The forecasters

By John Duchemin
Advertiser Staff Writer

Hawai‘i is in an uncertain spot. Last year, the state economy renewed itself as tourism increased, jobs grew and the Neighbor Islands boomed. But now the stock market has gone into a tailspin, the U.S. economy is showing signs of softening and Japan is continuing to struggle.

Economists, state officials and others continue to predict moderate growth for Hawai‘i this year. Their projections, however, are muddied with countless complicating uncertainties. Public school teachers may or may not strike; visitors may or may not keep coming in record numbers. The stock market may rise again, increasing Mainland wealth and improving the investment climate for Hawai‘i - or not.

The future is thus as hard to read as ever.

The Advertiser asked a group of business leaders to help sort through it all. While they didn’t agree on everything, their insights, refined by years of experience in the local markets, produced some striking conclusions.

Among them: Recent economic improvements have failed to reach some of Hawai‘i’s most needy regions and residents. 2001 will be the year of the newcomer. Hawai‘i will endure a serious labor shortage with far-reaching implications. And yes, problems with public education will still hamper the state’s economic performance in the coming years.

1. The top trends in 2001

Confidence will be unusually high, regardless of rumblings from the Mainland and Asia - at least for this year.

All the recent positive local economic signs - tourism up, unemployment down, jobs up, property investment up - will make people happy and hopeful.

"This may be the year that Hawai‘i people come out of it, stop wallowing in misery, and decide that yes, we’re experiencing success, regardless of what the outside world is doing," said Yuka Nagashima, president of the Internet service provider LavaNet.

The positive local economic indicators are such a contrast to the 1990s that mediocre external indicators - a poor stock market, bleak Asian outlook, high oil prices and a softening Mainland economy - aren’t enough to kill the optimism.

"Remember where we’re coming from," said Andres Albano, director of development consulting for CB Richard Ellis. "The last eight years have been pretty terrible, so now that we’re all seeing some investment, some job growth, a tourism rebound, we’re finally getting some confidence."

By year’s end, however, confidence may falter if outside factors get worse, said Chatt G. Wright, president of Hawai‘i Pacific University.

Also, because 401K plans are picking up popularity in previously pension-heavy Hawai‘i, people are probably feeling less wealthy thanks to the stock market problems of the last year, said Gabriel Lee, senior vice president at American Savings Bank. A bear market in 2001 thus could eat away at confidence, and spending and investing could drop.

2. Employers will face a labor shortage, both in high-skill and blue-collar industries.

Hawai‘i’s unemployment rate in November dropped to 3.7 percent - below the 3.8-percent national average. Employers are already feeling a labor crunch - but it will only get more severe this year, Albano predicted.

Already, Hawai‘i’s expanding technology sector has maxed out the universities’ ability to supply top-flight engineers and programmers. While the Mainland has become a principal source of technical experts, including many returning kama‘aina, more are still needed.

Neighbor Island retailers, hotels and restaurants are scrambling to find workers. Several large developments - including Hilton Hawaiian Village’s new Kalia Tower, set to open in May; DFS Hawai‘i’s new Galleria in Waikiki; and a third cruise ship set to hit Hawai‘i in December - will all need hundreds of workers. And construction companies are looking everywhere for heavy lifters.

The shortage could be good for workers if it leads to better wages and perks, but could reduce quality of work on important projects unless additional skilled workers can be found, Albano said.

Also, given a dearth of qualified applicants, businesses will spend more money to train their own workers, said Christine Camp, founder of Avalon Development Co. and president of the Hawai‘i Developers Council.

"Attending a minimum of one or two computer classes a year will become part of most employees’ jobs," she predicted.

Job growth could ease, however, if the U.S. economy softens more than expected, and if Asian economies slip back into recession, Wright said.

3. Despite a boom in skill jobs, opportunities may be limited for many Island residents.

While high-quality technology-based employment is expected to increase in 2001, the Island’s growth is still largely tied to tourism sectors - particularly hotels and restaurants - so most of the jobs created in Hawai‘i will still be in relatively low-skill and low-paying areas, said Katsumi Tanaka, president of tour bus and trolley operator E Noa Tours.

"Too many of these jobs will provide work, but not necessarily income," Tanaka said. "Tourism generally emphasizes the number of bodies, not necessarily the quality of work."

