Interest rates and exchange rates and current Oahu housing trends

Interest rates and exchange rates and current Oahu housing trends slides prepared for the

Hawaii International Real Estate Council Waialae Country Club by Paul H. Brewbaker, Ph.D. TZ Economics July 15, 2015

Copyright 2015 Paul H. Brewbaker, Ph.D.

Monetary policy normalization principles, plans

ƒ FOMC* will determine timing, pace of policy normalization ƒ Tactical method: primarily by adjusting interest rates on excess reserves with overnight reverse repurchase agreements: 1. Raise the federal funds rate and other short-term interest rates 2. Reduce the Federal Reserve’s securities holdings ƒ Securities holdings to be reduced gradually, predictably: 1. Only after FOMC begins increasing target range for federal funds rate 2. Initially by ceasing to reinvest repayments of principal in SOMA* 3. Not by selling agency mortgage-backed securities (MBS) ƒ FOMC prepared to adjust details in light of economic, financial developments—all actions contingent on evolving conditions—securities holdings, primarily U.S. Treasuries, held only for the purpose of implementing monetary policy

* Federal Open Market Committee (FOMC)

System Open Market Account (SOMA) Slide copyright 2015

Source: Federal Reserve Board, September 17, 2014 (http://federalreserve.gov/newsevents/press/monetary/20140917c.htm)

1

Monthly changes in Federal Reserve securities: U.S. quantitative easing (QE) now over 250

Mortgage-backed securities QE1

Billion dollars per month

200

Federal agency debt Treasury securities

150

QE2 QE3

100 50

Operation Twist

0 -50 -100 2008

2009

2010

2011

2012

2013

2014

2015

2016

Slide copyright 2015

Source: Federal Reserve Board (H.4.1 Factors Affecting Reserve Balances of Depository Institutions); average monthly changes in U.S. Treasury notes and bonds (including TIPS), federal agency debt securities, and mortgage-backed securities (http://www.federalreserve.gov/releases/h41/)

2

FOMC forecast distributions for year-end fed funds target rates, and averages: June 18, 2015 2015

2016

2017

Longer-run

4

3.647% 3.000%

Percent

3

2

1.750% 1

0.566% 0 0

5

10 0

5

10 0

5

10 0

5

10

Number of observations (FOMC participants, total = 17) Slide copyright 2015

Source: Figure 2. Overview of FOMC participants’ assessments of appropriate monetary policy released with June 18, 2015 projections (http://federalreserve.gov/monetarypolicy/fomcprojtabl20150617.htm); interest rate intervals are in 1/8ths

3

U.S. Treasury yields; interest rate normalization Lehman Brothers

6 Recession

Normalization

5 4 Percent

Dec 2014

Taper Tantrum

3.65% 30 yr 20

3

10 7

2

5 3

1

2

June 2015 FOMC fed funds rate target average forecast

0 07

08

09

10

11

12

13

14

15

16

17

18

19

Slide copyright 2015

Source: Federal Reserve Board (H.15) and June 18, 2015 projections (http://federalreserve.gov/monetarypolicy/fomcprojtabl20150617.htm)

4

Monetary policy shifts: Quantitative Easing depreciated both the yen and the Euro 140 Value of

Yen/dollar

123 ¥/$

(right scale)

120

dollar in yen

100 1.0

Euro/dollar

Value of dollar in Euro

[$1.09/€]−1

(left scale) BoJ*

0.8 ECB†

0.6 2005

2010

2015

* Prime Minister Abe re-elected Dec. 16, 2012, initiates “Abenomics,” endorsing Quantitative Easing. † QE

widely anticipated in financial markets; announced by ECB President Draghi Jan. 22, 2015. Slide copyright 2015

Source: Federal Reserve Bank of St. Louis; data through June 2015 (monthly averages) (http://research.stlouisfed.org/fred2/series/EXUSEU and http://research.stlouisfed.org/fred2/series/EXJPUS); exchange rates as of July 15 were 123.33 ¥/$ and 1.0993 $/€.

