Hawai i Outlook Fallout from Sept 11 and Recovery

Hawai‘i Outlook: Fallout from Sept. 11 and Recovery Prospects Presentation for Credit Rating Agencies Honolulu Convention Center Wednesday, January 23, 2002

Terror and Recovery • September 11 caused wide-spread damage to an already-slowing global economy • Hawaii effects large because of reliance on air travel and tourism • Relative strength prior to attacks provides support • Many unknowns make forecasting difficult • I’ll talk about a preliminary UHERO assessment and forecasts for the next two years • These results are in part excerpted from a November report to DBEDT. Rating Agencies, January 23, 2002 http: //www 2. hawaii. edu/~UHERO

U. S. Cooling Before 9 -11 Rating Agencies, January 23, 2002 http: //www 2. hawaii. edu/~UHERO

Japan Was Falling Fast Rating Agencies, January 23, 2002 http: //www 2. hawaii. edu/~UHERO

and Japanese Unemployment was at post-war record levels Rating Agencies, January 23, 2002 http: //www 2. hawaii. edu/~UHERO

But Hawaii Was in Pretty Good Shape 2001 figures are pre-9/11 forecasts Rating Agencies, January 23, 2002 http: //www 2. hawaii. edu/~UHERO

Then the World Changed Rating Agencies, January 23, 2002 http: //www 2. hawaii. edu/~UHERO

Outlook Worsened Across the Board • US Enters Recession * Disruptions pushed economy over edge to recession * Consumer confidence takes a hit, but spending holds up * Quick Fed and some Federal gov’t action • Japan’s prospects turn even worse * Hoped-for export-led recovery down the tubes * Government unable or unwilling to do much • Hawaii tourism hammered * Passenger counts, ocup. rates fell well below 2000 * Spillovers to broader economy limited Rating Agencies, January 23, 2002 http: //www 2. hawaii. edu/~UHERO

Hawaii Jobs Destroyed Fast Rating Agencies, January 23, 2002 http: //www 2. hawaii. edu/~UHERO

Job Market Situation At Year End Percent Change in Jobs over 2000 Jan-Sep Average Oct-Dec Average 1. 7% -1. 5% Trade 2. 2 -2. 7 Services 2. 5 -2. 3 Construction Finance, Insur, Real Estate 0. 5 0. 7 -0. 3 -0. 1 Total Non-Ag. Jobs Rating Agencies, January 23, 2002 http: //www 2. hawaii. edu/~UHERO

Assessing the Forecasting Environment • Prospects for US, Japanese recoveries will play key role * Econometric modeling captures HI response to external developments • But worst risks aren’t economic * Prospects for War on Terrorism * Evolving attitudes toward vacations and air travel • Policy uncertainties * How much more from Feds? * Chances of significant State Legislative action • Spillovers and unrelated bad luck * Dengue fever scare over? Rating Agencies, January 23, 2002 http: //www 2. hawaii. edu/~UHERO

Macro Effects Explain Only Part of Visitor Decline Rating Agencies, January 23, 2002 http: //www 2. hawaii. edu/~UHERO

The Gulf War As Guide? Rating Agencies, January 23, 2002 http: //www 2. hawaii. edu/~UHERO

External Assumptions • US economy will resume growth this quarter * Accelerates toward 3+% rates by year end as monetary (and some fiscal) stimulus kick in * Interest rate environment will continue to support spending • Japan growth will not resume until late in the year * Will not touch 2% growth until 2003 * Yen will remain about 120 for next several years • Further improvement in security environment supports continued tourism recovery Rating Agencies, January 23, 2002 http: //www 2. hawaii. edu/~UHERO

UHERO Forecast Highlights • Visitor arrivals fell 8 -9% last year * Japan travel weakness means only 2% growth in 2002 * Mainland drives 7. 4% growth in 2003 • Job losses for state will top 14, 000 * More than 6, 000 in hotels * Only slow job recovery • Unemployment will rise to 5. 6% • Hawaii has entered a moderate recession * Real income will fall 1. 5% before beginning recovery next year Rating Agencies, January 23, 2002 http: //www 2. hawaii. edu/~UHERO

Westbound Arrival Recovery Continues Rating Agencies, January 23, 2002 http: //www 2. hawaii. edu/~UHERO

Eastbound Visitors Will Take Much Longer Rating Agencies, January 23, 2002 http: //www 2. hawaii. edu/~UHERO

Tourism Job Losses Will Persist Rating Agencies, January 23, 2002 http: //www 2. hawaii. edu/~UHERO

Overall Job Losses Will Be Less Severe Rating Agencies, January 23, 2002 http: //www 2. hawaii. edu/~UHERO

A Moderate Recession in Real Income Rating Agencies, January 23, 2002 http: //www 2. hawaii. edu/~UHERO

Unemployment Rate will Rise Rating Agencies, January 23, 2002 http: //www 2. hawaii. edu/~UHERO

Inflation Will Cool Rating Agencies, January 23, 2002 http: //www 2. hawaii. edu/~UHERO

Risks and Mitigating Factors • Risks of Further Fallout * Bankruptcy risks for Japanese-dependent retail firms * Slower pickup in global economy • Factors supporting growth * Federal and state tax cuts * Income creation from home refinancing and sales * Renovation tax incentives Rating Agencies, January 23, 2002 http: //www 2. hawaii. edu/~UHERO

The Numbers Rating Agencies, January 23, 2002 http: //www 2. hawaii. edu/~UHERO

Rating Agencies, January 23, 2002 http: //www 2. hawaii. edu/~UHERO

High-Low Scenarios Rating Agencies, January 23, 2002 http: //www 2. hawaii. edu/~UHERO

High-Low Scenarios Rating Agencies, January 23, 2002 http: //www 2. hawaii. edu/~UHERO

High-Low Scenarios Rating Agencies, January 23, 2002 http: //www 2. hawaii. edu/~UHERO