UHERO: Hawaiʻi economy turns a corner, moves beyond recession with modest growth

Hawaiʻi’s economy is moving beyond last year’s mild recession, but the recovery will be gradual, according to the University of Hawaiʻi Economic Research Organization’s first quarter forecast for 2026 released on Feb. 27. After job losses tied to a tourism downturn and federal job cuts, payrolls have begun to edge upward.

A resilient US economy and continued strength in construction are providing support, even as international visitor markets languish. Tepid job and income growth will become the new normal, because of anemic population trends and structural underperformance (relatively low long-run growth trend). 

Maui specific takeaways of the Feb. 27 report:

• Fiscal challenges and affordability: Short-term rental conversions would reduce visitor capacity, so housing-market gains may come with tradeoffs for tourism activity, jobs, and incomes, as documented in a recent UHERO analysis of the Maui short-term rental phase-out.
• FEMA recently extended Temporary Housing Assistance for Maui wildfire survivors through February 28, 2027. This continued support for roughly 1,000 households reduces near-term displacement risk and helps limit further disruption to local employment and schooling, but it does not address the underlying housing shortage and mainly buys time as interim and permanent housing options expand.
• Payroll/Jobs: In Hawaiʻi, construction remains a bright spot in the labor market. Construction payrolls grew by more than 4% over the past year, adding about 1,700 jobs. This expansion reflects elevated government contracting and increased building activity, with construction job counts hovering at or near historical highs on Oahu and in Maui County. 
• Tourism recovery: Maui is the standout, as ongoing recovery from the disastrous 2023 wildfires will continue to propel rising tourism activity, if at a slower pace than last year. Still, growth in Maui daily census will average about 4% annual growth over the next four years. Even at that rate, visitor numbers will remain below pre-fire levels at the end of the decade. 
• TVRs: Maui County’s treatment of short-term vacation rentals operating in Minatoya List buildings entered a new phase in December with the passage of Bill 9. The ordinance establishes a timetable to phase out about 7,000 short-term vacation rentals in apartment-zoned districts, beginning in West Maui in 2029 and extending countywide by 2031. Converting these units to long-term housing could increase Maui’s housing stock by up to 13%, roughly equivalent to a decade of new construction. Debate of Bill 9 over the past couple years has already chilled the Maui condo market. Still, the ultimate impact of the policy remains uncertain.

Major takeaways of the Feb. 27 report:

• The US economy has held up better than expected, with solid consumer spending, investments in artificial intelligence and improving productivity. Economic gains slowed in the fourth quarter of 2025, partly because of the federal government shutdown. UHERO expects growth to remain near 2% this year before slowing somewhat in 2027. It is too soon to know the effects of the recent Supreme Court decision invalidating the administration’s broad tariffs. Globally, conditions have improved modestly, but continued trade tensions and policy uncertainty present ongoing risks.
• Tourism has stabilized but is not yet expanding. In 2025, the average daily visitor census dropped 1.3%. The Japanese recovery has resumed at a moderate pace, but arrivals from other international markets have fallen sharply, reflecting adverse reaction to US federal policy. Domestic visitors have helped offset these losses, and spending rose last year even as visitor numbers declined. On Maui, visitor arrivals rose 7% as recovery continued, and inched higher on the Big Island and Kauaʻi. Arrivals will stabilize this year, but a more substantial recovery in visitor headcounts is not expected until 2027.
• The local labor market has improved modestly after contracting in the first half of 2025. UHERO now expects a small net increase in payroll jobs this year. Construction, health care and the accommodations and food service sectors will continue to add jobs, while federal civilian employment losses will pull down growth numbers. The unemployment rate will remain near its current low 2.2% level.
• Inflation in Honolulu is expected to peak just above 3% in the second half of this year, although persistent US inflation and the recent Supreme Court ruling on tariffs  introduce considerable uncertainty. Local inflation will then ease to a 2.5% trend. Mortgage rates will remain near 6%, weighing on housing affordability even as construction activity overall remains elevated.

Overall, UHERO expects Hawaiʻi’s economy to expand at a modest rate over the next several years.

“Real income will grow by about 1% annually,” UHERO wrote. “Real GDP will expand by 1.6% this year before converging to a similarly slow long-run growth path. Forecast risks remain significant, including trade policy uncertainty, potential additional federal workforce reductions and ongoing weakness in international tourism. While the adoption of artificial intelligence holds promise, Hawaiʻi’s road ahead still looks to be one with slower growth than we have seen in the past.”

UHERO is housed in UH Mānoa’s College of Social Sciences.

*Maui Now’s Wendy Osher contributed to this report.