, daily) US Treasury nominal yield curve Jul 06 Jul 07 Mar 07 (percent, adjusted to constant maturities) 5.00 6 5 4.00 Dec 07 4 Primary credit (discount) Effective fed funds Fed funds target Sudden Stop Term Auction Facility Week of Jan 18, 2008 3.00 3 07:1 07:2 07:3 07:4 08:1 2.00 FF 1y 2- r y 3- r yr 5yr 7yr -y r 10 20 Conditional daily annualized volatility of effective fed funds rates through January 22, 2008 (annualized GARCH conditional standard deviations) (percent, adjusted to constant maturities) US Treasury real (TIPS) yield curve Jul 2007 Jul 2006 Mar 2007 4 2.50 3 2.00 2 1.50 Dec 2007 Week of Jan 18, 2008 1 1.00 0 07:1 07:2 07:3 07:4 08:1 0.50 FF 1y 2- r y 3- r yr 5yr 7yr r r -y -y 10 20 Spreads from 3-month LIBOR yields to yields on 3-month US Treasury Bills 250 200 150 100 50 0 07:1 07:2 07:3 2.50 (in basis points) Implied long-term inflation expectations plus inflation risk premium 2.75 (percent, difference between nominal and TIPS yield curves) Jul 2006 Mar 2007 Jul 2007 Week of Jan 18, 2008 2.00 FF 1y 2- r yr 3yr 5yr -y r 7yr 10 20 30 -y r -y r Term Auction Facility Discount Rate cut 07:4 08:1 2.25 Dec 2007 Bank of Hawaii Economic Research Center [www.boh.com/econ] (January 30, 2008) 30 -y r 30 -y r -y r 19