UHERO forecast: Hawaiʻi’s growth remains sluggish as economy emerges from recession

Hawaiʻi’s economy is emerging from last year’s mild recession, but growth will remain slow and uneven, according to a new forecast released by the University of Hawaiʻi Economic Research Organization.

In its first-quarter 2026 outlook, UHERO said payrolls have begun to edge upward following job losses tied to a tourism downturn and reductions in federal civilian employment.

A resilient U.S. economy and continued strength in construction are helping stabilize conditions, even as international visitor markets remain weak.

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,” according to the 42-page report.

Real gross domestic product 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,” the report said.

Nationally, economic performance has been stronger than anticipated, buoyed by solid consumer spending, artificial intelligence investment and productivity gains. Growth slowed in the fourth quarter of 2025, partly due to a federal government shutdown, and UHERO projects U.S. growth will hover near 2% this year before easing in 2027.

Economists said it remains too early to determine the full impact of a recent U.S. Supreme Court decision invalidating broad federal tariffs, while global trade tensions and policy uncertainty continue to pose risks.

Tourism, a key driver of Hawaiʻi’s economy, has stabilized but is not yet expanding. The average daily visitor census fell 1.3% in 2025.

Although arrivals from Japan have resumed a moderate recovery, other international markets have declined sharply, reflecting reactions to U.S. federal policy. Domestic travelers have helped offset those losses, and overall visitor spending increased even as total arrivals dipped. UHERO expects arrivals to level off this year, with more meaningful gains not anticipated until 2027.

The state’s labor market has shown modest improvement after contracting in early 2025. UHERO forecasts a small net increase in payroll jobs this year, led by construction, health care, and accommodations and food services.

Continued declines in federal civilian employment are expected to temper overall job growth. The unemployment rate is projected to remain near 2.2%.

Inflation in Honolulu is expected to peak slightly above 3% in the second half of the year before easing toward a 2.5% trend. Mortgage rates are projected to remain near 6%, continuing to weigh on housing affordability even as construction activity stays elevated.

Overall, UHERO projects Hawaiʻi’s real gross domestic product will grow 1.6% this year, with real income rising about 1% annually in the coming years. Economists cautioned that risks remain, including trade policy uncertainty, potential additional federal workforce reductions and ongoing weakness in international tourism.

While advances in artificial intelligence offer potential long-term benefits, the report said the state’s economic outlook points to slower growth than in past decades.

For a more in-depth look at the University of Hawaiʻi Economic Research Organization report, click here.