On the plus side, technology companies are adding hundreds of top-flight jobs to Hawai‘i. Many companies are demanding world-class workers, and are paying salaries and benefits competitive with the Mainland.

Also, many of the new tourism jobs could be upper-tier hotel service positions, Lee said, because many hotels, thanks to dozens of new investors who have replaced debt-ridden Japanese owners, will try to upgrade service by adding high-caliber workers.

But for workers in low-skill jobs, wages will continue to lag the high cost of living in Hawai‘i. Employment may be full, but many people will still need two or three jobs just to get by, Wright said.

And in areas without hotels, high-end housing or technology - like West O‘ahu, Waipahu, the North Shore, Moloka‘i and Big Island’s Puna district - development and employment opportunities will remain limited, Tanaka said.

"Unfortunately, I still don’t see a good balance being reached," Albano said. "The structure here is still really the wealthy and the poor. There’s no room for a middle class, and they’re slowly disappearing."

4. Higher education will experience a renaissance, but K-12 public education will still be a limiting factor on Hawai‘i’s ability to create prosperity for itself.

The University of Hawai‘i is on the verge of a break-out year, predicted Richard C. Lim, president of City Bank. Recently-granted autonomy from the Legislature has created a newly entrepreneurial atmosphere, stepped-up research activity and new centers for marine science, wireless technology and genetic research, Lim said.

But public elementary and high schools will continue to languish, and this will drive some would-be Hawai‘i businesses away - as in the past - as employers not only struggle to find qualified job applicants, but also question whether the state can provide quality education for employees’ children.

"The issues are the same this year as in the past: We need more qualified people," Camp said.

5. Hawai‘i will start to get intensely wired.

As the state’s technology industry matures, so will the supporting infrastructure. Connection of two trans-Pacific fiber-optic cables to Hawai‘i and the spread of wireless technology in businesses, hotels and public places like airports and schools mean a lot more bandwidth will be available for use in the state, Nagashima said.

This bodes well for small Internet service companies, which should see business increase dramatically, she said.

Meanwhile, traditional businesses will start to use more technology. About half of Hawai‘i’s businesses will have a Web presence by the end of the year, up from about a third now, Lim said. This will lead to a significant increase in Web-based business for online retailers, banks and others, he said.

The work force will also become more skilled with technology, thanks to business’ heavy emphasis on training, predicted Linda Gilchrist, president of Island Insurance Co. The gap will decrease between technology wizards and everyone else, Lee said, as training takes hold.

"Enterprises will become more high-tech, and will start to need more cerebral contributions from their employees," Tanaka said.

6. Lots of development money will come in, but only in key areas.

A good investment climate - low interest rates and a comparative land value advantage compared to the Mainland - will attract investment in places like downtown Honolulu, Kaka‘ako, Kapolei and Kailua. Prime tourist areas including Wailea and Waikiki will also fare well, Albano predicted.

Residential development will also boom in upscale areas, Camp and Lee said. Camp predicted a new high-rise condominium on O‘ahu, and Lee said timeshare will boom in East Honolulu.

On the Neighbor Islands, Camp predicted construction of several apartment projects to house newly arrived service-industry workers on Maui and the Big Island.

Kaka‘ako will start to become a development focal point, Camp and Albano said, as the state and private industry work on a medical research center and a new headquarters for red-hot network testing company Adtech.

But poor infrastructure could cause other areas to stagnate despite developers’ best intentions. Most of M¯‘ili‘ili, McCully and Kapahulu are unable to support much new construction because of overtaxed sewer mains, Albano said. Commercial developers will also avoid leasehold areas where rents are still artificially high, Lee said. And areas like Waipahu, Wahiawa, Wai‘anae and Waimanalo will continue to be neglected as developers concentrate on the high-end markets, Tanaka said.

Camp, however, predicted a trickle-down effect as newly wealthy homeowners sell their high-end properties and seek deals in less costly neighborhoods.

The main constraint on commercial development will be lack of large-scale local financing, Camp said. Bank of Hawai‘i, still recovering from credit problems in its commercial real estate portfolio, has adopted a conservative lending stance, and another major lender, GE Capital Corp., has announced plans to lay off 100 people. The company told developers it will pare back lending in Hawai‘i, Camp said.

