Post on 30-May-2018
8/14/2019 Econ 0609
1/15
HAWAII
ECONOMIC
TRENDS
June 30, 2009
prepared by
Paul H. Brewbaker, Senior Economic AdvisorBank of Hawaii
https://www.boh.com/econ/512_539.asp
8/14/2019 Econ 0609
2/15
2 Bank of Hawaii Economic Research Center https://www.boh.com/econ/512_539.asp (June 30, 2009)
-40%
-20%
0%
20%
40%
4/1/09 5/2/09 6/2/09
Hawaii daily international passenger arrivals growth, April 2009 through June 26, 2009(percent change, year-over-year, from comparable days of the week one year earlier; the H1N1-A influenza virusgradually emerged, eventually to global pandemic status, beginning in the final weeks of April 2009)
Economic SummaryJune 30, 2009
From the economic freefall that was underway in Hawaii during fourth quarter 2008 a transition toemerging stabilization began to appear in second quarter 2009. As a reminder that progress towards
economic recovery will be uneven, the biological surprise of the H1N1-A influenza pandemic late inApril 2009 added new economic uncertainty to Hawaiis economic outlook. Historically, biological
events such as the SARS episode in 2003, which set back international travel to Hawaii almost as much asthe 9/11 event, have had the potential to undermine the economic forecast. Coming just as this report wasto be published in early-May, the H1N1 pandemic required a tourism forecast recalibration. At least onepublished Hawaii economic forecast had to be revised in the wake of H1N1; this report takes into accountabout two months of daily international passenger arrivals data from late-April through late-June to take afirst stab at a tourism forecast revision.
The dominance of tourism in Hawaiis changing fortunes during the last four quarters was not just theconsequence of tourisms importance as the island economys principal export, comprising 15-20 percentof Hawaii value-added. Tourist volumes were moving more than anything else in Hawaiis economy(except petroleum prices) for the last five quarters. Unlike the early-1990s, when domestic air lift toHawaii was gradually reduced by roughly one-quarter, the shutdown of Aloha Airlines and ATA in
March/April 2008 instantaneously reduced capacity by nearly one-fifth. Rising oil prices and consumerretrenchment meant that this lift was not replaced, and the April 2008 tourism forecastwhichanticipated a 9/11-like impactproved to be premature: the sharp initial drop in Aprils forecast fortourist volume more than doubled by the time of the November 2008 forecast revision.
The sharper 9/11-type decline in 2008 travel to Hawaii means that the tourism recovery extends toseveral more years than previously envisioned in the April 2008 forecast. Airline shutdowns, consumerrecession, and the post-Lehman Brothers financial panic all contributed. In the end, 2008 Hawaii visitorarrivals (by air) declined 12.2 percent on the domestic side, and 6.1 percent on the international side. Infirst quarter 2009 domestic and international arrivals were down 17.7 percent and 5.2 percent,respectively.
Second quarter 2009 Hawaii tourism performance entered the window one-year-since the Aloha/ATAshutdowns occurred in spring 2008. From this point forward, comparisons to one year earlier will exhibit
more muted losses; domestic arrivals changed 3.6 percent in April and 2.2 percent in May 2009, year-over-year, and turned upward in summer. Official data are notseasonally-adjusted but, in fact, the trendfor seasonally-adjusted domestic arrivals since late-summer 2008 actually has been flat to up slightly.This rising pattern continued in spring 2009.
8/14/2019 Econ 0609
3/15
Bank of Hawaii Economic Research Center https://www.boh.com/econ/512_539.asp (June 30, 2009) 3
-100
-50
0
50
100
1990 1995 2000 2005 201050
60
70
80
90
100
110
120
90 95 00 05 10
Bank of Hawaii semi-annual Business Confi-
dence Survey results: diffusion index(positive sentiment above zero; neutral equals zero)
University of Michigan Index of U.S. consumer
sentiment(monthly, first quarter 1966 = 100)
NBER recessions shaded NBER recessions shaded
International travel experienced a sudden but temporary drop after the collapse of Lehman Brothers inSeptember 2008, but by year-end was rebounding on a seasonally-adjusted basis. Stabilization wasbeginning to appear in seasonally-adjusted data until the H1N1 virus appeared. Now, after eight to tenweeks of daily international arrivals data (graph at bottom of page 2) it seems as if the H1N1 pandemic isnothaving as dramatic an impact as did SARS six years ago. Thankfully, the widespread incidence ofthis viral pandemic does not appear to have been matched by its severity. The new tourism forecast in
this report anticipates shrinking losses in international travel (reported on page 4).
Just as the transition through economic stabilization in mid-2009 to economic recovery at year end isforecast for annualized U.S. real GDP growth, the transition from negative to positive year-over-yeargrowth began in domesticpassengerarrivals in May and most of June 2009. The long, slow tourism
recovery will be damped by challenges on the international side. Consensus Hawaii tourism forecasts
anticipate improvement from 12 percent domestic arrivals growth through May 2009. Second half gains
should be sufficient for domestic annual arrivals growth of3 percent; gains will extend into 2010.Views are less uniform regarding the international arrivals forecast, but modest cumulative losses of 6 to9 percent in international arrivals from now trough end-2010 are expected.
The 2008-2009 recession continued to play out in Hawaii economic data through mid-year. Hawaiiunemployment through the end of second quarter 2009 hovered at a seasonally-adjusted 7.4 percent of thelabor force, about two percentage points below the national average, and about a percentage point belowthe forecasts for Hawaii in 2010 included in this report. Private job loss this cycle was particular sharp,worse than in past downturns, although the annualized growth rate of seasonally-adjusted payroll
employment did decelerate from 3.35 percent in December 2008 to 2.91 percent through May 2009.Public sector workforce reduction is expected to extend economy-wide job loss through year-end 2009 inHawaii, which will likely see continued employment erosion even after the recovery has begun.