5

Depreciation erodes purchasing power, as can wealth effects (falling stock, commodity prices)

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Visitor arrivals

700

450

(right scale)

Aloha

650 U.S. recession shaded

600

400

550 Visitor expenditure

500

(left scale)

350

Tohoku seismic event

450

400

Thousands, monthly, s.a. (log scale)

Million 2014$, monthly, s.a. (log scale)

Ex) Oahu real visitor expenditure decoupled from monthly visitor arrivals in 2012

300 04

05

06

07

08

09

10

11

12

13

14

15

16 Skip to slide 18

Slide copyright 2015

Sources: Hawaii Tourism Authority, Hawaii DBEDT (http://dbedt.hawaii.gov/visitor/tourism/) includes 2013-2014(Apr) revisions and data through April 2015; seasonal adjustment and deflation of visitor expenditure using U.S. personal consumption deflator by TZ Economics

7

Exchange rates and real estate: a Canadian dollar example

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Perhaps the value of the Canadian dollar links to the price of crude petroleum in U.S. dollars 160 US$/bbl (log scale)

80

1.1 Crude petroleum price (US$)

1.0

CAN$ / US$ (logs)

(left scale)

0.9 40

Value of CAN$ (in US$)

0.8

(right scale) U.S. recession shaded

0.7

20 0.6 2005

2010

2015 Slide copyright 2015

Source: Federal Reserve Bank of St. Louis; data through June 2015 (monthly averages) (http://research.stlouisfed.org/fred2/series/EXCAUS and http://research.stlouisfed.org/fred2/series/MCOILWTICO/downloaddata); exchange rate as of July 15 was 1.2742 CAN$/US$.

9

Canadian home prices 2005-2013 (000 CAN$) Canada recession shaded

Vancouver

614 429

386

Calgary 221

494

Toronto 308

301

Montreal 193 2006

2008

2010

2012

2014

2006

2008

2010

2012

2014

Slide copyright 2015

Sources:

Prices in thousand Canadian dollars (log scales); Canadian Real Estate Association (http://homepriceindex.ca/hpi_tool_en.html); C.D. Howe Institute (http://www.cdhowe.org/turning-points-business-cycles-in-canada-since-1926/19364);

10

Canadian home prices, converted (000 U.S.$)

Canada recession shaded

Vancouver Toronto

Vancouver

556

Toronto

Calgary

Calgary

315

Montreal

388

Montreal

181 2006

2008

2010

2012

2014

2006

2008

2010

2012

2014

Slide copyright 2015

Sources:

Prices in thousand U.S. dollars (log scales); Canadian Real Estate Association (http://homepriceindex.ca/hpi_tool_en.html); C.D. Howe Institute (http://www.cdhowe.org/turning-points-business-cycles-in-canada-since-1926/19364); Federal Reserve Bank of St. Louis

11

Appreciation of currency and home prices in Canada made Hawaii “affordable,” boosting investment Canada recession shaded

643 542 345

228

2006

2008

2010

2012

2014

Maui single-family home prices

2006

2008

2010

2012

2014

Oahu condominium prices

Slide copyright 2015

Sources:

as in prior slides, Realtors Association of Maui, Honolulu Board of Realtors

12

Housing and the New Urbanism

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Geographic constraint: urbanizable land is limited

Slide copyright 2014 Paul H. Brewbaker, Ph.D.

Hawaii urban areas occupy narrow coastal margins

Slide copyright 2014 Paul H. Brewbaker, Ph.D.

More remote areas are undevelopable

Slide copyright 2014 Paul H. Brewbaker, Ph.D.

Neighbor Islands: room to grow vs. Politics of NIMBY

Mauna Kea

4,000 meters

6,000 meters from the ocean floor Slide copyright 2014 Paul H. Brewbaker, Ph.D.

Investors attracted to destination resorts: Waikiki

Slide copyright 2014 Paul H. Brewbaker, Ph.D.

Hilton Hawaiian Village development is in intervals

Slide copyright 2014 Paul H. Brewbaker, Ph.D.

Major focus: Honolulu’s urban core (Kakaako)

Disney Aulani Resort: all timeshare

Ko Olina Resort Slide copyright 2014 Paul H. Brewbaker, Ph.D.

