We published a report last week revealing how Michigan has the highest probability of entering a recession later this year, with Hawaii having the second-highest chances.
In the latest forecast, published last Friday, the Economic Research Organization at the University of Hawaii (UHERO) warns Hawaii is "poorly positioned for risks" associated with an economic shock that could tip the island economy into a recession.
UHERO blames the synchronized global slowdown, waning tourism industry, trade war, faltering US economy, population outflows, a strong dollar, and restrictions on vacation rentals that have already slowed the economy to a "near standstill," with the ability to generate recessionary shocks next year.
The slowdown in Hawaii's economy started around the time when J.P.Morgan Global Manufacturing PMI topped out in late 2017. And that slowing is getting more serious:
"Two years of population decline have undercut demand in many sectors. Tourism, while still generating impressive visitor numbers, has seen spending slip, and many international markets have fallen back sharply," researchers said.
"Add to that the impending shock to Oahu from the crackdown on home vacation rentals, and prospects for further tourism growth look poor."
Researchers warned Hawaii's largest industry, tourism, could see a plunge in volume from international markets thanks to President Trump's trade war, could be enough to tip the economy into a recession.
"Conditions in the visitor industry are also weaker than they might at first appear. While arrivals numbers continue to set records, the number of visitors in Hawaii on a typical day has grown by just 1% this year. (The two can differ because of changes in the average length of visitor stay.)
Most worrisome has been a sharp pullback in international markets, where the number of visitor days has declined across all major market segments. Because of a stronger dollar, foreign visitors are facing an increase in the price of Hawaii vacations, and the global economy has also slowed markedly.
Trump's rhetoric adds insult to injury. Those visitors who do come tend to spend fewer dollars. Inflation-adjusted international visitor spending is down more than 9% this year; only spending by US visitors remains on par with the same period in 2018. Not surprising, then, that jobs in the accommodation and food service sector have been flat for the past two years. Jobs in the trade sector have fallen sharply."
And the local government's crackdown on illegal rentals on Aug. 01, prohibits anyone from advertising on online sites.
"All told, Hawaii visitor days will contract by a half-percent in 2020, a marked decline from this year's 2.6% gain. Trend growth in visitor days will remain very limited thereafter, averaging less than 1% in the 2021-2023 period. Considering that a substantial number of illegal units appear to still be advertising online, the ultimate effects of the ordinance could yet be larger. We will of course be watching data closely in coming months and updating the outlook as appropriate."
Soft economic conditions will limit earnings growth and weigh on consumer sentiment in the state. Per capita real income will expand at a 50bps average annual rate into the early 2020s, further limiting local spending.
The report concludes by warning Hawaii doesn't have countercyclical buffers in place to weather an economic downturn.
"If the economy were booming, these risks might be less of a concern. Unfortunately, population outflow and global weakness have already brought hiring to a halt," the report said.
"That makes Hawaii's prospects more dependent than ever on what happens next in the broader US economy."
And with economists warning about a 2H19 US recession, the weakest states, like Hawaii, and even Michigan (as we explained last week), are about to fall first.