Sentiment probably began to shift from negative to neutral in second quarter 2009, based on surveys andthe revival of investor interest in global equity markets earlier in the spring. Economic forecasts betweensecond quarter 2009 and first quarter 2009 were not revised very much, also marking a wideningperception of stabilization when compared to downward forecast revisions late in 2008. Recovery canonly come after the economic declines have endedthough lagging indicators (employment,foreclosures, bankruptcies) will remain fodder for pessimism. Just as Hawaii went into the downturn instep with the U.S. mainland, so is it likely that economic recovery by end-2009 will push through in 2010and beyond, both in the islands as well as nationwide.
8/14/2019 Econ 0609
4/15
4 Bank of Hawaii Economic Research Center https://www.boh.com/econ/512_539.asp (June 30, 2009)
Annual Jobs
percent
changes1 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010
Brewbaker2
2.5 1.9 -0.4 -2.9 -1.3 0.9 1.8 -0.3 -2.5 -1.1 4.6 4.6 4.6 -0.2 1.2
UHERO3
2.6 2.1 0.0 -2.9 -0.6 1.1 1.6 -0.2 -2.7 -0.6 5.1 5.0 4.5 0.5 0.3
DBEDT4
1.9 0.0 -2.1 0.0 1.8 -0.2 -1.1 0.0 4.5 4.2 1.2 1.5
Laney6
2.5 2.0 -0.3 -1.2 2.0 1.0 -1.0 -1.5 5.0 5.0 5.0 3.5
Actual(p) 2.6 1.3 -0.9 1.4 1.0 0.2 5.9 4.8 4.3
Annual
percent
changes1 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010
Brewbaker2
-0.5 -1.6 -10.6 -3.1 3.7 1.7 -0.1 -12.6 -2.7 5.7 -5.9 -5.3 -4.7 -4.4 -1.8
UHERO
3
0.4 -1.1 -10.8 -6.8 3.1 2.4 -0.8 -14.2 -3.2 1.7 -8.6 -3.4 -9.8 -13.8 5.7DBEDT
4-0.8 -10.1 -5.9 1.2
Laney6
0.5 -0.5 -9.0 -5.0
Actual(p) 0.6 -1.2 -10.6 3.3 0.0 -12.2 -4.8 -4.7 -6.1
Annual
percent
changes1 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010
Brewbaker2
4.0 7.9 8.4 8.9 -1.2 0.2 -11.2 -15.5
UHERO3
2.7 2.5 3.9 7.4 8.1 -3.7 -19.4 -10.3
DBEDT4
2.0 -6.4 -7.9 5.2
Laney6
2.8 2.5 4.2 5.5
Actual(p) 4.0 2.6 -11.4 2.5 2.7 12.6 11.7 5.8
Notes:
Data were compiled by TZ Economics but users are encouraged to refer to orginal sources for updated information.
Construction5
(UHERO ; see footnote)
6Professor Leroy Laney, Hawaii Pacific University (https://www.fhb.com/hm_econ.htm)
4Hawaii DBEDT, "Outlook for the Economy: 2nd Quarter 2009," (May 18, 2009) (DBEDT visitor estimates include cruise ship arrivals)
http://hawaii.gov/dbedt/info/economic/data_reports/info/economic/data_reports/qser/outlook-economy5
Carl Bonham (UHERO) and Paul Brewbaker, "UHERO Hawai'i Construction Forecast: Global Downturn Hammers Construction" (March 6, 2009)
(http://www.uhero.hawaii.edu/eis/eis_forecastarchive.html)
Visitor Unemployment rate
Expenditures (UHERO ; see footnote)
12006-2008 "forecasts" are taken from last published forecasts prior to end of each year
2Paul Brewbaker (TZ Economics), Senior Economic Advisor, Bank of Hawaii (https://www.boh.com/econ/512_803.asp); construction forecasts are unpublished, as
prepared for Hawaii Council on Revenues3
Professors Carl Bonham and Byron Gangnes (University of Hawaii Economic Research Organization), "UHERO Hawai'i Quarterly Forecast Update:
State Budget Crisis Threatens Recovery," (June 12, 2009) (http://www.uhero.hawaii.edu/eis/eis_forecastarchive.html)
Personal Income CPI
Comparative Hawaii economy 2009-2010 forecastsJune 30, 2009
Total Domestic International
(real) Honolulu
Total
(UHERO: Japan)
Arrivals by air Arrivals by air Arrivals by air
Visitor (UHERO: US)
8/14/2019 Econ 0609
5/15
Bank of Hawaii Economic Research Center https://www.boh.com/econ/512_539.asp (June 30, 2009) 5
2006:3
2006:4
2007:1
2007:2
2007:3
20
07:4
2008:1
2008:2
2008:3
2008:4
2009:1
51.9
92
52.
065
52.
345
52.
547
52.4
68
52
.483
52.
362
52.
784
52.
222
51.
810
52.
210
2.
0
1.
0
1.
2
0.
8
0.
9
0.8
0.
0
0.5
-0.5
-1.
3
-0.
3
5.
84
5.8
3
5.2
4
4.
95
4.
82
4.
75
4.
9
4.9
4.0
3.
6
2.
1*
644.
62
647.4
6
648.0
4
645.
13
644.
18
64
6.
44
651.2
3
655.
03
655.7
1
655.0
5
647.
07
628.
93
633.0
0
632.0
8
629.
52
626.
57
62
7.
42
631.4
3
632.
25
627.8
7
622.1
8
603.