Hoakalei Resort centered on recreational lagoon

Slide copyright 2014 Paul H. Brewbaker, Ph.D.

A train to nowhere? Weak reason to pave over ag land

H- 1 Kualakai Parkway

TheTrain UHWO: fewer students than Campbell High School

This is the sweet spot for Oahu urban redevelopment

TheEnd

TheTrain

Hawaii registered motor vehicles per resident 1.00

0.75 HART 1 0.50

0.35

0.25 0.15 0.06 0.00 1923 1938

60

65

70

75

80

85

90

95

2000 2005 2010 2015 Slide copyright 2015

Sources: Hawaii DBEDT State of Hawaii Data Book (http://dbedt.hawaii.gov/economic/databook/2013-individual/)

25

TheTrain is about housing, not transportation: where you build on Oahu in the 21st century ƒ Agglomeration economies: one person’s productivity rises when near others 1. Externality—productivity rises from learning or imitating a neighbor 2. Internalized—supplier and customer co-locate to reduce transportation cost ƒ Explains urban density without appeal to external factors (ports, canneries)* ...the evidence suggests that these external factors are no longer that important. The older cities were generally built around harbors, and those harbors were significant, but there is no natural advantage that can explain Las Vegas… ƒ Mechanism is partly combinatoric: larger numbers of productive interactions are possible the more people are gathered in related occupational pursuits† (e.g.) When research effort is applied, new ideas arise out of existing ideas in some kind of cumulative interactive process that intuitively has a very different feel from prospecting for petroleum. To me, the research process has a sort of pattern-fitting or combinatoric feel about it.

Slide copyright 2015

* Edward L. Glaeser (2008) Cities, Agglomeration and Spatial Equilibrium, Oxford University Press; Paul Krugman (1991), Geography and Trade. Cambridge MA: MIT Press. †Martin L. Weitzman (1996), “Hybridizing Growth Theory,” American Economic Review Papers and Proceedings 86(2)

26

Urbanization and the services economy

ƒ Fashionable to deride services as low-wage and less productive as U.S. manufacturing declined; reality is the opposite during the last twenty years ƒ Services spatially concentrated to the point that innovation and productivity growth took off after the mid-1990s, reshaping the economic and physical landscape “Since the structural transformation shifts labor from high-productivity growth sectors to low-productivity growth sectors, Baumol (1967) feared that the economy was doomed to long-run stagnation. In [Desmet and Rossi-Hansberg (2014)] this dismal prediction fails to materialize because it is exactly the structural transformation that makes the service sector concentrated enough for innovation to endogenously take off. This is consistent with the acceleration of services productivity growth in the mid-1990s, as well as with the increase in land rents and real wages around that period.”* ƒ Low elasticities of substitution, shift from manufacturing to services, spatial concentration of services yield rising innovation, productivity since 1990s Slide copyright 2015

Source: *Klaus Desmet and Esteban Rossi-Hansberg (2014), “Spatial Development,” American Economic Review 104(4), pp. 1211-1243; William Baumol (1967), “Macroeconomics of Unbalanced Growth: The Anatomy of Urban Crisis,” American Economic Review 57(3), pp. 415-426..

27

Bumper sticker economics for nerds

DENSITY IS PROXIMITY PROXIMITY IS MOBILITY

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Bumper sticker economics for bruddahs

KEEP THE COUNTRY COUNTRY MAKE THE CITY CITY

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Oahu housing valuation trends

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Oahu single-family existing home sales price trend back to long-run 4-5% nominal appreciation

Monthly in thousand $, s.a., logs

800 U.S. recessions shaded

600

400

200 1990

1995

2000

2005

2010

2015

Slide copyright 2015

Sources: Honolulu Board of Realtors; seasonal adjustment, trend extraction by TZE

31

Quarterlyly in thousand $, s.a., logs

Oahu single-family existing home sales price trend at quarterly frequencies 800

4.7% U.S. recessions shaded

400

200

100 1980

1985

1990

1995

2000

2005

2010

2015

Slide copyright 2015

Sources: Honolulu Board of Realtors; seasonal adjustment, trend extraction by TZE

