UHERO Focus: 2026 Q2 Forecast

Added: 2026-05-17

[00:00:01]Aloha, I'm Carl Bonham, the executive director at U-Hiro. I'm here with another U-Hero focus update. This time for our second quarter forecast report.

[00:00:10]And you know, just three months ago, we were sort of optimistically looking forward to some continued growth as we came out of a week 2025 and then of course we get hit by multiple Kona low storms and now a war with Iran. So, um, let's go ahead and look and see where we've been and then we'll talk about the the shock from the war. 2025 admittedly was pretty lousy start. Um, we job net job creation. The the gold line in the bottom panel here uh peaked at about a thousand uh jobs per month in the beginning of the year and fell into negative territory. So we were losing jobs uh throughout the first half of the year and then we began to see growth really on the back of very strong visitor spending in the second half of of 2025. That led us to be sort of cautiously optimistic about 2026. Uh we were also looking forward to some of the fiscal stimulus, the tax refunds, etc. coming in 2026. But the start of the year, notice that the last data point here for the the gold line net job creation is basically at zero. And actually the the March uh jobs number, payroll jobs number for the month of March in 2026 is lower than it was in January of 2025. Um basically and that that data point would have been impacted by the Kona storms that disrupted lives and and the economy and destroyed properties etc. Of course now we're dealing with a supply shock that is going to drive up costs. um no one can tell you exactly when this war will end or when the strait will reopen or gas prices will come down. And so we're doing a set of scenarios. We've got a baseline scenario that is uh maybe even a little bit on the optimistic side. Uh and that's you can think of that as okay, the straight reopens in the next month or so. Oil starts to flow again.

[00:02:05]It gets to markets over the next six weeks or so and refined products um start to get out within the next couple of months. And then you, you know, you begin to see prices come down. So that has Brent oil prices, these are spot prices, not future prices, hovering around $120 a barrel in Q2 and then coming down pretty rapidly, uh, falling below $90 a barrel by start of next year and then remaining in in in that area around 2027 and into 2028. In the pessimistic scenario, uh this is where you know the the war is prolonged, the straight remains closed for you know maybe into July um maybe late July or August and that in that case oil prices have to rise to reduce demand for oil because really you know we what we've been doing is is uh consuming out of inventories and there's a limit to that.

[00:03:01]Uh and the oil price rise here in this scenario reaches $170 a barrel uh for the quarter and remains elevated over $100 a barrel in the in the out quarters. Uh so what does that do to the US economy? Well, the baseline scenario is one that that the US economy can weather. It brings the right chart shows US real GDP growth and the green bars are our forecast from our previous our first quarter forecast report. So 2.1 2.2% 2% in 2026. Our new baseline forecast brings that down to 1.6% 1.7%.

[00:03:39]Um, and so, you know, we're talking about a 40 to 50 basis point cut in the in the forecast and and then bouncing back and sort of converging on trend growth. Um, the pessimistic forecast is is quite a bit harder. Uh, initially that higher oil price, higher gas price.

[00:03:58]So, think gas prices $5 plus a gallon nationally. Uh, I know that doesn't sound like like much in Hawaii, but nationally that's that's those are big increases. That really eats into overall consumer uh spending. Consumers that are spending, you know, 20 30% of their income, this is low-income consumers, on on energy have to cut back elsewhere.

[00:04:21]And US real GDP growth instead of being 2.1 2.2 is 1%. So a you know a full percentage point a little bit more than that cut to GDP growth and then a bounce back going forward uh with GDP growth getting back to trend in 2829.

[00:04:41]And you know why do I spend so much time focusing on the US economy? Well, it's driving Hawaii's economy. everything from federal spending and tax policy and monetary policy, but more importantly is visitor spending. 80% of the visitors in Hawaii are coming from the US and 80% of visitor spending is relying on US. And if you see that peak in real visitor spending in the fourth quarter of 2025 in this chart, the green line is real visitor spending. And then 2026 first quarter remains elevated. That's a 6% year-over-year growth in real visitor spending in Q1. Um, in the baseline, and this is our baseline forecast, uh, we have visitor spending continuing to decline all the way to first quarter 2027 when the US economy begins to to grow more rapidly and we and oil prices come down and gas prices come down in that baseline scenario. And so, you know, this is something that Hawaii can weather. uh the size of this drop is is a little bit smaller than the post Maui wildfire drop. Uh of course this is the baseline. In the pessimistic scenario, uh it's a completely different story and visitor spending would be impacted much more severely because uh consumers across the world are spending so much money on energy uh to to cool their homes or heat their homes and to to get food on their table uh that they're cutting back on sort of non-essential spending. If you look more closely at what that does to Hawaii in terms of inflation, that's the left set of bars here in a grid. Again, the green the green bars are our previous our first quarter forecast. We had forecast inflation to be just a little under 3% in 2026.

[00:06:34]Uh in the baseline, we think that jumps to 4.2% and in the pessimistic scenario, we think that jumps to closer to five.

[00:06:42]Uh they all come back down eventually as as energy costs come down. In the pessimistic case, it takes longer. Uh, and so the hit to particularly to, you know, middle income and and below households is much much larger in the in the pessimistic case. So what about Hawai's overall economic growth? You Hawaii real GDP growth. Our forecast coming into this before the Kona uh Kona lows and before the the oil price shock was almost trend growth. So 1.7% uh 1.6% 6% real GDP growth for Hawaii. We think that'll be a full 60 basis points or or um down to 1% in the baseline case. So again, that's something that that we can sort of manage. It's not necessarily a recession. The pessimistic case is almost certainly a recession for Hawaii uh with real GDP growth uh just a little bit above 0.3.4% in 2026. And in the pessimistic case, it takes longer to recover, but you do eventually bounce back and and get back to uh roughly 1.5 1.6% real GDP growth, which is about all you can expect in an economy that's not adding population or labor force. Um, and so, you know, let's hope that our our forecast is too pessimistic and and we get through this uh you know, the weather gets better just like it did after the con of storms and we get through this economic turmoil once again. Mahalo.