94
2.
5
2.
2
2.
4
2.
5
2.
7
3.0
3.
0
3.
5
4.1
5.
2
6.
9
626.
96
628.4
3
630.0
6
630.
70
631.
98
63
2.
93
633.3
9
628.
00
622.2
0
617.9
7
613.
70
624.
69
629.3
4
632.1
8
634.
31
636.
15
63
8.
11
619.
96
621.5
0
623.3
1
624.
12
625.
59
62
6.
54
627.0
2
621.
70
616.
104
612.
122
607.
956
976.
3
1002.
0
814.
5
930.
2
819.
7
8
39.3
859.
7
909.2
659.3
444.
4
681.
5
443.
9
411.
6
435.
6
557.
6
398.
1
3
57.9
385.
9
439.0
350.6
174.
9
326.
0
165.
8
259.
8
97.
6
195.
9
113.
1
2
32.4
167.
8
139.7
109.9
40.
4
75.
2
363.
6
331.
5
245.
5
180.
3
318.
6
2
33.7
275.
0
369.1
206.2
235.
5
226.
6
156.
6
238.
1
157.
7
327.
5
184.
9
1
60.8
180.
1
140.8
269.5
384.
7
169.
6
2,
431
2,
373
2,
500
2,
453
2,
157
2
,031
1,
913
1,
715
1,6
04
1,
457
1,1
24
984
964
1,
000
979
881
776
776
697
652
629
505
1,
447
1,
409
1,
500
1,
474
1,
276
1
,256
1,
137
1,
018
951
828
620
627.
7
627.
7
633.
4
650.
0
642.
9
6
34.0
633.
1
621.0
608.7
618.
7
581.
9
317.
2
313.
5
321.
9
325.
0
327.
6
3
23.8
331.
4
327.1
319.7
319.
5
300.
9
1,
887.
3
1,
881.
3
1,
833.
3
1,9
08.
7
1,
904.
3
1,8
45.
5
1,
830.
2
1,
734.
7
1,
589.8
1,
551.
5
1,
561.
8
1,
409.
9
1,
403.
1
1,
351.
6
1,4
33.
5
1,
412.
2
1,3
80.
1
1,
367.
9
1,
261.
1
1,
139.7
1137.
2
1124.
2
477.
4
478.
1
481.
7
475.
1
492.
1
4
65.
3
462.
3
473.
6
450.2
414.
3
437.
5
79.
3
78.
1
74.
1
74.
6
75.
7
75.8
75.2
71.4
68.0
66.
9
66.
0
197.
51
196.1
6
198.5
9
200.
26
200.
07
20
0.
74
201.8
3
192.
68
189.2
0
185.3
4
171.
18
HawaiiEconomicInd
icators
Seasonally-adjusted,realdata
(homepricesnominal)
Realpersonalincome
billion2008$
Growthrate
%y-o-y
HonoluluCPIinflation*
%y-o-y
Civilianlaborforce
thousands
Civiliansemployed
thousands
Civilianunemploymentrate
percent
Totalwageandsalaryjobs
thousands
pre-benchmarkedjobs
thousands
Nonagriculturaljobs
thousands
Privatebuildingpermits
million2008$
Residential
million2008$
Commercialandindustrial
million2008$
Additionsandalterations
million2008$
Governmentcontracts
million2008$
Oahuhomesales
units
Singlefamily:Honolulu
units
Condominium:Honolulu
units
SFmedianprice:Honolulu
thousand$
Condomedianprice:HNL
thousand$
Visitorarrivals
thousand
Domesticarrivals
thousand
Internationalarrivals
thousand
Hoteloccupancy
percent
Averagedailyroomr
ate
2007$
*interpolation;2009:1forecast
8/14/2019 Econ 0609
6/15
6 Bank of Hawaii Economic Research Center https://www.boh.com/econ/512_539.asp (June 30, 2009)
10
11
12
13
14
15
16
85 90 95 00 05 10
20
40
80
160
00 01 02 03 04 05 06 07 08 09
20
40
80
160
00 01 02 03 04 05 06 07 08 09
20
22
24
26
28
30
32
98 00 02 04 06 08 10
20
22
24
20
22
24
26
28
26
28
30
32
98 00 02 04 06 08 10
30
32
98 00 02 04 06 08 10
580
590
600
610
620
630
640
2004 2005 2006 2007 2008 2009
Dimensions of the Great Recession
Not as severe as the Great Depression of the 1930s, theU.S. recession that started at the end of 2007 has proven
to be more severe than almost every other one since then.
Late in November 2008 the National Bureau of EconomicResearch (NBER) confirmed December 2007 as the peak
of the last U.S. economic expansion. Shortly before that, inSeptember 2008, a financial panic ensuing from the
collapse of Lehman Brothers precipitated a more intense
phase of the recession, until then more moderate in manydimensions. Hawaii data illlustrate much of what happened
pre- and post-Lehman. The slowdown in Hawaiis eco-nomic expansion had emerged some years earlier. Sales
of existing homes peaked at the end of 2004, in seasonally-adjusted terms. Homebuilding peaked in 2005, and
constant-dollar total visitor expenditure also peaked that
year. The subsequent erosion in residential investmentand in real tourism receipts during 2006 and 2007 began a
process that ultimately dragged Hawaii into recession after
the financial crisis began in August 2007 and intensified inSeptember 2008. Accompanied by loss of lift following the
shutdown of Aloha Airlines and ATA in the spring of 2008,the tourism contraction deepened. The corresponding
downward trend in Hawaii real retail sales in 2006 and2007 steepened sharply in fourth quarter 2008 after the
post-Lehman financial panic (see graph below). Hawaiis
recession was exacerbated in mid-2008 by the rise in
global petroleum prices that peaked that summer, butsubsequent declines also eased somewhat those pres-sures on Hawaiis highly-petroleum dependent economy.