32

Quarterly in 000 2014$, s.a., logs

Adjusted for inflation: real quarterly Oahu single-family median home prices

U.S. recessions shaded

800 1.6%

400

1980

1985

1990

1995

2000

2005

2010

2015

Slide copyright 2015

Sources: Honolulu Board of Realtors; deflation, seasonal adjustment, trend extraction by TZE

33

Oahu and N. Isle inflation-adjusted home price paths are approximately log-linear @ 2% 320 Real Neighbor Island FHFA home price index (2014 = 100)

“Subprime”

160

Notional

“Japan”

2014 = 100 80 9/11

Actual Projected

40

Oahu real mean single-family home prices (2014 = 100)

20 1960

1970

1980

1990

2000

2010

2020

2030

Slide copyright 2015

Sources: Honolulu Board of Realtors, Federal Housing Finance Agency, TZE database

34

Contrasting less bubblicious Oahu with Maui SF existing home sale median prices Oahu

800 Monthly in thousand $, s.a., logs

U.S. recessions shaded

400 Maui

200 1995

2000

2005

2010

2015 Slide copyright 2015

Sources: Honolulu Board of Realtors, Realtors Association of Maui; seasonal adjustment, trend extraction by TZE

35

From high-frequency (monthly) trend/cycle components to longer-term price trend

Monthly in thousand $, s.a., logs

800

Oahu U.S. recessions shaded

Longer-term trend component (Maui) 400 Maui

200 1995

2000

2005

2010

2015

Slide copyright 2015

Sources: Honolulu Board of Realtors, Realtors Association of Maui; seasonal adjustment, trend extraction by TZE

36

Another interesting long-run comparison: Oahu and Orange County, CA 800

Quarterly, s.a., 000 $, log scale Honolulu

400

200 Anaheim-Santa Ana-Irvine, CA

100

50 1975

1980

1985

1990

1995

2000

2005

2010

2015

Slide copyright 2015

Sources: Honolulu Board of Realtors, National Association of Realtors; seasonal adjustment, trend extraction by TZE

37

Estimated gamma distributions of Oahu existing home sales prices (2003, 2013, projected 2023) F(x) 0.0025 2003 2003

0.0020

2013 2023a

0.0015

2023b 2013 0.0010 a Assumes

2023 0.0005

quantiles appreciate at average annual rate of 3.8% (long-run projection)

b Assumes

quantiles appreciate at average annual rate of 5.9% (actual annualized increase 2003-2023)

0.0000 0

500 1000 1500 2000 2500 3000 3500 4000 4500 5000 Thousand dollars (x) Slide copyright 2015

Source for underlying data: Honolulu Board of Realtors; gamma distributions estimated by TZE

38

Estimated cumulative distributions of Oahu home sales prices (2003, 2013, 2023(projected)) F(x)

2003

2013

2023a

1.0 0.8 2023b 0.6

2003 2013 2023a

0.4

2023b

0.2

a Assumes

quantiles appreciate at average annual rate of 3.8% (long-run projection) quantiles appreciate at average annual rate of 5.9% (actual annualized increase 2003-2023)

b Assumes

0.0 0

500 1000 1500 2000 2500 3000 3500 4000 4500 5000 Thousand dollars (x) Slide copyright 2015

Source for underlying data: Honolulu Board of Realtors; cumulative distributions estimated by TZE

39

Quantile thresholds from the inverse gamma distribution of Oahu home prices million $ thresholds

2003

Year 2013 2023a*

Top 0.01% Top 0.1% Top 1.0% Top 5% Top 10% Top 20% Top 30% Top 40% ‡ Top 50%

1.767 1.394 1.008 0.726 0.598 0.464 0.380 0.317 0.265

3.055 2.418 1.759 1.275 1.055 0.823 0.678 0.569 0.477

239,000 312,302 242,567

449,500 559,917 439,480

Actual median ($) Actual mean ($) Mean from log distn ($)

4.380 3.474 2.536 1.845 1.531 1.199 0.991 0.833 0.702 -

2023b

†

5.282 4.195 3.069 2.239 1.861 1.460 1.209 1.019 0.860 -

*Quantiles appreciate at (unweighted) average annual rate of 3.8% (2013-2023) †

Quantiles appreciate at (unweighted) average annual rate of 5.9% (2013-2023)

