Senate Ways & Means + House Finance

Pre-session Briefing

January 4, 2013

Forecast Project

Dr. Carl BonhamExecutive Director, UHERO

Tourism Hot, but broader growth still elusive

on the way

UHERO.HAWAII.EDU ©2013January 4, 2013

Overview

External Snapshot• Recent news on US economy is encouraging • 2013 outlook still highly uncertain‣ Fiscal Cliff averted but Debt Debacle II looms‣ Can deficit reduction be offset by private sector?‣ Fed to ease continuously until improvement occurs ‣ Europe’s slow moving train wreck continues to drag

Current Conditions

2013 Outlook‣ Visitor arrivals will set new record‣ Airline lift is still the story‣ State and County cuts are ending‣ Real Estate and Construction outlook improving rapidly‣ Oahu construction about to ramp up

Source: Census

200

230

260

290

320

350

380

410

440

470

500

Jan-2

006

Jan-2

007

Jan-2

008

Jan-2

009

Jan-2

010

Jan-2

011

Jan-2

012

Nov-2

012

$ Bil

US Retail Sales (SAAR)

Consumer spending still on again off again

Retail Salesex Gasoline

UHERO.HAWAII.EDU ©2013January 4, 2013

4%

5%

6%

7%

9%

10%

11%

12%

1990

Q1

1992

Q3

1995

Q1

1997

Q3

2000

Q1

2002

Q3

2005

Q1

2007

Q3

2010

Q1

2012

Q2

Homeowners Financial Obligation Ratios

But De-leveraging on track

Consumer

Mortgage

Source: FRB

UHERO.HAWAII.EDU ©2013January 4, 2013

3.0

3.6

4.1

4.7

5.3

5.9

6.4

7.0

1925

1933

1941

1949

1957

1965

1973

1981

1989

1997

2005

2011

Average Age of Consumer Durables Highest in 60+ Years

And replacement spending poised for rebound

Source: BEA http://192.149.12.20/iTable/index_FA.cfm

UHERO.HAWAII.EDU ©2013January 4, 2013

Backing away from the fiscal cliff

The Good• There was a deal—and it came before the end of January!• Fiscal austerity reduced (from what it could have been)‣ extending unemployment benefits, ‣ raising income threshold to 450K‣ The AMT is permanently patched

• And the deficit has been declining for 3 years‣ FY09—10.1% of GDP, FY10—9%

FY11—8.7%, FY13—6%?Details for wonks (thanks to Ezra Klein at WaPo)— Tax rates will permanently rise to Clinton-era levels for families with income above $450,000 and individuals above $400,000. All income below the threshold will permanently be taxed at Bush-era rates.— The tax on capital gains and dividends will be permanently set at 20 percent for those with income above the $450,000/$400,000 threshold. It will remain at 15 percent for everyone else. (Clinton-era rates were 20 percent for capital gains and taxed dividends as ordinary income, with a top rate of 39.6 percent.) — The estate tax will be set at 40 percent for those at the $450,000/$400,000 threshold, with a $5 million exemption. That threshold will be indexed to inflation, as a concession to Republicans and some Democrats in rural areas like Sen. Max Baucus (D-Mt.).— The sequester will be delayed for two months. Half of the delay will be offset by discretionary cuts, split between defense and non-defense. The other half will be offset by revenue raised by the voluntary transfer of traditional IRAs to Roth IRAs, which would tax retirement savings when they’re moved over.— The 2009 expansion of tax breaks for low-income Americans: the Earned Income Tax Credit, the Child Tax Credit, and the American Opportunity Tax Credit will be extended for five years. — The Alternative Minimum Tax will be permanently patched to avoid raising taxes on the middle-class.— The deal will not address the debt-ceiling, and the payroll tax holiday will be allowed to expire.— Two limits on tax exemptions and deductions for higher-income Americans will be reimposed: Personal Exemption Phaseout (PEP) will be set at $250,000 and the itemized deduction limitation (Pease) kicks in at $300,000. —The full package of temporary business tax breaks — benefiting everything from R&D and wind energy to race-car track owners — will be extended for another year. — Scheduled cuts to doctors under Medicare would be avoided for a year through spending cuts that haven’t been specified.— Federal unemployment insurance will be extended for another year, benefiting those unemployed for longer than 26 weeks. This $30 billion provision won’t be offset. — A nine-month farm bill fix will be attached to the deal, Sen. Debbie Stabenow told reporters, averting the newly dubbed milk cliff.

UHERO.HAWAII.EDU ©2013January 4, 2013

To the Fiscal plateau —it goes on and on

The Bad• No solution to debt sustainability problem.• Sequestration only postponed for two months• We passed the debt ceiling on Monday.• Continuing resolution expires at the end of March

Remember Debt Debacle I• Aug 2. —Budget Control Act of 2011 signed, the same day the

Treasury expected to exhaust the its borrowing authority.• Aug 5. S&P downgrades the US credit rating• Market volatility soars to highest level since Lehman

Hopefully this time will be different

UHERO.HAWAII.EDU ©2013January 4, 2013

Prof. ServicesConstruction

AccommodationRetail TradeHealth Care

TransportationFood ServicesFinance & Ins.Manufacturing

Other ServicesArts, Entertain. & Rec

AgricultureInformation

Wholesale TradeState Gov.Local Gov.

Federal Gov.Public Education

-600 0 600 1,200 1,800 2,400 3,000

Tourism boom to spread in 2013

2012 2013

change in State job counts by sector

Source: DLIR

UHERO.HAWAII.EDU January 4, 2013

State Job Count vs Unemployment Rate

Job Market improvement—accelerating

0

2

3

5

6

8

2007M1 2008M1 2009M1 2010M1 2011M1 2012M1 2012M11580

590

600

610

620

630Thou.%

Unemployment Rate* (left axis) Non-farm Jobs* (right axis)* Source: DLIR Seasonally adjusted—UHERO

UHERO.HAWAII.EDU ©2013January 4, 2013

Visitor Arrivals & Spending

Can the tourism surge continue?

400

467

533

600

667

733

800

2006

M1

2007

M1

2008

M1

2009

M1

2010

M1

2011

M1

2012

M1

2012

M10630

735

840

945

1,050

1,155

1,260Thousands*

Visitors (left axis) Spending (right axis)

Mil. $*

* Source: HTA; Seasonally adjusted by UHERO

UHERO.HAWAII.EDUJanuary 4, 2013

1,900

2,006

2,113

2,219

2,325

2,431

2,538

2,644

2,750

Janua

ry

Febr

uary

March

April

MayJun

eJul

y

Augus

t

Sept

embe

r

Octo

ber

Novem

ber

Decem

ber

2008 2009 2010 2011 2012

Scheduled Seats Outlook

Thousands of seats

* Source: HTA

Can the tourism surge continue?

UHERO.HAWAII.EDU ©2013January 4, 2013

Oahu Room Revenue and Occupancy Rates

Can the tourism surge continue?

50

70

90

110

130

150

170

190

210

230

250

1998

q1

1999

q1

2000

q1

2001

q1

2002

q1

2003

q1

2004

q1

2005

q1

2006

q1

2007

q1

2008

q1

2009

q1

2010

q1

2011

q1

2012

q1

2012

q4*60

63

66

69

72

75

78

81

84

87

90$Revpar Room Rate Occupancy Rate

%

* Source: Hospitality Advisors & UHERO

UHERO.HAWAII.EDU January 4, 2013

0

250

500

750

1,000

1,250

1,500

1993Q41995Q4

1997Q41999Q4

2001Q42003Q4

2005Q42007Q4

2009Q42011Q4

2012Q3

0

500

1,000

1,500

2,000

2,500

3,000

Oahu Single Family Market Data

Sales (left axis) Inventory (right axis)

* Seasonally adjusted—UHEROSource: Prudential Locations

notHousing market in balance?