The commodity price rebound that has raised oil prices to
about half year-earlier levels in 2009 is a complcation forthe stabilization that is starting to show sustainability in
domestic tourism (facing page). The starting date pickedby the NBER for the current recession corresponds with the
start of job loss in Hawaii, which proceeded throughout
most of 2008 and into 2009.
2008Q42008
Crude petroleum prices(monthly, U.S. dollars per barrel)
Hawaii payroll employment(monthly, thousands, seasonally-adjusted)
NBER recessions shaded NBER recession shaded
Hawaii real retail sales
(quarterly, billion 2008 dollars at annual rates, s.a.)
Hawaii real visitor expenditure
(annual, billion 2008 dollars)
Jul90 Mar01Mar91 Nov01 Dec07
NBER recessions shaded
Gulf
9/11
8/14/2019 Econ 0609
7/15
Bank of Hawaii Economic Research Center https://www.boh.com/econ/512_539.asp (June 30, 2009) 7
100
150
200
250
300
250
300
350
400
450
500
96 98 00 02 04 06 08 10
Domestic (right scale)
International (left)
Tourism recovery interrupted by H1N1-A virus
Despite some weakness in March 2009--an unseasonablylow volume of Spring Break domestic travel to Hawaii
following two recent years with early Easters (2005; 2008)--
domestic tourism had already begun to establish recessionlows when the collapse of Lehman Brother was occurring
back in September 2009. To be sure, it would have beenhard for the average person to know what was going on.
Monthly visitor arrivals are not seasonally-adjusted in the
official statistics, nor was the stabilization in seasonally-adjusted domestic arrivals even clear until well into the
winter of 2009. At the very moment in March 2009 thatstock prices reached their low after the peak of October
2007, Hawaii domestic visitor arrivals were dropping out ofthe seasonally-adjusted plateau to which numbers had
settled in the July 2008-February 2009 period, with the
notable exception of September 2008. As April and May2009 domestic visitor counts confirmed, however, season-
ally-adjusted domestic volumes have been bouncing alonga flat and volatile trajectory since second quarter 2008.
Importantly, they are not declining. In the international
segment, things are more complicated. As this reportoriginally would have gone to press at the end of April
2009, the global H1N1-A viral pandemic emerged, castingdoubt on fresh tourism forecast revisions. Now, with two
months daily data on international passenger arrivals
available, a mini-SARS pattern is emerging. Internationalarrivals, after recovering from the Lehman event, are now
falling because of this new biological event. The decreaseappears to be less profound than SARS in 2003, but
meaningful quantitatively. The hotel industry, whichcannibalized its own utilization rate by raising hotel room
rates more than 25 percent beforethe recession, has nowbeen further unsettled by a small increase in the transientaccommodation tax rate intended to help fill the States
balanced-budget gap. Deep discounting has yet tostabilize hotel occupancy, although arrivals may finally have
found a bottom.
350
400
450
500
550
600
2004 2005 2006 2007 2008 2009
Passengers
Visitors
June*
May
*based on daily data through June 25, 2009
110
120
130
140
150
160
170
180
190
03 04 05 06 07 08 09
Monthly domestic visitor arrivals(thousands, seasonally-adjusted, log scale)
Aloha Airlines/ATA shut down
NBER recession shaded
Lehman
H1N1*
*includes June estimate based on daily passenger arrivalsdata through June 25, 2009
Monthly international visitor arrivals
(thousands, seasonally-adjusted, log scale)
SARS
Domestic and international visitor arrivals back
to the late-1990s(thousands, seasonally-adjusted, log scales)
SARS
9/11
LehmanH1N1*
Y2K
Asiancrisis
150
160
170
180
190
200
210
60
65
70
75
80
85
96 98 00 02 04 06 08
Occupancy (right)Real room rate (left)
NBERrecessions shaded
150
160
170
180
190
200
210
60
65
70
75
80
85
96 98 00 02 04 06 08
150
160
170
180
190
200
210
60
65
70
75
80
85
96 98 00 02 04 06 08
Occupancy (right)Real room rate (left)
NBERrecessions shaded
Data sources: Hawaii DBEDT for visitor counts (not seasonally-adjusted); hotel data from UHERO, as produced by HospitalityAdvisors LLC; all seasonal adjustment and deflation by TZE
Hawaii real hotel performance indicators(quarterly, percent of capacity(right scale), 2008$ pernight(left scale), all seasonally-adjusted)
MarchSep
Jul
NBER recessions shaded
8/14/2019 Econ 0609
8/15
8 Bank of Hawaii Economic Research Center https://www.boh.com/econ/512_539.asp (June 30, 2009)
100
10000.4
0.8
1.6
3.2
75 80 85 90 95 00 05 10
U.S. starts (right scale)
Oahu units (left scale)
Neighbor islands (left)
2
3
4
5
6
7
8
9
90 92 94 96 98 00 02 04 06 08
U.S.
Hawaii
120
160
200
240
00 01 02 03 04 05 06 07 08 09
Oahu (median)Maui (median)S&P Case Shiller 20
120
160
200
240
00 01 02 03 04 05 06 07 08 09
120
160
200
240
00 01 02 03 04 05 06 07 08 09
Oahu (median)Maui (median)S&P C
Oahu (median)Maui (median)S&P Case Shiller 20
NBERrecessionsshaded
Oahu
Maui
Case-Shiller
Peak:Synchronous
200
400
800
96 98 00 02 04 06 08
Orange Co., CAMaui
Oahu
200
400
800
96 98 00 02 04 06 08200
400
800
96 98 00 02 04 06 08
Orange Co., CAMaui
Oahu
Peak:Synchronous
Troughs:Asynchronous
Oahu
Maui
O.C.
