Tighter federal spending, a weaker yen and higher hotel room rates are combining to take a bite out of Hawaii’s economic recovery this year, says a team of University of Hawaii economists.

In a report released today, the University of Hawaii Economic Research Organization cut its forecasts for growth in both 2013 visitor arrivals and gross domestic product, the broadest measure of the state’s economic activity.

“Overall, the level of visitor industry activity has been coming in a bit weaker than we had anticipated earlier in the year,” the report’s authors wrote. “Next year may be more challenging since there are signs that global growth is slowing.”

While this month’s 16-day partial government shutdown hurt the state’s visitor industry, events in Washington were already affecting Hawaii, said Peter Fuleky, a UHERO research economist and assistant professor of economics.

It started with a rollback of tax breaks in the beginning of the year as part of the “fiscal cliff” deal approved by Congress. That was followed by the automatic budget cuts as part of the sequester, and then the government shutdown.

“Consumer confidence has dropped quite significantly,” Fuleky said. “All of these things are making consumers hesitant to go out and spend big-time on discretionary items. A trip to Hawaii is not a necessity. It’s something you can put off.”

A nationwide decline in consumer confidence accelerated with the government shutdown, according to the report. If that decline persists, it could have a greater impact on the U.S. economy than the shutdown itself, the report’s authors said.

Although 2013 is shaping up to be another record-setting year for the tourism industry, gains in arrivals and spending will not be as robust as previously thought, according to the report, which is issued quarterly.

UHERO’s new forecast calls for the number of visitors traveling to Hawaii to increase by 4.3 percent in 2013 from 2012. That’s down from the group’s previous forecast of a 5.5 percent increase released in August.

The Hawaii Tourism Authority, in a report last month, said a record 8,028,744 visitors came to the islands last year.

UHERO also revised downward its forecast for visitor spending in 2013. The organization is now looking for a 4.7 percent increase, down from the 7.4 percent gain it forecast in August.

A slowing of visitor arrivals from Japan since the start of the year is primarily due to the weakening yen, Fuleky said.

The yen has depreciated by about 25 percent over the past year, resulting in a drop in the purchasing power of Japanese visitors when they buy goods priced in dollars.

Hotels have benefited from rising room rates, but that has left less in the pockets of visitors to spend on other things, Fuleky said. It’s a “double whammy”for Japanese visitors who are being hit by both more expensive hotel rooms and less buying power with their home currency, he said.

Although the overall Hawaii economy remains healthy, there have been some signs of softening, with both job creation and income growth slowing since the beginning of the year, according to the report.

UHERO now forecasts inflation-adjusted GDP to increase 3.1 percent in 2013, down from the August forecast for 3.3 percent growth. Personal income is forecast to grow by 1.6 percent in 2013 after adjusting for inflation, compared with an estimated 2.6 percent growth in the August report.

“This has been another year of moderate, if unremarkable growth in Hawaii,” the authors wrote. “As expected, the torch is gradually being passed from tourism to construction and the broader service economy.”

Download (PDF, 3KB)

Photo Credit: The sun sets on Waikiki Beach in Honolulu, Hawaii January 2, 2010. Larry Downing / Reuters