UHERO.HAWAII.EDU ©2010January 4, 2013

Real Building Permits

0

600

1,200

1,800

2,400

3,000

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

Private Residential (left axis)Non-Residential Bldg Permits

And Supply of new homes at record lows

Mil. 11$

UHERO.HAWAII.EDU January 4, 2013

Honolulu Single Family Median Resale Prices

Best Affordability in a decade—for now

0

100

200

300

400

500

600

700

800

1997

Q4

1999

Q4

2001

Q4

2003

Q4

2005

Q4

2007

Q4

2009

Q4

2011

Q4

2013

Q4

-5.0

-3.9

-2.9

-1.8

-0.8

0.3

1.4

2.4

3.5Thou. $ (SA)

Affordable Mortgage Median SF Resale Price Job growth (right axis)

%

UHERO.HAWAII.EDU ©2010January 4, 2013

-8

-6

-4

-2

0

2

4

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Non-Farm jobsReal Income

Slow recovery from deep recession

Job and Income ForecastsPercent

UHERO.HAWAII.EDU ©2013January 4, 2013

Mahalo

UHERO.HAWAII.EDU ©2013January 4, 2013

Mahalo

UHERO.HAWAII.EDU ©2013January 4, 2013

Mahalo

Eugene Tian Department of Business, Economic Development & Tourism

to the

Current Hawaii Economic Conditions

Committee on Ways and Means

and

Committee on Finance

January 4, 2013

DBEDT November 2012 Forecast

Key Economic Indicators for Hawaii are positive in 2012 and

continue to be positive in 2013

(Annual % Change)

Actual

CY 2011

Forecasted

CY 2012

Forecasted

CY 2013

Total Population 1.0% 1.0% 1.0%

Visitor Arrivals 4.0% 9.4% 3.9%

Visitor Expenditures 10.7% 18.8% 5.2%

Honolulu CPI-U 3.7% 2.5% 2.4%

Personal Income 5.7% 4.3% 4.8%

Real Personal Income 1.9% 1.8% 2.3%

Total Non-Ag Wage and Salary Jobs 0.9% 1.5% 2.0%

Source: Department of Business, Economic Development & Tourism

State general fund tax revenues increased 13.0% during the 1st 11

months of 2012. For the current fiscal year FY 2013, general fund

revenues increased 12.3%

Visitor industry performed better than expected with 9.9% increase

in visitor arrivals, and 19.2% increase in spending during first 11

months. Passenger count for December increased by 6.9%

Labor market continues improving. Non-Ag wage and salary job

counts increased 1.5% during the 1st 11 months of 2011. Initial

unemployment claims for the whole year of 2012 were 11.1% lower

that those in 2011

Construction activities measured by value of building permit during

the 1st 11 months of 2011 was 40.4% higher than the 2011 level.

Construction jobs start increasing since August 2012

Latest developments in Hawaii’s Economy

Council on Revenues revised state tax revenue forecast upward on

January 3, 2013

Federal Fiscal Cliff, Sequestration, the loss of US Senate seniority

add more uncertainties to the economy

Latest developments in Hawaii’s Economy

Personal Income and Labor Market

Non-Ag Wage and Salary Jobs1

Unemployment Rates1

Per Capita Income ($000)

Quarterly Personal Income Growth2 (Compared to Same Period in Previous Year)

500,000

520,000

540,000

560,000

580,000

600,000

620,000

640,000

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Hawai‘i United States

13th lowest State

over the past 11

month period

$25.0

$30.0

$35.0

$40.0

$45.0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Hawai‘i United States

Source: DBEDT, Bureau of Labor Statistics, U.S. Department of Labor 1 As of November 2012 2 As of 3Q 2012

Employment and Income Metrics are Strong Diverse and Growing Economy

7.4%

5.3%

2.9% growth in November

1.5% growth over last 11 months

(6.0)%

(4.0)%

(2.0)%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Hawai'i United States

-6%

-4%

-2%

0%

2%

4%

6%

8%

19

91

.1

19

91

.3

19

92

.1

19

92

.3

19

93

.1

19

93

.3

19

94

.1

19

94

.3

19

95

.1

19

95

.3

19

96

.1

19

96

.3

19

97

.1

19

97

.3

19

98

.1

19

98

.3

19

99

.1

19

99

.3

20

00

.1

20

00

.3

20

01

.1

20

01

.3

20

02

.1

20

02

.3

20

03

.1

20

03

.3

20

04

.1

20

04

.3

20

05

.1

20

05

.3

20

06

.1

20

06

.3

20

07

.1

20

07

.3

20

08

.1

20

08

.3

20

09

.1

20

09

.3

20

10

.1

20

10

.3

20

11

.1

20

11

.3

20

12

.1

20

12

.3

Source: U.S. Bureau of Economic Analysis and U.S. Bureau of Labor Statistics

Source: BLS, Employment, Hours, and Earnings – National(Current Employment Statistics - CES) <http://www.bls.gov/data/>

In the United States, most of the industries gained jobs during the 1st 11

months of 2012 (change in jobs from same period in prior year, in 1,000 jobs)

-200 0 200 400 600 800

Local gov.

Federal gov.

Information

State gov.

Accommodation

Entertainment

Construction

Other services

Financial activities

Mining and logging

Educational services

Transp. Warehouse & Util.

Wholesale trade

Retail trade

Manufacturing

Food services

Health care

Prof. services

-500 0 500 1,000 1,500 2,000 2,500 3,000 3,500

Other Services

Federal Gov.

Information

Local Gov.

Manufacturing

Educational Services

Construction

Wholesale Trade

Entertainment

Agriculture

State Gov.

Health Care

Prof. Services

Financial Activities

Transp., Warehousing, Util.

Retail Trade

Accommodation

Food Services

In Hawaii, most of the industries gained jobs during the 1st 11 Months

2012, tourism sector contributed most to the job gains

-6%

-4%

-2%

0%

2%

4%

6% Hawaii Monthly Total Job Growth Rate: Jan. 1991 – Nov. 2012

Source: Hawaii State Department of Labor

and Industrial Relations

Updated thru November 2011

0

500

1,000

1,500

2,000

2,500

3,000

Nu

mb

er

of

Cla

ims

2009 2010 2011 2012

Changes from the same month in prior year

Source: Hawaii DLIR

Labor force

Unemployed

-40,000

-30,000

-20,000

-10,000

0

10,000

20,000

30,000

2007.0

1

2007.0

4

2007.0

7

2007.1

0

2008.0

1

2008.0

4

2008.0

7

2008.1

0

2009.0

1

2009.0

4

2009.0

7

2009.1

0

2010.0

1

2010.0

4

2010.0

7

2010.1

0

2011.0

1

2011.0

4

2011.0

7

2011.1

0

2012.0

1

2012.0

4

2012.0

7

2012.1

0

Employed

Source: Bureau of Labor Statistics

Changes from the same month in prior year

-8000

-6000

-4000

-2000

0

2000

4000

6000

8000

Jan-07

Apr-

07

Jul-

07

Oct-

07

Jan-08

Apr-

08

Jul-

08

Oct-

08

Jan-09

Apr-

09

Jul-

09

Oct-

09

Jan-10

Apr-

10

Jul-

10

Oct-

10

Jan-11

Apr-

11

Jul-

11

Oct-

11

Jan-12

Apr-

12

Jul-

12

Oct-

12

Employed

Unemployed

Labor force

Construction and Real Estate

Private Construction Activity Private Construction Activity Has Turned the Conner in 2012

12-Month Moving Average of Building Authorization Components*

*Additions and Alterations and Commercial & Industrial data do not include Kauai. All data through November 2012.

Source: County building departments and U.S. Census Bureau. 15

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000 Residential

Commercial & Industrial

Additions & Alterations

$ T

hou

san

ds

0

100,000

200,000

300,000

400,000

500,000

600,000

Source: Hawaii State Department of Accounting and General Services

State Government CIP spending has been at over $1B level per year in the last 5 years, 3Qs

2012 increased 32.9%

(in $1,000)

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000 Ja

n-0

0

Ap

r-0

0

Jul-

00

O

ct-

00

Jan

-0

1

Ap

r-0

1

Jul-

01

O

ct-

01

Jan

-0

2

Ap

r-0

2

Jul-

02

O

ct-

02

Jan

-0

3

Ap

r-0

3

Jul-

03

O

ct-

03

Jan

-0

4

Ap

r-0

4

Jul-

04

O

ct-

04

Jan

-0

5

Ap

r-0

5

Jul-

05

O

ct-

05

Jan

-0

6

Ap

r-0

6

Jul-

06

O

ct-

06

Jan

-0

7

Ap

r-0

7

Jul-

07

O

ct-

07

Jan

-0

8

Ap

r-0

8

Jul-

08

O

ct-

08

Jan

-0

9

Ap

r-0

9

Jul-

09

O

ct-

09

Jan

-1

0

Ap

r-1

0

Jul-

10

O

ct-

10

Jan

-1

1

Ap

r-1

1

Jul-

11

O

ct-

11

Jan

-1

2

Ap

r-1

2

Jul-

12

O

ct-

12

Source: Hawaii State Department of Labor and Industrial Relations

Updated thru December 2011

Honolulu median selling prices

18

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

$800,000 Single family Condo

0

500

1000

Single family Condo

Source: Honolulu Board of Realtors

Number of units sold

Tourism

Source: Hawai‘i Tourism Authority, DBEDT

Through November 2012

400,000

450,000

500,000

550,000

600,000

650,000

700,000

750,000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Vis

itor

Arr

ivals

Total Visitor Arrivals by Air

2011

2010

2009

2012

Visitor Arrivals Over the Last 5 Years (000)1 Visitor Expenditures Over the Last 5 Years ($mm)1