Median single-family home prices(thousand dollars, s.a., log scale)
Comparison of median home price movements
and Case-Shiller index movement(thousand dollars, s.a., and2000Q1 = 100; log scale)
U.S. and Hawaii residential construction cycles:peaks aligned in the current recession(U.S. in million housing starts at annual rates, right scale;
Hawaii in units authorized by building permit, left scale; bothscales logarithmic)
NBER recessions shaded
U.S. and Hawaii unemployment rates: cyclicalmovement aligned in the current recession(percent of labor force through May 2009)
No lags this time
Historically it has not been uncommon for Hawaii macro-economic performance, by a variety of aggregate indica-
tors experiences, to lag the mainland by months or
quarters, and even years. During the S&L mortgagelending crisis of the 1980s, and the ensuing formation of
the Resolution Trust Corporation (RTC), the cyclical troughin homebuilding nationwide coincided with the peak of the
Japan bubble in Hawaiis housing cycle around 1990.
(Graph below; in the aggregate, statewide homebuildingpeaked in Hawaii in 1990, but earlier on the neighbor
islands than on Oahu.) The peak of the residentialinvestment cycle coincided, this time, in the year 2005.
Similarly, Hawaiis unemployment rate moved widely out ofsynch with the national average during the early-1990s
recession. While U.S. unemployment rates began rising
almost immediately at the time of Iraqs invasion of Kuwait
and the commencement of Operation Desert Shield in mid-
1990, Hawaiis unemployment rate was actually at its
cyclical lowpoint in the middle of Operation Desert Stormduring winter 1991. Hawaii unemployment peaked yearsafter U.S. unemployment peaked in 1992. (Hawaii unem-ployment rates did not even rise during the dot.com
recession of 2001 except forthe increase associated withthe 9/11 event in September 2001.) In the 2008-09recession, however, not only have unemployment rate
movements been highly synchronized between Hawaii andthe mainland, home price movements that were a precur-
sor to the broader economic downturn were equally
synchronous around their peak in early-2006. As recently
as the 1990s, home price movements had been highlyunsynchronized between Hawaii and the mainland, withHawaii lagging by years.
9/11
NBER recessions shaded
8/14/2019 Econ 0609
9/15
Bank of Hawaii Economic Research Center https://www.boh.com/econ/512_539.asp (June 30, 2009) 9
Selected Counties:(percent of loans)
_________________
Dade, FL 12.26Merced, CA 10.57Clark, NV 8.24Maui, HI 3.15Hawaii, HI 3.08
Honolulu, HI 1.64_________________
Resilient Oahu homeprices reflectunderlying economic
fundamentals, notimminent collapse
Source: Federal Reserve Bank of New York (image not geographically accurate)
Mortgage delinquency rates by county at end-2008 (90 days or more past due)Darker shading indicates higher delinquency rate
0 2 4 6 8 10 120 2 4 6 8 10 12
Percent 30 days or more past due
1 Mississippi 13.11
2 Nevada 11.12
3 Florida 11.09
4 Michigan 11.08
5 Georgia 10.73
6 Indiana 10.59
7 Louisiana 10.13
8 Tennessee 9.929 Alabama 9.69
10 Ohio 9.49
11 Arizona 9.46
12 West Virginia 9.40
13 California 9.13
14 Texas 9.01
15 Rhode Island 8.75Hawaii 5.29% (90+ days 1.75%)Hawaii 5.29% (90+ days 1.75%)
Mortgage delinquency ratescontinue to run lower in Hawaiithan elsewhere, seriousdelinquency (90+ days) on Oahuis 1.6% compared to 12% inDade Co. FL, 10% in RiversideCo. CA, and 8% in Clark Co. NV.
Source: Mortgage Bankers Association
Hawaiis low mortgage risk experience
As has been true historically, but is especially distinctive inthe current recession, Hawaiis low mortgage delinquency
rates set apart its economic performance from the national
average. Broadly defined as 30 days or more past due,Hawaiis mortgage delinquency rate is in the lowest quintile
nationwide. Hawaiis four counties ranks among the lowestnationwide as well in terms of serious delinquency, defined
as 90days or more past due. Notably, these data include
all residential mortgages with Hawaii collateral includingthose properties held by offshore investors. In many
cases, particularly in Neighbor Island resort communities,the latter comprise second-home purchases by mainland
investors enabled by the same slackening of underwriting
requirements that contributed to mortgage lending prob-lems and the financial crisis generally. Correlated default
risk, exacerbated by the simultaneityof the increase inmortgage delinquencies nationwide, contributed to the
depreciation of mortgage-based CDOs (collateralized debt
obligation) and related derivates such as credit defaultswaps (CDS) that precipitated the liquidity crisis.
