UHERO: Headwinds hold back Hawai‘i’s economy

Hawai‘i’s economy has slowed this year under the weight of higher war-driven oil prices and an unusually active storm season, including two hurricanes within three weeks, according to the University of Hawai‘i Economic Research Organization’s third-quarter forecast for 2026.

Real gross domestic product growth is expected to fall to about half a percent this year, down from more than 3% in 2025, while payroll employment edges lower. UHERO anticipates gradual relief as energy prices ease and storm recovery proceeds, with growth and hiring firming up in 2027 and 2028. An aging, shrinking population will keep job gains modest, though continued AI investment could offer some upside for incomes—though how much remains uncertain.

“Overall, we expect 2027 to bring gradual economic improvement to the state as energy prices and storm effects recede, although the persistent Middle East conflict remains a primary risk, together with election-related policy uncertainty,” UHERO wrote. “Slowly declining population will mean a tepid trend employment path, while AI adoption could provide a potential upside income surprise in the years ahead.”

Key takeaways from the Sept. 25 report include:

National backdrop: The US economy continues to grow at roughly 1.5% to 2%, propped up by higher-income households benefiting from AI-related wealth gains and the broader AI buildout, while high fuel and other costs squeeze lower-income families. With core inflation running above the Federal Reserve’s 2% target, the central bank raised the federal funds rate at its September meeting. Long-term rates have already climbed in response, pushing mortgage rates higher. Growth abroad remains soft, with Canada facing new US tariffs, China expanding at its slowest pace since the pandemic, and elevated oil prices weighing on many other trading partners.

Tourism: Hawai‘i’s visitor industry faced a rough year, squeezed by both fuel costs and a string of storms. Hurricane Lowell’s September brush with Kaua‘i alone is expected to cut that county’s arrivals by more than 6% for the year. Statewide, visitor arrivals will likely dip just over half a percent, while a sharp decline in reported length of stay will drag the average daily visitor census down more than 6%. Maui’s tourism sector continues to recover, and UHERO expects modest statewide arrivals growth to resume in 2027 and 2028 as fuel prices ease and storm impacts fade.

Jobs: Hawai‘i’s job growth has stalled, with Maui the only county UHERO expects to post net employment gains this year. The report points to weak labor demand—not a worker shortage—as the primary driver: job postings are down, and unemployment has ticked up to a still-low 2.7%. Real wage growth has been modest and inconsistent across industries. Statewide payroll employment is projected to contract slightly this year before a small rebound in 2027, with income growth slowing before it recovers.

Inflation: Honolulu inflation hit 5.6% over the 12 months ending in July, driven by surging energy prices and continued increases in shelter costs. UHERO projects inflation will average 4.8% for 2026 before easing to 3.3% in 2027 as those pressures subside.

Construction: Construction remains a major pillar of the state economy, buoyed by large federal military projects, Honolulu’s Skyline rail project, the Kapālama port upgrade and private condo development. Employment in the sector has flattened but should hold above 40,000 workers for several more years, even as the public infrastructure cycle passes its peak. Changes to federal law and a possible new local financing tool are expected to support further housing development.

Housing: Housing affordability remains strained despite prices holding largely flat this year. Mortgage rates near 7% have driven up monthly payments, and Hawai‘i’s already-steep condo fees could climb further under new federal funding rules. Rebuilding from this year’s storms adds near-term costs for the state and counties, compounded by long delays in the release of federal recovery funds.