Source: DBEDT, HTA. 2012 figure is a projection

$12,811

$11,399

$9,993

$11,066

$12,255

$14,562

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

2007 2008 2009 2010 2011 2012

7,628

6,823 6,517

7,018 7,299

7,982

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2007 2008 2009 2010 2011 2012

Hawaii’s Tourism Industry Continues to Show Remarkable

Strength, Creating New Records in 2012

Diverse and Growing Economy

22

22 22 22

Visitor Activity

For the First 11 Months of 2012, 62.6% of Hawaii Visitors Were From the U.S. with Japanese

Visitors Accounting for 18.4%

US West

40.9%

US East

21.8%

Japan

18.4%

Canada

6.1% Others

12.8%

US West,

42.4%

US East,

23.4%

Japan,

17.8%

Canada,

5.8% Others,

10.7%

2010 First 11 Months of 2012

Visitors from Canada and other markets are increasing

Visa waivers for Taiwanese started on November 1 of 2012

Source: Hawaii Tourism Authority

23

Market Arrivals Length of Stay

(Days)

Daily Spending

($)

Total Expenditure

($M)

U.S. West 2,905,674 9.50 151.3 4,177.3

U.S. East 1,549,721 10.44 191.5 3,099.1

Japan 1,312,342 6.02 300.7 2,373.7

Canada 431,344 13.01 154.0 864.1

Other 913,950 10.13 254.3 2,354.8

International Visitors Accounted For 43.5% of Total Visitor Spending

Source: Department of Business, Economic Development & Tourism, Hawaii Tourism Authority 1 Last Twelve months from October 2011 to September 2012

Region Historical peak

level

2008 Arrivals LTM Arrivals1 % Change

US Mainland 5,173,264 4,452,343 4,804,721 7.9

Japan 2,216,890 1,175,199 1,388,056 18.1

Canada 477,564 459,580 494,472 7.6

China 81,738 54,235 99,273 83.0

Korea 122,902 38,110 146,289 283.9

Taiwan 88,193 11,482 10,335 -10.0

Australia 237,808 137,812 233,056 69.1

Europe 231,604 115,172 131,010 13.8

Latin America 22,116 18,896 24,272 28.5

0

10

20

30

40

50

60

70

80

90 1

95

2

19

55

19

58

19

61

19

64

19

67

19

70

19

73

19

76

19

79

19

82

19

85

19

88

19

91

19

94

19

97

20

00

20

03

20

06

20

09

20

12

*

(Percent of all Visitors)

First Time Visitors

Repeat Visitors

Source: Hawaii Tourism Authority, 2012 figure YTD thru November

26

26

Visitor Activity

Source: Hawaii State Department of Business, Economic Development and Tourism

Daily Passenger Counts Continue Increasing

60%

80%

100%

120%

140%

160%

1-J

ul

8-J

ul

15-J

ul

22-J

ul

29-J

ul

5-A

ug

12-A

ug

19-A

ug

26-A

ug

2-S

ep

9-S

ep

16-S

ep

23-S

ep

30-S

ep

7-O

ct

14-O

ct

21-O

ct

28-O

ct

4-N

ov

11-N

ov

18-N

ov

25-N

ov

2-D

ec

9-D

ec

16-D

ec

23-D

ec

30-D

ec

Domestic

Int'l Flights from Japan

Total

Base Line

Source: Department of Business, Economic Development & TourismNote: Includes all direct out-of-state flights to the islands, excludes inter-island flights.

7-Day Moving Average Ratio (100% = passenger count is the same this year as it was last year on the same date)

27

27 27

Source: Smith Travel Research, Hospitality Advisors LLC

Hotel Revpar Set New Records During the First 10 Months of 2012

77.7%

81.1%79.8%

75.0%

70.5%

66.5%68.5%

73.4%

77.4%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

2004 2005 2006 2007 2008 2009 2010 2011 2012*

$152.17

$166.16

$184.81

$199.96$201.85

$176.46 $172.22

$189.62

$201.62

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

$200

$220

$240

2004 2005 2006 2007 2008 2009 2010 2011 2012*

$118.21

$134.69

$147.41 $150.01

$142.30

$117.35 $117.97

$139.18

$156.05

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

2004 2005 2006 2007 2008 2009 2010 2011 2012*

Average Occupancy Rates

2004 to 2012 (thru Oct.)

Average Hotel Room Rates 2004

to 2012 (thru Oct.)

Average Room Revenue per Available Room

2004 to 2012 (thru Oct.)

* First 10 months

Select New Flights and Routes in 2012

Source: Public news, DBEDT 1 Includes new flights, routes and up-gauging equipment on existing flights for all airlines

Investing in the Future

Hawaiian Airlines Expansion

28% capacity increase from summer 2011 to 2012

Signed codeshare agreement with JetBlue Airlines, adding to route network on mainland

New nonstop flights announced to Australia, New Zealand and Japan; opened sales offices in Beijing and Shanghai

$435 million in total debt financing for 22 new aircraft since 2010

Increase in inter-island capacity, including service to secondary markets in Hawai‘i

New Trans-Pacific Air Seats in 20121

O‘ahu

70.1%

Maui

12.4%

Hawai‘i

8.8% Kaua‘i

8.7%

Total: 816,5821

Air seats capacity has increased by 8.8% in 2012

Airline City Frequency Air Seats

Hawaiian Fukuoka, New York, Brisbane, Sapporo Varies 121,338

Alaska San Diego, Oakland, San Jose Daily 104,986

Asiana Incheon Varies 59,496

Allegiant Las Vegas, Fresno, Bellingham, Eugene, Santa Maria, Stockton Varies 49,500

United Washington D.C. Daily 48,645

China Eastern Shanghai Twice/Week 29,848

Source: HTA

500,000

550,000

600,000

650,000

700,000

750,000

800,000

850,000

900,000

950,000

1,000,000

JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC

20082010

2011

20122013

Tax Revenues

General fund tax revenue: FY 1990 to FY 2013*

In $1,000

COR Forecast of 5.1% growth in January 3, 2013

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

FY90 FY91 FY92 FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13*

-40%

-20%

0%

20%

40%

60%

80%

20

03

.01

20

03

.03

20

03

.05

20

03

.07

20

03

.09

20

03

.11

20

04

.01

20

04

.03

20

04

.05

20

04

.07

20

04

.09

20

04

.11

20

05

.01

20

05

.03

20

05

.05

20

05

.07

20

05

.09

20

05

.11

20

06

.01

20

06

.03

20

06

.05

20

06

.07

20

06

.09

20

06

.11

20

07

.01

20

07

.03

20

07

.05

20

07

.07

20

07

.09

20

07

.11

20

08

.01

20

08

.03

20

08

.05

20

08

.07

20

08

.09

20

08

.11

20

09

.01

20

09

.03

20

09

.05

20

09

.07

20

09

.09

20

09

.11

20

10

.01

20

10

.03

20

10

.05

20

10

.07

20

10

.09

20

10

.11

20

11

.01

20

11

.03

20

11

.05

20

11

.07

20

11

.09

20

11

.11

20

12

.01

20

12

.03

20

12

.05

20

12

.07

20

12

.09

20

12

.11

Source: Hawaii State Department of Labor Taxation Through November 2012

0

200

400

600

800

1,000

1,200

1,400

1,600 2000:1

Q

2000:2

Q

2000:3

Q

2000:4

Q

2001:1

Q

2001:2

Q

2001:3

Q

2001:4

Q

2002:1

Q

2002:2

Q

2002:3

Q

2002:4

Q

2003:1

Q

2003:2

Q

2003:3

Q

2003:4

Q

2004:1

Q

2004:2

Q

2004:3

Q

2004:4

Q

2005:1

Q

2005:2

Q

2005:3

Q

2005:4

Q

2006:1

Q

2006:2

Q

2006:3

Q

2006:4

Q

2007:1

Q

2007:2

Q

2007:3

Q

2007:4

Q

2008:1

Q

2008:2

Q

2008:3

Q

2008:4

Q

2009:1

Q

2009:2

Q

2009:3

Q

2009:4

Q

2010:1

Q

2010:2

Q

2010:3

Q

2010:4

Q

2011:1

Q

2011:2

Q

2011:3

Q

2011:4

Q

2012:1

Q

2012:2

Q

2012:3

Q

Hawaii bankruptcy filings has been declining since the 3rd quarter of 2010

All the economic indicators show that Hawaii’s economy is on a normal growth path – though unemployment rate is still lagging

Visitor industry performed very strong and will set another new record in 2013

Labor market will continue to improve in 2013

Construction industry shows signs of recovery in 2012, 2013 is a bright year for construction

Personal income will continue to grow at a rate similar to the national average

Hawaii’s economy will grow at a higher rate than the nation in 2013.