Mortgage delinquency rates by state at end-2008 (30 days or more past due)Ranked by delinquency rate
8/14/2019 Econ 0609
10/15
10 Bank of Hawaii Economic Research Center https://www.boh.com/econ/512_539.asp (June 30, 2009)
100
150
200
250
300
350
00 01 02 03 04 05 06 07 08 09
200
300
400
500
600
700
00 01 02 03 04 05 06 07 08 09
Real Estate still receding
Total sales of existing single-family homes and condomini-ums in Hawaii have declined from an annual pace around
21,000 statewide at the peak of the last cycle in 2005 to an
annualized pace around 10,000 trades in the first severalmonths of 2009. Low interest rates during winter 2009
helped surge a huge wave of refinancings as a deliberateoutcome of Federal Reserve policy of credit easing or
quantitiative easing. This was an explicit strategy of
extraordinary purchases of long-dated U.S. Treasurysecurities designed to maintain low interest rates, com-
bined with outright purchases of mortgage-backedsecurities and agency debt designed to reduce the risk
premium in mortgage financing costs. By enabling largenumbers of households to reset the terms of their mort-
gage liabilities, the hope was to help partially ofset much of
the wealth loss associated with falling stock and housingprices by reducing debt burdens. Higher bank mortgage
underwriting standards may have limited somewhat theefficacy of this strategy. At the same time, sales volumes
in Hawaii--a non-recourse state with low mortgage
delinquency and foreclosure volumes--did seem torespond positively to the low rate environment. Season-
ally-adjusted sales volumes on Oahu rebounded throughmid-2009 (graph at upper right). Greater absorption in the
first few months of 2009 drew down months of inventory
remaining on Oahu (graph at rigth). A sudden rise in long-term interest rates caused mortgage interest rates to rise
beginning mid May 2009. Home prices on Oahu beganfading more quickly in the early months of 2009, on a
seasonally-adjusted basis. Oahu condominium priceslooked somewhat more steady through mid-year. The
drop in sales and rise in inventories that followed the post-
Lehman financial panic did reverse itself in first half 2009,but whether sales have indeed found the bottom of the
home sales recession that began at the end of 2004remains an open question.
Oahu existing single-family home median salesprices(thousand dollars, seasonally-adjusted, level scale)
Oahu existing condominium median sales prices
(thousand dollars, seasonally-adjusted, level scale)
Months of inventory remaining on Oahu(at existing sales rates and last months inventory)
Oahu sales of existing homes(Monthly units at annual rates, seasonally adjusted,logarithmic scales)
200
400
800
2005 2006 2007 2008 2009
0
2
4
6
8
10
12
14
2005 2006 2007 2008 2009
Condominium
Single-family
Single-family
Condominium
NBER recession shaded
NBER recession shaded
NBER recessions shadedNBER recessions shaded
Lehman
Lehman
8/14/2019 Econ 0609
11/15
Bank of Hawaii Economic Research Center https://www.boh.com/econ/512_539.asp (June 30, 2009) 11
400
800
1600
3200
60 65 70 75 80 85 90 95 00 05 10500
1000
2000
4000
75 80 85 90 95 00 05 10
Hawaii housing authorizations by building permit(quarterly, units, seasonally-adjusted)
U.S. housing starts(monthly, million units at seasonally-adjusted annual rates)
U.S. residential investment decline hasbroken out of the lower bound of the
cyclical range of the last half century
NBER recessions shaded
At the roots of the financial crisis, and even undelrying the
explosion of sub-prime lending in the years preceeding the
crisis that has left such a legacy of toxic mortgage-bankingrelated assets, is a garden variety housing cycle. Resi-
dential investment is one of the components of grossdomestic product that, though small, vary widely in a cycle
in which the range from peak to trough is larger than
virtually every other component of GDP. A tremendousamount of credit creation is associated with this residential
investment cycle, because wealth in the form of homeequity comprises the dominant form of household wealth,
larger even than stock market exposure through householdportfolio investment and retirement programs such as IRA
and 401k plans. Financial innovation during the last
decade extended the reach of securitization to a broaderclass of mortgage assets than those traditionally supported
by conforming fixed-rate, 30 year mortgages sponsored byagencies like Fannie Mae and Freddie Mac. Sub-prime
and Alt-A mortgages that had lower underwriting standards
were securitized by private packagers, which increased the
financial systems exposure to default risk as the housingcycle turned after 2005. As illustrated below, unlike the
cycle in the 1980s and 1990s that preceded the post-2005housing recession, the recent cycle was one in which U.S.
and Hawaii homebuilding cycles were in phase. Both
residential investment cycles peaked at around the sametime in 2005, whereas in the 1980s/90s cycle the trough of
the U.S cycle in 1990 coincided with the peak in the Hawaiicycle. At that time, the so-called Japan Bubble was having
an unusually influential effect on Hawaii housing invest-
ment, while the U.S. mainland was working its way throughthe down years that followed the S&L crisis of the 1980s.
Equally striking as the synchronous downturn in Hawaii inU.S. housing investment since 2005 is the differencebetween the extent to which U.S. homebuilding has fallenwell below the lower bound of the range over which it has
varied cyclically during the last half century. In Hawaii,
where complete data arent available for as long, thecurrent homebuilding downturn remains withinthe lowerbounds of housing decreases from the last few cycles.