‡

Median price from synthetic (empirical gamma) distribution

Source for underlying data: Honolulu Board of Realtors; cumulative distributions estimated by TZE

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Hawaii macroeconomic roundup

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June 2015 NABE forecast for U.S. real GDP growth consistently above CBO potential growth rate 8 Percent change, annualized

U.S. recession shaded

High

4

NABE forecast* Potential growth† Low

0 Sandy Tohoku Polar Vortex

-4

Polar Redux

-8 06

07

08

09

10

11

12

13

14

15

16

17

*Survey conducted by National Association for Business Economics published June 2015 †Estimated by Congressional Budget Office in January 2015 baseline budget projections Slide copyright 2015

Sources: BEA (http://bea.gov/national/index.htm#gdp) data through 2015Q1 second estimate (May 28, 2015), CBO (http://www.cbo.gov/publication/45066) baseline federal budget projections (January 26, 2014), NABE Outlook June 2015 (public summary at http://nabe.com/NABE_Outlook_June_2015)

42

Urban Honolulu real GDP growth exhibiting modest pace of economic expansion 6

Percent change

4 Potential U.S. real GDP growth rate

2 No data 2014

0 -2 -4 U.S. recession shaded

-6 2002

2004

2006

2008

2010

2012

2014 Skip to slide 9 Slide copyright 2015

Sources: BEA (http://bea.gov/iTable/iTableHTML.cfm?reqid=70&step=1&isuri=1&acrdn=2) annual data through 2013 (September 16, 2014)

43

Urban Maui* real GDP growth: bigger boom, less robust economic recovery 6

Percent change

4 Potential U.S. real GDP growth rate

2 No data 2014

0 -2 -4 U.S. recession shaded

-6 2002

2004

2006

2008

2010

2012

2014

*Defined as Kahului-Wailuku-Lahaina Slide copyright 2015

Sources: BEA (http://bea.gov/iTable/iTableHTML.cfm?reqid=70&step=1&isuri=1&acrdn=2) annual data through 2013 (September 16, 2014)

44

Non-agricultural jobs: Oahu has surpassed prior cyclical peak, Neighbor Isles have not 480

Monthly, thousands, s.a.. logs

180

Oahu (right scale) Slowing

460

170 Falling short

160

440

420 150

Monthly, thousands, s.a., logs

No Aloha

Neighbor Islands (left scale)

400

U.S. recession shaded

140 2002

2004

2006

2008

2010

2012

2014

2016

Slide copyright 2015

Source: Hawaii DLIR, Hawaii DBEDT; monthly averages through March 2015, seasonal adjustment by TZE

45

Oahu jobs: transitioning to investment-led phase of this economic expansion? 32

450 (right scale)

440 ?

28

430 420

24 No Aloha

410 Construction

20

400

(left scale)

390 U.S. recession shaded

16

Monthly, thousand jobs, s.a., logs

Monthly, thousand jobs, s.a., logs

Non-construction

380 02

04

06

08

10

12

14

16 Slide copyright 2015

Source: Hawaii DLIR, Hawaii DBEDT; monthly averages through March 2015, seasonal adjustment by TZE

46

Real visitor expenditure (tourism receipts): overall a recent mixed performance at best

Billion 2013$, monthly, s.a. (log scale)

700 Neighbor Islands Oahu 600 Oahu 500 Neighbor Islands

No Aloha

400 U.S. recession shaded

04

05

06

07

08

09

10

11

12

13

14

15

16

Slide copyright 2015

Sources: Hawaii Tourism Authority, Hawaii DBEDT (http://dbedt.hawaii.gov/visitor/tourism/) includes 2013-2014(Apr) revisions and data through March 2015; seasonal adjustment and deflation of visitor expenditure using U.S. personal consumption deflator by TZ Economics

47

Real visitor expenditure (trend component): extracting the trends from monthly data

Billion 2013$, monthly, s.a. (log scale)