Hawaii’s unemployment rate will still be better than the nation in 2013

Brewbaker Testimony January 4, 2012 page 1 of 6

Testimony

of

Paul H. Brewbaker, Ph.D., Principal, TZ Economics

before a joint informational briefing of the Hawaii State House Finance Committee

and Hawaii State Senate Ways and Means Committee

Friday, January 4, 2013 Good morning and thank you this opportunity to present to you some ideas about the economic outlook and implications for State finances. My name is Paul Brewbaker and I am the Principal of TZ Economics, a Hawaii consultancy. This testimony provides a narrative to the accompanying slideshow. The current economic expansion, at 3½ years, is approaching a plausible halfway point. Lengths of expansions aren’t reliably predictable, but the last three have averaged eight years in duration, plus or minus a couple years (slide 2).1 Though the Great Recession ended in June 2009, the gloom and doom of some economic forecasters has lingered on. Yet, real output has risen steadily (slide 3). Employment has risen (slide 4), even on the Neighbor Island where jobs fell farther (slide 5). The decline in unemployment rates has quickened, especially in Hawaii. Though bad, the Great Recession of 2008-09 did not yield the highest unemployment rates since the Great Depression (slide 6). Even though economic recovery could be contemplated by early-2009, the recession was two or three times as bad as the worst forecast scenarios at that time. 2 Three years ago, in this briefing, we reviewed how Council on Revenues (COR) general fund forecasts during fiscal year 2009 consistently were too high (slide 7).3 (The COR was not alone.4) Now, after three years of economic growth, forecasts may be too low.

1 The average 8-year duration of the last three U.S. economic expansions was twice that of expansions in the half century prior to the 1980s, and twice that again of those in the seven decades ending in the Roaring Twenties. See National Bureau of Economic Research cycle dates at http://www.nber.org/cycles/cyclesmain.html. 2 See my commentary, “Slowly, but surely,” in The Honolulu Advertiser (April 19, 2009) archives (http://the.honoluluadvertiser.com/article/2009/Apr/19/op/hawaii904190343.html). 3 In my January 2010 presentation, the sequence of slides 24-29 document downward revisions to Hawaii Council on Revenues (COR) forecasts as the financial crisis and economic recession intensified during fiscal year 2009 (http://www.state.hi.us/tax/cor/2010__01-05-paul_brewbaker_presentation.pdf). COR general fund revenue growth rates were below actual outcomes, 2004-06, and above actual outcomes 2007-2010. See slides 30-31. 4 Op. cit., slide 32, shows National Association for Business Economics forecast survey estimates for U.S. real GDP growth before and after the collapse of Lehman Brothers (September 2008).

Brewbaker Testimony January 4, 2012 page 2 of 6

The COR process yields average forecast growth estimates that smoosh out the business cycle. Dr. Leroy Laney of HPU observed this in the 1990s. My testimony in January 2010 reaffirmed it. The Council forecasts too high on the way down and too low on the way up the business cycle. In booms and busts one might place greater weight on extreme perspectives; the average doesn’t. Revenue growth forecasts were too low during the 2000s expansion and too high around the 2008-09 contraction. Now, revenues are rising faster than forecast (slide 8). General fund revenues have never been higher in nominal terms, and are close enough for horseshoes and hand grenades in real terms (slide 9). One could have taken the March 2009 COR forecast for fiscal year 2012 at face value and skipped three years: actual fiscal year 2012 revenues were higher than all succeeding forecasts (slide 10). Nothing that happened subsequently mattered.5 COR forecasts for the current fiscal year, 2013, have been revised upward for the last three years. Despite economic recovery denial, revenue growth was better than and revenues higher than expected. Only a year ago, people remained skeptical.6 Yet, as we’ll see, 2012 blew Hawaii tourism’s doors off. I expect economic recovery to continue on its plodding path. Even a mild recession in first half 2013 would be a n00bular recession attributable to a dysfunctional U.S. Congress, a wannabe recession like the 2001 dot.com recession. We may not be hurtling off a Fiscal Cliff,7 but we’re still stumbling down a Fiscal Crumble. Federal deficit reduction will exert fiscal drag on economic growth. Impacts of reduced federal spending earmarks already are unfolding.8 Still, Hawaii handled a 30 percent reduction in the U.S. military in Hawaii during the Clinton Administration, a template of things to come. It’s manageable, but disruptive in the short-term. The loss of federal earmarks is just a down payment on structural deficit reduction, 2-4 percentage points of GDP in either higher federal tax revenues or lower federal spending (slide

5 In commentary for The Honolulu Advertiser in April 2010, I wrote that, “The U.S. recession likely ended in the third quarter of 2009,” six months earlier. Eventually the NBER dated the recession’s end as June 2009 (see fn 2), nine months earlier. Explaining that their readership was not ready to hear that economic recovery was almost over, the Advertiser published my commentary under the headline, “The recession [sic] is almost over. Really! Here’s how you can tell,” (May 2, 2010) (http://the.honoluluadvertiser.com/article/2010/May/02/op/hawaii5020305.html). 6 Forecasting 2.6 and 2.7 percent visitor arrivals growth for the year 2012, in November 2011 (year-to-date 2012 actual visitor arrivals growth has been 9.4 percent through November), the UHERO 2012 forecast was entitled Hawaii in Pause Mode, (http://www.uhero.hawaii.edu/assets/11Q4StateUpdatePublicSummary.pdf (November 4, 2011)), and the title of First Hawaiian Bank’s forecast was Hopes for a Faster Hawaii Recovery Dampened (https://www.fhb.com/pdf/FHB_OahuEconForecast2011.pdf (November 18, 2011)). 7 An expression attributed to Federal Reserve Chairman Ben Bernanke by the media in the press conference on December 12, 2012 (http://www.federalreserve.gov/monetarypolicy/fomcpresconf20121212.htm; transcript at http://www.federalreserve.gov/mediacenter/files/FOMCpresconf20121212.pdf). 8 Talk to my sister-in-law, who for about fifteen years thought she worked for DBEDT. Turns out she actually worked for Senator Inouye (LOL)—who knew? Seriously, after working at the Naval Ocean Science Center (NOSC), sistah worked with the National Defense Center for Excellence in Research in the Ocean Sciences (CEROS), a conduit for federal funding initiated by the Defense Advanced Research Projects Agency (DARPA), administratively attached to DBEDT. CEROS shut down in October 2012. Real jobs are being lost.