Residential investment: at root
8/14/2019 Econ 0609
12/15
12 Bank of Hawaii Economic Research Center https://www.boh.com/econ/512_539.asp (June 30, 2009)
100
200
400
65 70 75 80 85 90 95 00 05 10
400
800
1600
3200
65 70 75 80 85 90 95 00 05 10 15
DBEDT data
Old BOH data
UHERO 3/09 forecast
500
1000
2000
80 85 90 95 00 05 10 15
Actual real contracting
H-P trend
Forecast
500
1000
2000
80 85 90 95 00 05 10 15
Actual real contracting
H-P trend
Forecast
3
4
5
6
7
8
80 85 90 95 00 05 10 15
Mar 2007
Sep 2008
Mar 2009
3
4
3
4
5
6
5
6
7
8
7
8
80 85 90 95 00 05 10 15
Mar 2007
Sep 2008
Mar 2009
Notoriously cyclical, construction is problematic
While the dominant view among economic forecasters isthat a broad-based reversal of private U.S. real investment
expenditure should mark the shift from negative real GDP
growth in first half 2009 to positive and accelerating realGDP growth in second half 2009, that pattern of invest-
ment-led recovery may be uneven across segments.Gains in equipment and software investment, and even
consumer durables purchases, seem likely. Residential
investment has overshot volumes consistent with meremaintenance of the per capita housing stock in the U.S.,
but here as well as in nonresidential investment theconstraints imposed on the overall economy by the credit
crunch in U.S. commercial banking will be slow to recede.Moreover, an overhang of commercial mortgage
refinancings expected to surge in the next two to seven
years poses additional uncertainties in spite of efforts bythe Federal Reserve to directly restore channels of
securitization for commercial mortgages. In Hawaii theseissues also weigh on the construction outlook. The most
recent forecast of the University of Hawaii Economic
Research Organization (UHERO), published in March2009, anticipated overall construction recovery in Hawaii no
earlier than 2011, partly as a result of implementation lagsassociated with federal fiscal stimulus. A quarterly forecast
prepared by the author for the January 2009 meeting of the
Hawaii Council on Revenues, beforepassage of theAmerican Recovery and Reinvestment Act of 2009 (ARRA:
federal fiscal stimulus) envisioned a similar timetable forconstruction recovery, with less rapid recovery for real
construction spending. Somewhat surprisingly, at leastsome observers appear to have expected that federal fiscal
stimulus would have strong near-term impacts, even
though it is virtual textbook doctrine that implementationlags for fiscal policy are long and variable. Material positive
impacts of the 2009 federal stimulus initiative, comprisingat three percentage points of GDP an injection twicethe
size of the New Deal in the 1930s, should be largest insecond half 2009 and first half 2010, gradually tapering offover the four quarters ending in mid-2011.
Brewbaker construction forecast for January
2009 meeting of Hawaii Council on Revenues(quarterly, million 2008 dollars, s.a., log scale)
NBER recessions shadedStrikes
UHERO Hawaii construction forecasts(annual, billion 2008 dollars, log scale)
NBER recessions shaded
Hawaii public construction commitments(annual, million 2008 dollars, s.a., log scale)
Burns Waihee
Hawaii private construction commitments:monthly totals and cyclical (trend) component(monthly, million 2008 dollars, s.a., log scale)
NBER recessions shaded
Includes county,state and federal
governmentcontracts
8/14/2019 Econ 0609
13/15
Bank of Hawaii Economic Research Center https://www.boh.com/econ/512_539.asp (June 30, 2009) 13
7.9
8.0
8.1
8.2
8.3
8.4
8.2
8.4
8.6
8.8
9.0
9.2
2006 2007 2008 2009
Disposable income (right)
Personal consumption (left)
-6
-4
-2
0
2
4
6
05 06 07 08 09-6
-4
-2
0
2
4
6
05 06 07 08 09
NBER recession start date
2007.4 and presumed
2009.3 end shaded
-8
-6
-4
-2
0
2
4
6
05 06 07 08 09-8
-6
-4
-2
0
2
4
6
05 06 07 08 09
-4
-2
0
2
4
6
8
10
92 94 96 98 00 02 04 06 08
-4
-2
0
2
4
6
8
10
92 94 96 98 00 02 04 06 08
What a long, strange trip it has been
When the Chair of the National Bureau of EconomicResearch (NBER), Stanford University Professor Robert
Hall, opined to a conference of the National Association
for Business Economics (NABE) in October 2008 that thejury was still out whether recession should officially be
declared (conceding its likelihood), U.S. real GDP stillhadnt experience a sustained and broad pattern of
decrease that would be consistent with economy-wide
recession. The intensity of the financial panic in the fall of2008 that followed the collapse of Lehman Brother in
September, despite extraordinary, and globally coordi-nated, monetary policy interventions in the following
months, helps explain why only one month after the NABEmeetings the NBER officially dated the peak of the last
U.S. expansion as December 2007. Clearly, the implosion
of U.S. consumer spending in second half 2008, much ofwhich accompanied the stock market collapse in the falls
financial panic, served as the decisive accelerant. AfterDecember 2007, widespread job loss averaging 150,000 to
200,000 per month through September 2008 contributed toa creeping deterioration in consumer sentiment. A collapse
of real consumption expenditure in third and fourth quarter
2008, marked by an unprecedented jump in the U.S.personal savings rate, dragged real GDP into the vortex.
By end-2009 it appears increasingly likely that the U.S.
personal savings rate will return to its historic range of 8-10percent (from the 1960s-90s). As of mid-2009, totalnominal U.S. personal savings had in one year reversed
two decades of decline to exceedpersonal savings almosta quarter century ago. While investment is beginning tomobilize in anticipation of a consumption recovery, and
massive inventory reductions now presage a productionrecovery, it seems quite plausible that a significant, secularshift in consumer behavior may have been initiated in 2008.