700 Neighbor Islands Oahu

600 Oahu

500 Neighbor Islands

No Aloha

400 U.S. recession shaded

04

05

06

07

08

09

10

11

12

13

14

15

16

Skip to slide 24

Slide copyright 2015

Sources: Hawaii Tourism Authority, Hawaii DBEDT (http://dbedt.hawaii.gov/visitor/tourism/) includes 2013-2014(Apr) revisions and data through March 2015; seasonal adjustment, deflation, and Hodrick-Prescott filter trend extraction by TZ Economics

48

Shrinking federal jobs in Hawaii since 2012: as in the 1990s, deficit reduction = job loss 38 Thousand jobs, s.a. (log scale)

U.S. recessions shaded

36

Census

Census

FY2013

34 Census

32

30

28 1990

1995

2000

2005

2010

2015

Slide copyright 2015

Source: Hawaii DLIR, Hawaii DBEDT; monthly averages through March 2015, seasonal adjustment by TZE (see also http://cbo.gov/publication/45653)

49

Monthly, million 2014$, s.a. (log scale)

Real contracting receipts declining statewide: construction “head fake” was a PV pulse Transitory impulse in photovoltaic panel installation—equipment investment, not capital formation in new structures: PV panels are not buildings.

700

600 Renovations* (2013$mil) 200

500

150 100 Other

50 U.S. recession shaded

PV

400 04

05

06

07

08

09

10

11

12

13

14

15

0 162012

2013

2014

2015

*Additions and alterations

Slide copyright 2015

Sources: Hawaii Department of Taxation, Hawaii DBEDT, U.S. Bureau of the Census; seasonal adjustment, deflation using construction cost deflator and trend extraction by TZE, tax base data and building permit data (inset) through November 2014 (December 2014 for solar photovoltaic panels)

50

June 3, 2013

Thousand new housing units

Oahu units authorized by building permit 2009-14 lower than in any 6-year period since WWII

12

8

4

0 1920

Fail

1930

1940

1950

1960

1970

1980

1990

2000

2010

2020

Slide copyright 2015

Sources: County building departments, Hawaii DBEDT, Robert C. Schmitt (1976), Historical Statistics of Hawaii UH Press

52

Long-run erosion of Hawaii productivity

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U.S. real GDP per capita grew steadily on trend after WWI at about 2% Thousand 2014 dollars (log scale)

2.1% growth

$54.6 (2014) The Great Recession

32 WWII

1.7% growth $14.6 (1947)

10

The Great Depression

3 1875

1900

1925

1950

1975

2000

2025

Slide copyright 2015

Sources: Real GDP data 1870-1929 from Angus Maddison (http://www.ggdc.net/maddison/maddison-project/home.htm) and data 1929-2014 are from the BEA (http://bea.gov/national/index.htm#gdp); deflation realignment and interval growth rates from trend regressions by TZE (intervals are 1870-1928, 1946-2007)

54

Hawaii real GDP per capita grew faster than U.S. in first half of statehood era, then lost it Sub-Prime

Japan Bubble

Thousand 2014 dollars (log scale)

Hawaii

The Great Recession

40 Catch A Wave

U.S.

2014 per capita GDP $ 54,629 U.S. 54,516 Hawaii

20

1960

1970

1980

1990

2000

2010

2020

Slide copyright 2015

Sources: Hawaii DBEDT (pre-1997) and BEA (http://bea.gov/national/index.htm#gdp) (note 1997 discontinuity); deflator realignment and interval growth waves illustrated from regressions of natural logs of Hawaii GDP per capita on polynomial trends 1958-1981, 1982-1996, and 1997-2008 by TZE.

55

Oahu and Neighbor Island economies’ real per capita personal income—three growth waves Dot.com/Housing Bubble

Thousand 2013$, log scale

50

Oahu U.S.

Japan Bubble

40 Rainbow Bridge

Neighbor Isles

30

Sugar

20 1970

1980

1990

2000

2010

2020

Slide copyright 2015

Sources: BEA (http://bea.gov/regional/index.htm), BLS http://data.bls.gov/cgi-bin/surveymost?r9); deflation using Honolulu CPI-U by TZE; three pulses are from interval regressions on changes in natural logarithms of real per capita personal income on linear and polynomial functions of time trend

56

Decelerating real per capita personal income trends in Hawaii: N. Isles divergent Oahu

50

Thousand 2013$, log scale

U.S.