Brewbaker Testimony January 4, 2012 page 3 of 6

11).9 This implies up to one-quarter reductions in defense and nondefense discretionary federal spending plus higher, more progressive marginal income tax rates. And why not? Since the 1970s the income distribution has changed dramatically. The U.S. income share of the top 10 percent rose from one-third to one-half of the total, the share of the top 1 percent rose from one-tenth to one-quarter, and the share of the top 0.1 percent quadrupled from 3 percent to 12 percent of all U.S. income. In Hawaii it changed almost as much (slide 12). Nowhere has the reversal of income equality since the 1970s exceeded America’s (slide 13). It is largely absent from Europe and Japan (slide14). From a tax perspective, this income distribution shift cannot be ignored, but other structural changes may be even more important for Hawaii. Hawaii needs to contractually rethink public service, rewarding public employees for their productivity growth, retaining more talented and experienced workers and attracting younger workers. Public and private sectors need an entirely different idea of the workplace and of retirement. Demographic reality is that from 10 working-age persons (aged 20-64) for each older person (aged 65 and over) in 1970, Hawaii now has 4 workers per older person (slide 15). DBEDT estimates 2 by 2040. Greater efficiency, higher productivity and faster economic growth, are the only ways to meet the challenges of population aging, fulfilling commitments to intergenerational transfers in Social Security and in public employee retirement systems. Beyond that, Hawaii needs to revive investment, stop negating capital formation with boneheaded policies and redouble stewardship of its resource endowment. Faster economic growth creates the potential for better stewardship. Instead, Hawaii is where “energy independence,” “food self-sufficiency,” “buying local,” versions of the economic concept of autarky—as in North Korea (http://en.wikipedia.org/wiki/Autarky), policies that make people worse off—have become the new fashion. This is an epic FAIL in economic policy-making. Public investment in Hawaii has been shrinking for a half century, as a share of value-added (slide 15). New private residential investment hadn’t been lower than it was in 2011 since World War II (slide 16). Still, a recent upturn bodes well for the next housing cycle (slide 17), validated by rising home prices: 2012 may only be the second worst year since the war. There was never less real new commercial construction in the last half century than there is now (slide 18). While the State obsesses over a single, 800-unit residential tower in Kakaako, new commercial construction has dwindled to Territorial Era levels.10 Hundreds of millions of dollars in renewable energy tax credits that could have been deployed in public infrastructure investment are, instead, transferring wealth from poorer renters to richer homeowners, via rising additions and alterations (like rooftop PV installation) (slide 19). Any rise in real contracting receipts associated with energy tax credits has not translated into construction jobs (slide 20). Don’t misunderstand me: I’m down with more construction, more investment, greater physical and human capital formation. I’m down with productivity growth. A credible 9 See data at http://www.cbo.gov/sites/default/files/cbofiles/attachments/43453-AugustUpdate-Budget_Projections.xls and a good discussion at http://www.cbo.gov/sites/default/files/cbofiles/attachments/43692-DeficitReduction_print.pdf. 10 Andrew Gomes, “Forest City selected to build Super Tower in Kakaako,” The Honolulu Star-Advertiser (December 13, 2012) (http://www.staradvertiser.com/news/breaking/183409111.html?id=183409111)

Brewbaker Testimony January 4, 2012 page 4 of 6

commitment to transparent regulatory rules of the game should facilitate investment. In Hawaii, regulation denies investment. I’m not talking about 800 units in one building, maybe, by the end of the decade. I’m talking about thousands of new housing units every year. Within a credible urban boundary, can’t regulatory posture be: “it’s already city, knock yourself out?” Instead, it’s “all you buggahs over there: stop at 300 feet; only us guys can build to 650.” Constraints on tourism capacity, specifically, threaten to stifle Hawaii’s tourism export-led expansion. Tourism is our comparative advantage (slide 22), but Hawaii’s various jurisdictions bend over backwards to limit investment in new tourism capacity. On Kauai, no more than 1.5 percent of existing capacity can be built annually.11 On Maui, converting existing transient accommodation units to timeshare requires additional construction of an equal number of new, affordable housing units.12 Construction of a Kuhio Avenue tower as high as existing Trump and Hilton towers requires a “Waikiki Special District Major permit and a resolution from the City Council allowing the tower to rise 350 feet,” as if one could tell the difference.13 Why stifle Hawaii’s principle export? Tourism in 2012 reached new record volumes in spite of dismal forecasts one year earlier (slide 23; footnote 6). Dismal expectations reflected dim views about travel demand, but it was travel supply that unleashed the deluge (slide 24). Unlike new building, entry in U.S. commercial passenger aviation is deregulated. Forecasters may have been hung up on oil prices and seismic shocks in 2011 but, recently, Hawaii tourism actually has enjoyed comparative tranquility from the most extreme events (slide 25), despite cyclical variation. Nevertheless, partly because of capacity constraints on Hawaii’s main export, tourism has shrunk as a share of GDP during the last two decades (slide 26). Moreover, real tourism receipts have declined absolutely in real, inflation-adjusted terms since the 1980s, when current tourism strategic policies limiting capacity growth began to be adopted (slide 27).14

11 No obvious consideration is given for years with hurricanes. See the 2011 ordinance at http://www.kauai.gov/LinkClick.aspx?fileticket=aCNsJljBrj4%3d&tabid=628&mid=3136 pursuant to the 2008 County Charter amendments incorporated in section 3.19.C. of http://www.kauai.gov/LinkClick.aspx?fileticket=9%2fsupUXrAJA%3d&tabid=362&mid=1186 12 Personal communication from a North Kaanapali Beach hotel management. 13 Andrew Gomes, “Ritz-Carlton puts brand on property in Waikiki,” The Honolulu Star-Advertiser (December 20, 2012) (http://www.staradvertiser.com/business/20121220__Ritz-Carlton_puts_brand_on_property_in_Waikiki.html?id=184222101). 14 Policy evolved in the mid-1980s, see Hawaii Department of Planning and Economic Development, Proceedings, Governor’s Tourism Congress, December 10 and 11, 1984 (1985) Honolulu, Hawaii. By decade’s end a new posture emerged. See Hawaii Department of Business Economic Development and Tourism, The Hawaii State Plan: Tourism State Functional Plan (1991), p. 8, which defines “the optimum growth rate of tourism…[as] a rate which balances the economic, social and environmental objectives of the State (p. 12).” The most recent strategic vision for Hawaii tourism was adopted “To move toward a sustainable and responsible tourism industry [sic] for the State [emphasis in the original]...” hoping by 2015 to “honor Hawaii’s people and heritage; value and perpetuate Hawaii’s natural and cultural resources; engender mutual respect among all stakeholders; support a vital and sustainable economy; and provide a unique, memorable and enriching visitor experience.” See Hawaii Tourism Authority, Hawaii Tourism Strategic Plan 2005-2015 (2004) (http://www.hawaiitourismauthority.org/default/assets/File/about/tsp2005_2015_final.pdf)

Brewbaker Testimony January 4, 2012 page 5 of 6

Tourists are just consumers. Over time, the benefits of innovation, technological progress, rising productivity and falling costs accrue to them through more efficient delivery of travel and tourism services and through lower real costs for many retail items (slide 28). In constant dollars, real travel and tourism outlays have been falling across segments (slide 29). After the 1980s, capacity constraints came to bear on Hawaii accommodation inventory growth.15 Hawaii total visitor arrivals growth slowed to a 0.5 percent annualized rate over the last two decades. Peaking in 1989, total real tourism receipts fell at a 0.8 percent annualized rate through 2011. Capping tourism accommodation capacity eventually limits the growth of arrivals volumes in sold-out seasons. Constraints raise the sensitivity of room rates to vacancy (slide 30), mostly benefiting hotels (slide 31). The downward trend in tourist outlays attributable to productivity growth ultimately swamps slower volume growth. In 2011, the last with full-year data, the same number of arrivals (6.5 million) yielded little more than $12 billion in receipts, versus nearly $17 billion in 1989 (in 2011 dollars). Even with record volumes in 2012, tourism is running out of headroom. At 8 million arrivals in 2012, real tourism receipts of $14-15 billion still will be less than what Hawaii earned from 6.5 million visitors. Working harder for less money: so Hawaii. Tourists spend less money and get better value like everybody else. That’s why Downtown Honolulu Macy’s is closing, not Ross Dress For Less,16 why obesity is spreading and why traffic is clogged with pick-up trucks. The real costs of food and clothing are lower than ever. In constant dollars, oil prices are no higher today than in 1980, but vehicles are vastly safer, more comfortable and more efficient. De facto tourism capacity constraints allow productivity growth to erode real tourism export receipts. Don’t let a good tourism year in 2012 fool you: filling off-peak season months with new visitors from Asia is no substitute for relieving constraints on urbanization. More and different kinds of accommodations, more efficient utilization of the urban core and in destination resorts, responsible integration of transient accommodation in non-resort communities can restore trend growth of Hawaii’s principle export and generate the economic surplus needed to achieve Hawaii’s strategic goals. Restricting development cannot. Mahalo,

Paul H. Brewbaker, Ph.D.

15 Lodging capacity grew less than 0.3 percent per annum after the 1980s, between the 1992 enumeration of 73,089 accommodation units in the State of Hawaii DBEDT’s and predecessor Visitor Plant Inventory reports, and the 2011 enumeration of 77,731 units. All of the net increase occurred after 2006: the inventory was 73,089 in 1992, and was still 73,220 in 2007. Arrivals had peaked at 7.53 million (2006) and 7.50 million (2007), pre-recession. 16 Dave Segal, “Macy’s to close downtown Honolulu store,” The Honolulu Star-Advertiser (January 3, 2012) (http://www.staradvertiser.com/news/breaking/Macys_to_close_downtown_Honolulu_store.html).

