Econ 0609

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HAWAII

ECONOMIC

TRENDS

June 30, 2009

prepared by

Paul H. Brewbaker, Senior Economic AdvisorBank of Hawaii

https://www.boh.com/econ/512_539.asp

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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.

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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.

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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)

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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,

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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

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409.

9

1,

403.

1

1,

351.

6

1,4

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1,

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2

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1

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139.7

1137.

2

1124.

2

477.

4

478.

1

481.

7

475.

1

492.

1

4

65.

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462.

3

473.

6

450.2

414.

3

437.

5

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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

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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

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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


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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)


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.

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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

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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 recessions shadedNBER recessions shaded

Lehman

Lehman

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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


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

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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)


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)


Includes county,state and federal

governmentcontracts

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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

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-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


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


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)

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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

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3

4

5


20-yr

30-yr

0

1

2

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20-yr

30-yr

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June

2009

Jul 07

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-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

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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

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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

Documents

Econ 0609