Jan 9th, 2009 by Capsun

“I wish I had better numbers to report…but it is what it is.”

-Paul Brewbaker, January 8, 2009

Speaking to a crowd of about three dozen people yesterday, Paul Brewbaker shared some of his thoughts on the economy - in Hawaii, nationally, and internationally. He commented on current trends and his predictions for the next few years to a meeting of the Association of Information Technology Professionals (AITP) - Honolulu Chapter, and I was lucky to attend as a guest. Mahalo to work for allowing me to take an extended lunch to attend the event.

If you’ve been in Hawaii for any longer than a few weeks, you’ve probably heard his name. But if you don’t already know, Brewbaker is one of Hawaii’s foremost economists and has served as Senior Vice President and Chief Economist at Bank of Hawaii for as long as I can remember. He also serves on the State’s Council on Revenues, a position appointed by the Governor. He is highly respected for his insights on our local economy. Take, for example, median Oahu home prices, which he predicted would climb to over $600,000 - two or three years before they did. At the time, no one thought that would happen, and many thought he would be wrong. As per usual, he was correct.

Here are some highlights of what he shared yesterday, some of which he has been saying for some time now:

2009 should be a year of stabilization. He thinks we will have negative growth and other data for the first half of the year, but should experience positive numbers during the second half. There are worse places to be in the country (Orange County, anyone?), so he is more hopeful of Hawaii’s ability to weather the storm. Unless of course you’re on a neighbor island (especially Maui and Kona) where they are eating it hard compared to Oahu.
Volatility has begun to abate. That’s economist-speak for the worst should be behind us. Just because it’s getting better doesn’t mean it’s good. We went from the craziest it has ever been to just plain wackiness now.
Don’t forget the lessons of It’s a Wonderful Life. Basically, hording cash hurts the economy by removing available capital for lending. For example, if BOH had taken $200 million in bailout money (which they didn’t!), they could have created about $2 billion in loans. He even told a story of a guy who withdrew thousands of dollars, in those nice bricks of cash with the money seal, to tuck under his mattress at home.
It’s not as bad as the Great Depression, but it could have been. The difference between then and now is that this time, the Federal government injected funds, both through traditional means and the bailouts. If a bank fails, all the available capital it had for lending would have also disappeared. That’s not good for the economy, but that’s what happened during the Depression.
He sees signs of recovery and stabilization. While Hawaii quarterly visitor arrivals are near where they were after the SARS incident in 2003, they are trending upward. Even nationally there are signs. When you can fly from Honolulu to Paris for under $700, that’s just too cheap. Even oil, trading at $50 a barrel or less, is too cheap. He thinks the equillibrium price is around $70. So if you own a gas-guzzler, enjoy while you can.
Although he sees stability, we still have some risk going forward. Hawaii, at 4.04%, ranks 44th for mortgage delinquency (that’s a good number, it means people are still paying their mortgages). And while we have lower sub-prime exposure than in other markets, we still have some exposure. But now is not the time to sell your house. Doing so makes things worse by lowering comps, the comparable sales data for homes. So if we all just stay put, we can keep the comps high, ride out the storm, and sell at higher prices when the economy recovers in 2010. The real risk now is deflation which makes the real cost of a mortgage go up.
Tech companies that take advantage of Act 221 should be careful. Act 221 created high tech tax incentives in Hawaii (a good thing), but it provides a nearly unheard of 100% tax credit (if not bad, at least unpopular). Since it became law, it’s been a controversial issue. And right now, because it’s not transparent, it’s all the things it’s bad to be in a down economy. People want to know who got, how much they got, and for what. So while the Legislature is going in to session knowing they will have to make cuts everywhere else, the State, by law, is already committed to paying Act 221 rebates that are estimated at up to $200 million.
Brewbaker did share very specific numbers and predictions for the economy (with charts and graphs!), as well as some personal thoughts. However, he serves as Chair of the Council on Revenues (COR) and his comments yesterday were in his individual capacity. So, in trying to be a responsible blogger, I am withholding that information. You can wait for the news media to report about COR’s meeting today at 3 pm 2:00 pm (thanks Dan Seto), when they will vote on and release their official forecast. However, I think most people agree the COR estimate will be down, but the debate will be over how much down.

If you’ve never heard Paul Brewbaker speak before, you should. While he’s as much a policy wonk as I am - actually, he far exceeds me - he’s quite entertaining. It’s a lot like watching Howard Dicus cover business news.

Mahalo!