Brewbaker Testimony January 4, 2012 page 6 of 6

Appendix

billion$March 2008

forecastMarch 2009

forecastMarch 2010

forecastMarch 2011*

forecastMarch 2012

forecast

September 2012

forecast

2007 4.5865 4.5865 4.5865 4.5865 4.5865 4.58652008 4.7652 4.6419 4.6419 4.6419 4.6419 4.64192009 4.9615 4.4098 4.2023 4.2023 4.2023 4.20232010 5.2032 4.4318 4.0972 4.3646 4.3646 4.36462011 5.4476 4.6534 4.3431 4.3879 4.3293 4.32932012 5.7192 4.9094 4.6037 4.8724 4.8488 4.9778 **2013 6.0727 5.2137 4.8799 5.1666 5.2125 5.2231 †

2014 6.4390 5.5370 5.1727 5.4757 5.1210 5.4272 º

2015 5.8083 5.4313 5.8045 5.7571 5.6982 ‡

2016 5.7029 6.1530 5.9874 5.76722017 6.5213 6.2867 6.01042018 6.6011 6.31592019 6.6085

* before Japan's seismic event**Forecasts did not account for approximately $170 million in energy tax credits†Would be approximately $260 million higher but for energy tax creditsºWould be approximately $320 million higher but for energy tax credits‡Would be approximately $340 million higher but for energy tax credits

Mar-08 http://www.state.hi.us/tax/cor/2008gf03_with0314_Ltr2Gov-Final.pdfMar-09 http://www.state.hi.us/tax/cor/2009gf03-12_with0313_Rpt2Gov.pdfMar-10 http://www.state.hi.us/tax/cor/2010gf03-11_with0315_Rpt2Gov.pdfMar-11 http://www.state.hi.us/tax/cor/2011gf03-10_with0315_Rpt2Gov.pdfMar-12 http://www.state.hi.us/tax/cor/2012gf03-07_with0309_Rpt2Gov.pdfSep-12 http://www.state.hi.us/tax/cor/2012gf09-06_with0910_Rpt2Gov.pdf

Sources: TZ Economics, Hawaii Department of Taxation

Council on Revenues General Fund Revenue forecasts and actual outcomes

Copyright 2013Copyright 2013Paul H. Brewbaker, Ph.D.Paul H. Brewbaker, Ph.D.

Sustaining economic growth in the 20teensSustaining economic growth in the 20teensslides prepared for a joint informational briefing of theslides prepared for a joint informational briefing of the

Hawaii State House Finance CommitteeHawaii State House Finance CommitteeHawaii State Senate Ways and Means CommitteeHawaii State Senate Ways and Means Committee

byby Paul H. Brewbaker, Ph.D.Paul H. Brewbaker, Ph.D.TZ Economics, Kailua, HawaiiTZ Economics, Kailua, Hawaii

January 4, 2013January 4, 2013

11

Slide copyright 2012, TZ Economics

Slides to accompany:

Testimony

of

Paul H. Brewbaker, Ph.D., Principal, TZ Economics

before a joint informational briefing of the Hawaii State House Finance Committee

and Hawaii State Senate Ways and Means Committee

Friday, January 4, 2013

22

Slide copyright 2012, TZ Economics

Duration of economic expansions lengtheningDuration of economic expansions lengthening

Source: NBER (http://www.nber.org/cycles/cyclesmain.html); statistics calculated by TZ Economics

months, or as noted Mean Median Maxs.d./mean

(%) skew n

1857-1927 25.5 22 46 38.0 0.641 191928-1982 46.2 39 106 59.0 1.123 111983-2010 95.0 92 120 24.9 0.562 3

20-teens expansion (2010-2018? )

Duration of economic recoveries + expansionsfrom NBER troughs to peaks

33

Slide copyright 2012, TZ Economics

0.900

0.950

1.000

1.050

1.100

2005 2006 2007 2008 2009 2010 2011 2012 2013

Previous 10 recessions*

Great Recession 2008-09

U.S. real GDP indexed to cyclical peaks:U.S. real GDP indexed to cyclical peaks:this is year 4 of the expansionthis is year 4 of the expansion

Source: Professor Robert Hall, Stanford University and Chair, NBER Dating Committee; BEA, U.S. Department of Commerce; includes revised 2012Q3 data and NABE December 2012 quarterly forecasts though 2013Q4

Inde

x of

real

GD

P: p

eak

quar

ter =

1.0

00

*Recessions since World War II—averages aligned to peak quarter of each business cycle and to 2007Q4

2012Q3

2007Q4

RecessionRecession RecoveryRecovery

44

Slide copyright 2012, TZ Economics

126

128

130

132

134

136

138

140

00 02 04 06 08 10 12130

140

150

160

170

180

380

400

420

440

460

00 02 04 06 08 10 12

Oahu (right scale)Neighbor Islands (left)

Nonagricultural payroll employmentNonagricultural payroll employment

Million jobs, s.a. (log scale)

U.S. recessions shaded

Sources: Hawaii DLIR and DBEDT, U.S. Bureau of Labor Statistics; monthly data through November 2012, seasonal adjustment of Hawaii data by TZE

Thousand jobs, s.a. (log scales)

U.S. recessions shaded

U.S.U.S. HawaiiHawaii

55

Slide copyright 2012, TZ Economics

0

2

4

6

8

10

12

00 02 04 06 08 10 12

U.S. averageNeighbor IslandsOahu

Recent U.S. and Hawaii unemployment ratesRecent U.S. and Hawaii unemployment rates

Per

cent

, s.a

.

Source: Bureau of Labor Statistics, U.S. Department of Labor, Hawaii DLIR, Hawaii DBEDT; data through November 2012, seasonal adjustment of Hawaii data by TZE

Recessions shaded

Neighbor Isles like Oahu

Neighbor Isles like mainland

U.S.

Neighbor Isles

Oahu

66

Slide copyright 2012, TZ Economics

0

2

4

6

8

10

12

80 85 90 95 00 05 10

U.S.Hawaii

Historical U.S. and Hawaii unemployment ratesHistorical U.S. and Hawaii unemployment rates

Per

cent

, s.a

.

Source: Bureau of Labor Statistics, U.S. Department of Labor, Hawaii DLIR, Hawaii DBEDT; data through November 2012, seasonal adjustment of Hawaii data by TZE

Recessions shaded

U.S.

Hawaii

77

Slide copyright 2012, TZ Economics

COR general fund revenue growth estimates COR general fund revenue growth estimates chased recession down and recovery up chased recession down and recovery up

-9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5

May

March

January

OctoberJuly

0

1

2

3

4

-9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5

May

March

January

OctoberJuly

0

1

2

3

4

Distributions of forecast general fund revenue growth ratesfor FY2009

< 0 < 0> 0> 0

Distributions of forecast general fund revenue growth ratesfor FY2010

Sources: Hawaii Council on Revenues meetings, Tax Research and Planning, Hawaii Department of Taxation and personal records.

Number of COR members

Number of COR members

88

Slide copyright 2012, TZ Economics

200

400

98 00 02 04 06 08 10 12 14

(Nominal) Hawaii general fund revenues: (Nominal) Hawaii general fund revenues: ““itit’’s so bad its so bad it’’s never been betters never been better””

Mon

thly

, milli

on c

urre

nt $

, s.a

., lo

g sc

ale

U.S. recessions shaded

Sources: Hawaii DoTax, DBEDT; seasonal adjustment (Census X-12 ARIMA) and trend (Hodrick-Prescott (1997)) estimates by TZE through October 2012

99

Slide copyright 2012, TZ Economics

900

1000

1100

1200

1300

1400

1500

98 00 02 04 06 08 10 12 14

(Real) Hawaii general fund revenues: “it’s so bad it’s the same as the last peak”

Qua

rterly

ly, m

illion

201

1$, s

.a.,

log

scal

e

U.S. recessions shaded

Sources: Hawaii DoTax, DBEDT; seasonal adjustment (Census X-12 ARIMA), trend (Hodrick-Prescott (1997) and deflation (using interpolated Honolulu CPI-U) estimates by TZE through third quarter 2012

2012Q22012Q22006Q1

2012Q32012Q3

1010

Slide copyright 2012, TZ Economics

Council on Revenues General Fund Revenue Council on Revenues General Fund Revenue forecasts and actual outcomesforecasts and actual outcomes

billion$March 2008

forecastMarch 2009

forecastMarch 2010

forecastMarch 2011*

forecastMarch 2012

forecast

September 2012

forecast

2007 4.5865 4.5865 4.5865 4.5865 4.5865 4.58652008 4.7652 4.6419 4.6419 4.6419 4.6419 4.64192009 4.9615 4.4098 4.2023 4.2023 4.2023 4.20232010 5.2032 4.4318 4.0972 4.3646 4.3646 4.36462011 5.4476 4.6534 4.3431 4.3879 4.3293 4.32932012 5.7192 4.9094 4.6037 4.8724 4.8488 4.9778 **2013 6.0727 5.2137 4.8799 5.1666 5.2125 5.2231 †