Now what? Neighbor Isles

40

0.7% annualized growth rate

30

1.7% annualized growth rate

20 1970

1980

1990

2000

2010

2020

Slide copyright 2015

Sources: BEA (http://bea.gov/regional/index.htm), BLS http://data.bls.gov/cgi-bin/surveymost?r9); deflation using Honolulu CPI-U by TZE; three pulses are from interval regressions on changes in natural logarithms of real per capita personal income on linear and polynomial functions of time trend

57

Is Hawaii converging to the U.S. average (from above) or going down the tubes? ƒ U.S. real GDP per capita (output/person = productivity) grows at 2 percent ƒ Diffusion of technological advance, etc.*, implies “Hawaii can do that” ƒ Hawaii outperformed the U.S. while building tourism (early statehood) ƒ Since the 1970s, Hawaii has lost ground; in terms of per capita income: 1. Oahu’s premium to the U.S. has narrowed (from 1.24x to 1.12x)† 2. Neighbor Islands steadily diverged from the U.S. average, falling behind ƒ Either 30 years of bad luck, or 30 years of bad Hawaii economic policymaking

Slide copyright 2015

*Economic union, unconstrained mobility of capital, labor, and information, technological advances in transportation and telecommunication † Hawaii output per capita was 35-40 percent higher in the early-1970s than the U.S. average, which it scarcely matches today

58

Mahalo! Slides available from: Paul H. Brewbaker, Ph.D. Principal, TZ Economics 606 Ululani St. Kailua, Hawaii 96734-4430 [email protected]

Slide copyright 2015

Appendix 1: mature destination tourism

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Volumes grew, tourism receipts declined after 1980s 8.1 million

8

6

20

$14.54 billion

Tourist arrivals

Million

Real tourism receipts 2

5

0

0

1950

1960

1970

1980

1990

2000

Billion 2013 $

10

4

2010 Slide copyright 2015

Sources: Hawaii Tourism Authority, Hawaii DBEDT (http://files.hawaii.gov/dbedt/visitor/tourism/2013/Dec13.xls), Bureau of Labor Statistics; deflation calculations by TZE

61

Hawaii tourism grew with aviation technology (logs)

Annual arrivals (left scale, millions) WWII

10.000

Boeing  707

Pan Am Clipper

Boeing 787

1.000

Boeing  737‐900ER

Boeing 777 Boeing 767

0.100 Boeing 747

0.010 Luxury

Discovery

Adolescence

Maturity

0.001 1930

1940

1950

1960

1970

1980

1990

2000

2010

Slide copyright 2015

Sources: Hawaii Tourism Authority, Hawaii DBEDT, Robert C. Schmitt, Historical Statistics of Hawaii (1996) UH Press

62

Tourist arrivals, reaching 8 million annually, punctuated by volatility “Black Swans” (logs)

Annual arrivals (left scale, millions) WWII

10.000

.8 9/11

1.000

.6 Monthly volatility (right scale)

Gulf War

0.100

0.010

.4

.2

NO DATA Luxury

Discovery

Adolescence

Maturity

.0

0.001 1930

1940

1950

1960

1970

1980

1990

2000

2010

Slide copyright 2015

Sources: Hawaii Tourism Authority, Hawaii DBEDT, Robert C. Schmitt, Historical Statistics of Hawaii (1996) UH Press; Bureau of Labor Statistics; conditional monthly annualized TARCH(1,1) volatility calculations by TZE

63

Constant-dollar tourist outlays per Hawaii visit (logs) 4000 Real (2013 $) expenditures per tourist per visit 2000

Discovery

Adolescence

Maturity

1000 1950

1960

1970

1980

1990

2000

2010

Slide copyright 2015

Sources: Hawaii Tourism Authority, Hawaii DBEDT, Robert C. Schmitt, Historical Statistics of Hawaii (1996) UH Press; Bureau of Labor Statistics; deflation calculations by TZE

64

Don’t like growth? Be careful what you wish for

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