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

2. Rating Agencies, January 23, 2002http://www2.hawaii.edu/~UHERO 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.

3. Rating Agencies, January 23, 2002http://www2.hawaii.edu/~UHERO U.S. Cooling Before 9-11

4. Rating Agencies, January 23, 2002http://www2.hawaii.edu/~UHERO Japan Was Falling Fast

5. Rating Agencies, January 23, 2002http://www2.hawaii.edu/~UHERO and Japanese Unemployment was at post-war record levels

6. Rating Agencies, January 23, 2002http://www2.hawaii.edu/~UHERO But Hawaii Was in Pretty Good Shape 2001 figures are pre-9/11 forecasts

7. Rating Agencies, January 23, 2002http://www2.hawaii.edu/~UHERO Then the World Changed

8. Rating Agencies, January 23, 2002http://www2.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

9. Rating Agencies, January 23, 2002http://www2.hawaii.edu/~UHERO Hawaii Jobs Destroyed Fast

10. Rating Agencies, January 23, 2002http://www2.hawaii.edu/~UHERO Job Market Situation At Year End Jan-Sep Average Oct-Dec Average Total Non-Ag. Jobs1.7%-1.5% Trade2.2-2.7 Services2.5-2.3 Construction0.5-0.3 Finance, Insur, Real Estate 0.7-0.1 Percent Change in Jobs over 2000

11. Rating Agencies, January 23, 2002http://www2.hawaii.edu/~UHERO 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? Assessing the Forecasting Environment

12. Rating Agencies, January 23, 2002http://www2.hawaii.edu/~UHERO Macro Effects Explain Only Part of Visitor Decline

13. Rating Agencies, January 23, 2002http://www2.hawaii.edu/~UHERO The Gulf War As Guide?

14. Rating Agencies, January 23, 2002http://www2.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

15. Rating Agencies, January 23, 2002http://www2.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

16. Rating Agencies, January 23, 2002http://www2.hawaii.edu/~UHERO Westbound Arrival Recovery Continues

17. Rating Agencies, January 23, 2002http://www2.hawaii.edu/~UHERO Eastbound Visitors Will Take Much Longer

18. Rating Agencies, January 23, 2002http://www2.hawaii.edu/~UHERO Tourism Job Losses Will Persist

19. Rating Agencies, January 23, 2002http://www2.hawaii.edu/~UHERO Overall Job Losses Will Be Less Severe

20. Rating Agencies, January 23, 2002http://www2.hawaii.edu/~UHERO A Moderate Recession in Real Income

21. Rating Agencies, January 23, 2002http://www2.hawaii.edu/~UHERO Unemployment Rate will Rise

22. Rating Agencies, January 23, 2002http://www2.hawaii.edu/~UHERO Inflation Will Cool

23. Rating Agencies, January 23, 2002http://www2.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

24. Rating Agencies, January 23, 2002http://www2.hawaii.edu/~UHERO The Numbers

25. Rating Agencies, January 23, 2002http://www2.hawaii.edu/~UHERO

26. Rating Agencies, January 23, 2002http://www2.hawaii.edu/~UHERO High-Low Scenarios

27. Rating Agencies, January 23, 2002http://www2.hawaii.edu/~UHERO High-Low Scenarios

28. Rating Agencies, January 23, 2002http://www2.hawaii.edu/~UHERO High-Low Scenarios