Mild recession forecast for Hawaii economy

Yahoo

09-05-2025

University of Hawaii economists expect the state economy to begin gradually contracting later this year due to federal policy impacts hurting tourism, employment and personal income.
The University of Hawaii Economic Research Organization forecasts a mild state recession to occur before the end of 2025 and stretch into 2026, according to a report released publicly today.
UHERO's report said global tariffs being imposed by President Donald Trump will have knock-on effects that depress U.S. and international tourism to Hawaii while federal spending and job cuts in the state also ding the local economy.
'Hawaii's economic outlook has taken a decisive turn for the worse, as expansive federal policy shifts look poised to tip the local economy into a mild recession, ' the report said.
The report also warned that the anticipated economic decline in Hawaii could be worse.
'Risks remain exceptionally large : sustained tariffs, delayed policy reversals, and global backlash to U.S. actions could deepen the downturn, ' UHERO said in its forecast.
A month before Trump took office in January, UHERO had forecast that Hawaii's economy, after accounting for inflation, would grow by 2.9 % this year and then 2.5 % in 2026. The new report revised those figures to 1.1 % growth this year followed by a 0.3 % decline in 2026.
A 0.3 % dip represents a loss of $313 million in produced goods and services after accounting for inflation in Hawaii's estimated $117 billion economy.
UHERO also forecasts that the number of people with jobs statewide will fall by 5, 100 in 2026, representing a 0.8 % decline that boosts Hawaii's unemployment rate to 3.6 % in 2026 from a projected 3.1 % this year. For the first three months of this year, the unemployment rate has been a hair under 3 %.
Personal income is expected to dip 0.2 % in 2026 after accounting for inflation, representing a loss of about $177 million in household earnings.
If Hawaii's economy shrinks in 2026, it would be the second annual decline in six years but much lighter than the crushing 10.4 % downturn in 2020 brought on by the COVID-19 pandemic.
Some of the expected coming loss in the economy is attributed to what had already been a weakening in tourism before dramatic changes in federal policy were announced. UHERO said impacts from new federal policies should further hurt the biggest driver in the local economy.
The report forecasts that the number of visitors arriving by plane will decline by 2.2 % this year to 9.47 million, and then by 1.9 % in 2026 to 9.29 million.
'Although not everyone is employed in tourism, tourism flows throughout our economy, through secondary and flow-through effects, ' Steven Bond-Smith, one of several UHERO economists who contributed to the report, said Thursday during a news conference. 'So people are affected by that slowdown in tourism even if they're not directly employed in the tourism sector.'
Bond-Smith also said negative impacts on the local economy are coming from federal spending and job cuts locally. 'So that creates some slowing in the economy as well, ' he said.
Peter Fuleky, another UHERO economist and report author, added that businesses and consumers in Hawaii face uncertainties that can lead to them pulling back on spending, contributing to a broad economic downturn.
'So the reaction typically to uncertainty is caution, ' he said. 'Caution means retrenchment of consumption … and that has macroeconomic effects for everyone, right ?'
UHERO's forecast anticipates the federal government backing off from extremely high tariffs Trump announced for many countries April 2 and then delayed for 90 days while leaving in place a 10 % tariff on imports from countries except for China, where a 145 % tariff exists.
Fuleky said that even the 10 % tariff rate globally represents a significant increase that will be a drag on the U.S. economy and produce negative impacts on Hawaii's economy.
One bright spot noted in the forecast is the strength of the local construction industry. Some materials are expected to cost more because of tariffs, but Justin Tyndall, another UHERO economist and report author, said he does not expect any freezes on big projects that include Pearl Harbor shipyard improvements, state government work and housing towers.
'I think generally the construction outlook looks pretty stable and unaffected by federal policy, ' he said. 'In the longer term if we do enter a sustained economic downturn, inevitably there'll be cutbacks everywhere, potentially including (construction ).'
UHERO's report forecasts that Hawaii's economy will rebound in 2027 with 0.9 % growth.