7. New faces will play increasingly important roles in business and politics.

With job growth up and unemployment down, employment opportunities have increased and skilled kama‘aina are coming back to Hawai‘i to pursue careers. Along with wealthy Mainland residents investing in and moving to Hawai‘i, they will play a key part in Hawai‘i’s economy, increasing the quality of the labor market, starting new companies and acting as sources of entrepreneurialism and intellectual property.

A weakening Mainland economy may actually help the Islands attract workers back, Nagashima said. Two recent "kama‘aina come home" job fairs drew hundreds of attendees, several of which already have found jobs here.

"Hawai‘i’s work force will be expanded when Hawai‘i expatriates return once they realize the Mainland isn’t all that great and more dot-coms close," she said.

A human information network is building "critical mass," Lim said, as newcomers and returnees keep in touch with their Mainland counterparts. A good example: The "E-list," an informal club with more than 100 members in Honolulu, in February will hold a joint "Bay Area pau hana" with a similar tekkies-only club in San Francisco.

Emerging organizations like E-list in turn will become more and more a part of Hawai‘i’s business and social life, and could be the building blocks for serious business organizations and political lobbies, Lim said.

8. 2001 will be a year of parity, without any real power center in politics or business.

In recent years, all of the big forces controlling life in Hawai‘i have seen their influence curbed. Old institutions - the landed estates, plantations, unions - have vanished, shrunk or lost dominant roles. The Democrats have lost seats in both legislative bodies and have been torn by factional struggles. Big Hawai‘i banks have turned their focus to the Mainland and the Pacific.

Meanwhile, emerging industries continue to grow. New Economy business leaders - Digital Island founder Ron Higgins, Adtech’s Tareq Hoque - are gaining influence, and new organizations like the Hawai‘i Technology Trade Association and E-list are expanding, Lim said.

In 2001, "it will become generally known that there is no clear center of influence left in Hawai‘i," Lim said.

Disparate factions will be forced to work together because no one unit has the power necessary to improve the situation without help from others, Tanaka said.

In this environment, business and government will learn to cooperate better this year, Gilchrist said. One example: O‘ahu Work Links, a new work force training program sponsored by private businesses and the City & County of Honolulu.

9. The government will be consumed with a fight between impulses to cut taxes and increase spending.

Recent positive economic signs and revenue increases will create an impetus for more social and business programs, Albano said. These pressures will be especially strong in public education, which faces hundreds of millions of dollars of new expenses from a court order to improve special education, proposed construction at the University of Hawai‘i and raises for teachers and professors.

But meanwhile, proposed economic stimuli including further excise and income tax cuts, tax holidays for key sectors and proposed tax-relieving enterprise zones for places like Kaka‘ako and Kalihi-Palama could create a short-term budget crunch.

In the name of higher spending, tax reductions could very well be sacrificed, Albano said.

"Now that there are signs the economy is moving forward, the government will have a definite propensity to increase spending and taxes," he said. "And that means higher taxes."

The struggle over the government’s financial course - already made public in the power struggle among the Democratic legislative leaders and the battle over teachers’ raises - could lead to a decision-making paralysis despite the many pressing needs, which several experts said include workers’ compensation and medical privacy laws, education reform and the negotiation of teachers’ salaries.

10. Tourism spending may be dampened as the Mainland slows and the dollar stays strong.

The Japanese yen peaked in December 1999, and has since slipped in value about 10 percent. Most economists in the United States see a weaker yen as beneficial to the struggling Japanese economy - it makes Japanese goods seem cheaper internationally, stimulating demand. But in Hawai‘i, a weaker yen is bad news, because it cuts into Japanese visitors’ purchasing power.

Tanaka said tourism businesses expect the yen may get weaker throughout 2001. They also expect the euro, Europe’s unified currency, to remain weak, and thus expect most foreign visitors to reduce their spending, Tanaka said.

Meanwhile, the slowing U.S. economy could reduce spending by American tourists, Wright said. Tourism spending could also drop as families burned by the drop in stocks decide to trim travel budgets and save money, Lee said.

These trends could also affect other Hawai‘i sectors heavily dependent on the financial well-being of out-of-towners - including education, where foreign students won’t be able to afford as much schooling here, Wright said.

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