U.S. real disposable income and consumption(monthly, trillion 2008$ at annual rates, s.a., log scales)
Quarterly U.S. real aggregate consumptionexpenditure growth through first quarter 2009(quarterly percent change at annual rates)
Quarterly U.S. real GDP growth through firstquarter 2009(quarterly percent change at annual rates)
U.S. personal savings rate(percent of disposable income, through May 2009)
NBER recession shadedNBER recessions shaded
8/14/2019 Econ 0609
14/15
14 Bank of Hawaii Economic Research Center https://www.boh.com/econ/512_539.asp (June 30, 2009)
-1
0
1
2
3
4
5
03 04 05 06 07 08 09
Headline
Core
-1
0
1
2
3
4
5
03 04 05 06 07 08 09
Headline
-1
0
1
2
3
4
5
03 04 05 06 07 08 09
Headline
Core
-2
0
2
4
6
8
98 00 02 04 06 08 10 12
Fed funds rate
Taylor Rule-2
0
2
4
6
8
98 00 02 04 06 08 10 12
Fed funds rate
Taylor Rule
NBER recessions shaded
Target Fed Funds as f[inflation gap, output (growth) gap]:r* = [4.5 + (0.5)(p - p*) + (0.5)(y - y*)]
r = Fed Funds ratep = increase in the core CPI [p* =2 (target)]y = real GDP growth rate [y* = potential GDP growth]
0
500
1000
1500
2000
2500
Aug-07 Dec-07 Apr-08 Aug-08 Dec-08 Apr-09
Securities
Other assets
Term Auction credit
Commercial Paper funding
Central bank swaps
-8
-6
-4
-2
0
2
4
6
06 07 08 09 10
Actual
May 09 forecast
-8
-6
-4
-2
0
2
4
6
06 07 08 09 10
Actual
May 09 forecast
02/08
05/08
10/08
11/08
NABE05/09
NBER recession shaded
02/09
Unwinding the monetary intervention
Combined with an historically unprecedented fiscal policyintervention, the extension of monetary policy intervention
beyond traditional use of interest rate targeting is one of the
hallmarks of the current recession. When the federal fundsrate, reached zero at the end of 2008 a new policy ap-
proach was needed. Implemented gradually at first infourth quarter 2008 and then expansively in early-2009, this
was executed especially through securities acquisition,
while other channels of intervention actually diminished(graph at right). The Feds move to what Chairman
Bernanke has called credit easing, or quantitative easingin the theoretical literature, is exhibited in the massive
increase in the Feds balance sheet as depicted. Becausethis injection coincided with what the Depression-era
economist J.M. Keynes called an increase in liquidity
preference by households and businesses following thecollapse of Lehman Brothers, the Fed was essentially
acting to prevent the collapse of the money supply that
would otherwise have accompanied the flight towards thesave haven of bank deposits and cash equivalents. This
increase in the demand for money required a countervailingincrease in its supply. In the short-run, such behaviors are
rational responses to perceptions of increased risk. In thelong-run, as behavior returns to normal and households
and businesses go back to minimize holdings of liquidity
that forego higher interest earnings and other returns
(including utility from consumption) the Fed will graduallyhave to reverse its massive monetary injection to avoidbecoming a source of future price inflation.
U.S consumer price inflation rates show no sign offuture inflation risk, but only time will tell(percent changes, year-over-year)
NABE real GDP forecasts: 2nd half recovery
(quarterly percent change in real GDP at annual rates)
Federal Funds rates under the Taylor Rule(percent, actual and under NABE forecast assumptions)
Federal Reserve assets(billion dollars, weekly through mid-June 2009)
8/14/2019 Econ 0609
15/15
Long-term inflation expectation implied by the
difference between nominal and real yields(percent, includes a latent (unobservable) inflation riskpremium and liquidity risk premium)
Nominal U.S. Treasury yields(percent, adjusted to constant maturities)
Real U.S. Treasury (TIPS) yields(percent, adjusted to constant maturities)
Monetary policy and beyond: fiscal policy
An intensification of the global financial crisis in September2008 abated in winter 2009 with a stabilization of equity
valuations, enactment of federal fiscal policy stimulus, and
signs going into the spring that economic indicators mightexhibit a transition from recession to stabilization during the
course of the year. Indeed, much talk of green shoots ofspring accompanied a rebound in stock prices during the
latter two-thirds of March through April and May, before
running into the lawn mower of summer by June 2009. Atthe end of second quarter 2009 long-term yields on U.S.
Treasury notes and bonds had moved up sharply at the tailend of the stock price recovery. Concern about the
persistence of federal budget deficits implied by the fiscalstimulus plan and other ambitious initiatives including
health care systemic reform began to raise two kinds of
concerns both unfavorable for bond prices. First, under ascenario in which long-term inflation expectations remained
well-anchored, real long term interest rates might have torise to induce the necessary global savings required to
finance persistent deficits. Second, any erosion of mon-
etary policy credibility might lead to higher future inflationthan such deficits might imply if the central banks commit-
ment to restraining future inflation was not called intoquestion. Neither of these outcomes is necessary in the
sense that a stable inflation environment and higher real
interest rates could exist in a formation that doesnt undulycrowd out private investment under a sufficiently robust
economic recovery. At the end of second quarter 2009,long-term inflation expectations remained contained.
0
1
2
3
4
5
FF 1-yr2-yr3-yr 5-yr 7-yr 10-yr
20-yr
30-yr
Jul 06
June
2009
Jul 07
Jul 08
Dec 08
Apr 09
0
1
2
3
4
5
FF 1-yr2-yr3-yr 5-yr 7-yr 10-yr
20-yr
30-yr
0
1
2
3
4
5
FF 1-yr2-yr3-yr 5-yr 7-yr 10-yr
20-yr
30-yr
Jul 06
June
2009
Jul 07
Jul 08
Dec 08
Apr 09
-2
-1
0
1
2
3
FF 1-yr2-yr3-yr
5-yr
7-yr
10-yr
20-yr
30-yr
Jul 06, 07, 08
Jun 2009
Mar 2008
Nov 2008
Feb 2009
-2
-1
0
1
2
3
FF 1-yr2-yr3-yr
5-yr
7-yr
10-yr
20-yr
30-yr
Jul 06, 07, 08
Jun 2009
Mar 2008
Nov 2008
Feb 2009
0
1
2
3
FF 1-yr2-yr3-yr
5-yr
7-yr
10-yr
20-yr
30-yr
Jul 2006
Jul 2007
Jul 2008
Mar 2008
Jun 2009