2014 6.4390 5.5370 5.1727 5.4757 5.1210 5.4272 º

2015 5.8083 5.4313 5.8045 5.7571 5.6982 ‡

2016 5.7029 6.1530 5.9874 5.76722017 6.5213 6.2867 6.01042018 6.6011 6.31592019 6.6085

* before Japan's seismic event**Forecasts did not account for approximately $170 million in energy tax credits†Would be approximately $260 mill ion higher but for energy tax creditsºWould be approximately $320 million higher but for energy tax credits‡Would be approximately $340 mill ion higher but for energy tax credits

Mar-08 http://www.state.hi.us/tax/cor/2008gf03_with0314_Ltr2Gov-Final.pdfMar-09 http://www.state.hi.us/tax/cor/2009gf03-12_with0313_Rpt2Gov.pdfMar-10 http://www.state.hi.us/tax/cor/2010gf03-11_with0315_Rpt2Gov.pdfMar-11 http://www.state.hi.us/tax/cor/2011gf03-10_with0315_Rpt2Gov.pdfMar-12 http://www.state.hi.us/tax/cor/2012gf03-07_with0309_Rpt2Gov.pdfSep-12 http://www.state.hi.us/tax/cor/2012gf09-06_with0910_Rpt2Gov.pdf

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14

16

18

20

22

24

26

70 75 80 85 90 95 00 05 10 15 20

OutlaysRevenues

Federal government revenue and outlays as a Federal government revenue and outlays as a percent of GDP through FY2011, projected to FY2022percent of GDP through FY2011, projected to FY2022

Per

cent

of G

DP

Per

cent

of G

DP

Vertical shaded areas denote recessions

Source: Congressional Budget Office, Budget and Economic Outlook Fiscal Years 2012 Through 2022 (March 2012; updated August 2012)(http://cbo.gov/sites/default/files/cbofiles/attachments/BudgetProjectionsMarch2012.xls; update at http://cbo.gov/publication/43539)

Assumes expiration of Bush tax cuts

Aging, health care cost inflation

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Rising inequality returns Hawaii to Plantation EraRising inequality returns Hawaii to Plantation Era

.30

.35

.40

.45

.50

.55

.60

.65

20 30 40 50 60 70 80 90 00 10

HawaiiCaliforniaColorado

Source: Mark W. Frank, “Inequality and Growth in the United States: Evidence from a New State-Level Panel of Income Inequality Measure,” Economic Inquiry vol. 47, no. 1 (2009) pp 55-68; http://www.shsu.edu/~eco_mwf/unequal/Frank_All.csv

Gini coefficient

.0

.1

.2

.3

.4

.5

20 30 40 50 60 70 80 90 00 10

HawaiiCalifornia

Top10percent

Top1percent

Gini coefficients Top income quantile shares

Income share

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Top 1 percent share: English speaking countriesTop 1 percent share: English speaking countries((UU--shaped) 1910shaped) 1910--20052005——rising since the 1970srising since the 1970s

Sources: Anthony B. Atkinson, Thomas Piketty, and Emmanual Saez, “Top Incomes in the Long Run of History,” Journal of Economic Literature 49:1 (2011) pp. 3-71 ftp://emlab.berkeley.edu/pub/users/saez/atkinson-piketty-saezJEL10.pdf

U.S.

U.K.

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Top 1 percent share: middle Europe and JapanTop 1 percent share: middle Europe and Japan((LL--shaped) 1900shaped) 1900--20052005——relatively steady sharesrelatively steady shares

Sources: Anthony B. Atkinson, Thomas Piketty, and Emmanual Saez, “Top Incomes in the Long Run of History,” Journal of Economic Literature 49:1 (2011) pp. 3-71 ftp://emlab.berkeley.edu/pub/users/saez/atkinson-piketty-saezJEL10.pdf

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0

1

2

3

4

5

6

65 70 75 80 85 90 95 00 05 10 15

Public construction at Public construction at allall levels of government in levels of government in Hawaii falling on trend as a percent of gross productHawaii falling on trend as a percent of gross product

Per

cent

of G

DP

Sources: BEA, Hawaii DPED, Hawaii DBEDT, Bank of Hawaii TZE database; estimates are crudely bridged over the 1997 SIC- and NAICS-based GDP transition by assuming a constant of proportionality

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New Hawaii housing formation is lower thanNew Hawaii housing formation is lower thanat any timeat any time since the Second World Warsince the Second World War

0

2

4

6

8

10

12

14

40 50 60 70 80 90 00 10

OahuNeighbor Isles

Thousand units

Sources: Robert C. Schmitt Historical Statistics of Hawaii; Hawaii DBEDT, Bank of Hawaii, TZE data through 2011

Shaded: pre-1975 LUC law amendments

.00

.01

.02

.03

.04

.05

.06

.07

60 65 70 75 80 85 90 95 00 05 10 15

New housing unit authorizationsby building permit

Investment/capital ratio (∆Kt / Kt ):new units/existing inventory

Percent of existing stock

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Monthly real new residential building permitsMonthly real new residential building permits

100

1980 1985 1990 1995 2000 2005 2010

Actual dataPre-LehmanPost-Lehman

U.S. recessionsshaded

35

255

Sources: County building departments, Bank of Hawaii, Hawaii DBEDT, U.S. Census Bureau; TZE database; deflation uses a Fisher index of residential construction cost and trend is from a Hodrick-Prescott (1997) filter

Milli

on 2

011$

U.S. recessions shaded

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Annual new Hawaii commercial building Annual new Hawaii commercial building permit values lower than ever recordedpermit values lower than ever recorded

200

400

800

1600

1960 1970 1980 1990 2000 2010 2020

DBEDTBOH

Milli

on 2

011$

Sources: County building departments, Bank of Hawaii, Hawaii DBEDT, U.S. Census Bureau; TZE database; deflation uses a Fisher index of residential construction cost

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Real private building permit values for additions Real private building permit values for additions and alterations and for new commercial structuresand alterations and for new commercial structures

20

40

80

160

320

1980 1985 1990 1995 2000 2005 2010

Additions, alterationsTrend component

1

10

100

1980 1985 1990 1995 2000 2005 2010

Commercial (new)Trend component

Additions and alterations(residential and nonresidential)

New commercial

No DBEDT data prior to 1989

No DBEDT data prior to 1989

Sources: County building departments, Bank of Hawaii, Hawaii DBEDT, U.S. Census Bureau; TZE database; deflation uses a Fisher index of residential construction cost and trends are from a Hodrick-Prescott (1997) filter

2020

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Recent growth in construction spending (mostly Recent growth in construction spending (mostly energy investments) is energy investments) is notnot translating into jobs translating into jobs

10

20

40

200

400

800

1980 1985 1990 1995 2000 2005 2010

Contracting (right)Jobs (left scale)

Workstoppages

SIC data

NAICS data

Sources: Bank of Hawaii, Hawaii DoTax, DLIR and DBEDT, U.S. Census Bureau; TZE database; deflation of monthly data uses a Fisher index of residential construction cost and trend is from a Hodrick-Prescott (1997) filter

Thou

sand

s, s

.a. (

log

scal

e)

Million 2011$, s.a. (log scale)

U.S. recessions shaded

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2020p

2030p

2040p

Demographic dynamics: rising old age dependency; Demographic dynamics: rising old age dependency; Hawaii Hawaii ““workers/old peepsworkers/old peeps”” 10 10 (1970)(1970),, 4 4 (2010)(2010), 2.3 , 2.3 (2030)(2030)

Young (x-axis): [(Pop < 20) / (Pop 20-64)]

Old (y-axis): [(Pop ≥ 65) / (Pop 20-64)]

Source: Hawaii DBEDT State of Hawaii projections from table 1.28, State of Hawaii Data Bookhttp://hawaii.gov/dbedt/info/economic/databook/db2011/section01.xls (historical data, TZE database)

.1

.2

.3

.4

.5

.3 .4 .5 .6 .7 .8

Youth dependency ratio

Old

age

depe

n den

cyr a

tio

1970

1990

19962010

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State and local9.3%

Federal militaryFederal military9.2%9.2%

Federal civilian5.4%

Private industry76.1%

Hawaii economic value-added (GDP) sharesin tourism and military: combined approx. 25%

2010 Tourism vs. Non-tourism

Source for underlying data: Bureau of Economic Analysis, U.S. Department of Commerce, Hawaii DBEDT, Hawaii Tourism Authority; all calculations by TZE

See also:James Mak, 2005. “Tourism demand and output in the U.S. Tourism Satellite Accounts: 1998-2003,” Journal of Travel Research, 44 (1), pp. 4-5Eugene Tian, James Mak, and PingSun Leung, “The direct and indirect contributions of tourism to regional GDP: Hawaii,“ UHERO Working Paper

No. 2011-5 (July 28, 2011) (http://www.uhero.hawaii.edu/assets/WP_2011-5.pdf) DBEDT State of Hawaii Data Book (http://hawaii.gov/dbedt/info/economic/databook/2010-individual/07/073410.xls) James Hosek, Aviva Litovitz, Adam C. Resnick, 2011 “How Much Does Military Spending Add to Hawaii’s Economy?” Rand Corporation Technical

Report TR-996 (http://www.rand.org/pubs/technical_reports/TR996.html); note that this report incorrectly doubles the military share of Hawaii GDP to inflate its importance using input-output multipliers, which is like doubling everything and dividing by 200% of GDP.

2009 Military vs.

Non-military

Non-tourism85.2%

TourismTourism14.8%14.8%

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450

500

550

600

650

700

04 05 06 07 08 09 10 11 12 13 14

Actual arrivalsFall 2011 forecasts

Actual Hawaii visitor arrivals Actual Hawaii visitor arrivals way higher than 2011 forecasts for 2012way higher than 2011 forecasts for 2012--1414

Mon

thly

in th

ousa

nds,

s.a

. (lo

g sc

ale)

Source: Monthly data through November 2012 from Hawaii Tourism Authority, Hawaii DBEDT including revisions; seasonal adjustment using Census X-12 ARIMA filter by TZE; Nov. 2011 arrivals forecasts from DBEDT, FHB and UHERO

U.S. recession shaded

Aloha/ATA shut-downs Japan

earthquake

P T

2012f2013f

““ItIt’’s so bad its so bad it’’s never s never been better.been better.””

2014f

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650

700

750

800

850

900

950

04 05 06 07 08 09 10 11 12

Monthly total seats flown to Hawaii (Monthly total seats flown to Hawaii (s.as.a.); .); forecasts model demand but neglect forecasts model demand but neglect supplysupply

Thou

sand

s, s

.a. (

log

scal

e)

Source: Monthly data through June 2012 from Hawaii Tourism Authority, Hawaii DBEDT; seasonal adjustment and Hodrick-Prescott filter trend calculation by TZE

Aloha/ATA shutdowns

(vertical line)

P T

Two lift surges

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Recent years notable for lack of volatility:conditional volatility of monthly visitor arrivals

.0

.1

.2

.3

.4

.5

70 75 80 85 90 95 00 05 10 15

9/11

EarlyEaster

AlohaAloha

Y2K

Gulf

UALIAM

ILWU

Source: Monthly data through November 2012 from Hawaii Tourism Authority, Hawaii DBEDT including revisions; seasonal adjustment using Census X-12 ARIMA filter and TARCH(1,1) volatility calculations by TZE

0.2

= “2

0 pe

rcen

t”

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High volume, but Hawaii tourism has shrunk in High volume, but Hawaii tourism has shrunk in absolute (real export receipts) absolute (real export receipts) and and in relative termsin relative terms

Other3%

Canada1%

Non-tourism75%75%

Japan9%

Domestic12%

Other2%

Canada1%

Non-tourism80%80%

Japan3%

Domestic14%

Non-tourism85.2%

TourismTourism14.8%14.8%

1994-98 Hawaii GDP

2005-07 Hawaii GDP

Source for underlying data: Hawaii DBEDT, Hawaii Tourism Authority; calculated estimates by TZE except as noted

See also:James Mak, 2005. “Tourism demand and output in the U.S. Tourism Satellite Accounts: 1998-2003,” Journal of Travel Research, 44 (1), pp. 4-5Eugene Tian, James Mak, and PingSun Leung, “The direct and indirect contributions of tourism to regional GDP: Hawaii,“ UHERO Working Paper

No. 2011-5 (July 28, 2011) (http://www.uhero.hawaii.edu/assets/WP_2011-5.pdf) DBEDT World Travel and Tourism Council report (http://hawaii.gov/dbedt/info/visitor-stats/econ-impact/WTTC99.pdf)

2010 Hawaii GDP

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TourismTourism’’s problem: not working out according to s problem: not working out according to planplan——higher volumes, lower real receiptshigher volumes, lower real receipts

Billion 2011$Million visitors

Sources: Hawaii Tourism Authority, Hawaii DBEDT, Bureau of Labor Statistics; deflation calculations by TZE

Thousand rooms

Visitor accommodationsVisitor accommodations Visitor arrivalsVisitor arrivals Tourism receiptsTourism receipts

0

1

2

3

4

5

6

7

8

50 60 70 80 90 00 100

4

8

12

16

50 60 70 80 90 00 100

10

20

30

40

50

60

70

80

50 60 70 80 90 00 10

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1

2

4

1950 1975 20000.5

1.0

2.0

4.0

8.0

1925 1950 1975 2000

Productivity growth reduced travel Productivity growth reduced travel andand destination destination cost; favorable composition shifts remain elusivecost; favorable composition shifts remain elusive

$14,000$14,000

$850$850

$5,000$5,000

$2,500$2,500

$1,750$1,750

Real West Coast air fares (2011$)1927-1977

Real per visitor expenditure (2011$)1951-2011

Sources: Andrew Kato and James Mak, “Technical progress in transport and the tourism area life cycle,” UHERO Working Paper No. 2010-13 (September 28, 2010) and HVB, Hawaii DBEDT, Hawaii Tourism Authority, U.S. BLS; deflation by TZE

Both graphs in thousand 2011$ (log scales)

Deregulation

$2,000$2,000

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200

400

800

60 65 70 75 80 85 90 95 00 05 10 15

160

200

240

280

60 65 70 75 80 85 90 95 00 05 10 15

Real average daily Hawaii visitor expenditure: Real average daily Hawaii visitor expenditure: they figured out how to do it cheaperthey figured out how to do it cheaper——havenhaven’’t you?t you?

$289.89$289.89

$159.71$159.71

Sources: Hawaii DBEDT State of Hawaii Data Book Table 7.23 (http://hawaii.gov/dbedt/info/economic/databook/2010-individual/07/072310.xls), Bureau of Labor Statistics; deflation calculations by TZE

2011 dollars, log scales

U.S. recessions shaded

Mainlanders Japanese

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-20

-15

-10

-5

0

5

10

15

.1 .2 .3 .4 .5

Hotel vacancy rate (%, lagged 2)

Actual data1977-992000-082009-12

Rea

lro o

mra

tech

ange

(%y-

o-y)

Annual Hawaii real room rates and inventory: Annual Hawaii real room rates and inventory: ““room room ‘‘supplysupply’”’”

140

160

180

200

220

240

260

30 40 50 60 70 80

1993-20101978-1992

Price*

Quantity (000)†

*2010$ per night †Visitor plant inventory (thousand rooms)

Sources: Hospitality Advisors, LLC, UHERO, BLS; deflation using Honolulu CPI-U by TZE

Hotel room supplyHotel room supply ElasticityElasticity

1978-1999

20092009--20122012

2000-2008

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Real average daily hotel room rates rising on trend, Real average daily hotel room rates rising on trend, while real total visitor expenditure has been fallingwhile real total visitor expenditure has been falling

120

140

160

180

200

220

240

80 85 90 95 00 05 10 15

Sources: TZE data base draws from sources such as PKF Hawaii, Hospitality Advisors, LLC, UHERO, BLS; deflation using Honolulu CPI-U

2011

dol

lars

per

nig

ht, s

.a. (

log

scal

e)

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MahaloMahalo!!

Aloha!Aloha!Paul H. Brewbaker, Ph.D.Paul H. Brewbaker, Ph.D.Principal, EconomistPrincipal, EconomistTZ EconomicsTZ Economics606 606 UlulaniUlulani St.St.Kailua, Hawaii 96734Kailua, Hawaii 96734--44304430paulbrewbaker@tzeconomics.compaulbrewbaker@tzeconomics.com