Thursday, June 04, 2020
Hawai'i Free Press

Current Articles | Archives

Monday, May 04, 2020
COVID-19: Developing Economic Recovery Scenarios for Hawaii
By UHERO @ 9:57 PM :: 588 Views :: Economy, COVID-19

COVID-19: Developing Economic Recovery Scenarios for Hawaii

by Carl Bonham, Peter Fuleky, and Byron Gangnes, UHERO, May 4, 2020

A significant part of Hawaii’s economy has effectively been shut down to slow the spread of the coronavirus in the Islands. The mandatory fourteen-day self-quarantine requirement for arriving visitors and residents has largely put a stop to tourism. And the stay-at-home order for all non-essential workers that shuttered many businesses is just now beginning to be relaxed. The unprecedented pause in economic activity has had a profoundly negative impact on Hawaii, with a sharp drop in spending, employment, and income. The key question as we look forward is how rapidly economic conditions will improve as the positive effects of government relief measures are felt and as restrictions are gradually eased over the coming weeks or months. In this blog, we describe how we are developing baseline assumptions about Hawaii’s recovery, as well as potential alternative paths. Such assumptions will be key drivers of the economic forecasts for Hawaii that we will be releasing later this month. 

Before attempting to establish reasonable scenarios for the economy’s future path, we need to have a good understanding of where we are. In fact, this is tricky. The impact of the precipitous changes of recent weeks is difficult to assess because most official government statistics are released with a considerable delay. But a limited number of available high frequency indicators and reasonable assumptions about exposure to shut-down restrictions can be used to gauge the extent and distribution of losses we have experienced so far. Airline passengers to the state declined from more than 30,000 per day to an economically negligible 500-600 per day recently. Reservations at restaurants dropped even before mandatory rules brought them to zero, and a sharp reduction in residents’ mobility suggests that activity across a broad swath of the economy has declined to less than half its pre-crisis level. 

Job losses due to COVID19 accumulated during late March and April, with initial claims for unemployment compensation surging by 200,000 during this period. This represents 30% of the February labor force. The number of layoffs differs across industries depending on their exposure to the two main channels of COVID19 impact: 1) the halt to tourism and 2) the stay-at-home order for local residents. Industries that predominantly cater to visitors (for example, accommodations) are primarily affected by the first channel, but most industries are affected to varying degrees through both channels. Since the available unemployment claims data do not provide industry or occupation identifiers, we must make assumptions about the distribution of job losses across sectors, taking into account their sensitivity to the decline in tourism and the stay-at-home order. These assumptions are informed by results from a recent survey UHERO conducted with the Chamber of Commerce Hawaii and other organizations.[1]

Because most COVID19-related job losses occurred after the US Bureau of Labor Statistics and Hawaii Department of Labor and Industrial Relations surveyed local establishments in March, the number of non-farm payroll jobs reported for the first quarter remained relatively stable. We estimate that job losses peaked at about 220,000 in April, with about 116,000 of those job losses attributable to the tourism halt and the remaining 104,000 jobs resulting from the stay-at-home order.[2] During May and June, the labor market will benefit from the forgivable Small Business Administration loans provided under the CARES Act Paycheck Protection Program (PPP). The maximum amount of these loans is equivalent to 2.5 months of payroll costs, and the covered period is eight weeks. The terms of the loan require that not more than 25% of the forgiven amount may be used to cover non-payroll costs. This implies that 75% of the loan is used for personnel costs and the remainder for other business expenses.

Using information on PPP loans by industry and prevailing pay rates, we are able to estimate the number of industry jobs that will be supported by the program. Specifically, we divide 75% of the aggregate value of approved loans in each industry by an estimate of the supported payroll earnings of an employee in that industry. The implied total number of jobs supported by the $2.2 billion of loans approved to date is 165,000. We estimate that an additional 7,000 jobs may be supported by the Payroll Support Program for Airlines. But because these programs allow funds to be used to retain employees still on company payrolls, only a fraction of the loan amounts will actually result in re-hiring previously laid-off employees. This fraction varies by industry. Under our assumptions, the aggregate impact of the CAREs act Payroll Protection and Support Programs will be to reverse roughly 83,000 of the job losses that have already occurred. Taking all of this into account, we estimate that average payroll employment for the second quarter will be about 165,000 lower than it was in the first quarter of the year.

Beyond the temporary effects of the PPP, our scenarios for the economic activity in a particular future month are determined by assumptions about when restrictions will be lifted and the rate of increase in capacity utilization once those restrictions are gone. The timing and degree of recovery in tourism is highly uncertain, but it is likely to be very attenuated. We assume that progress in rolling out screening, testing, and tracing of visitors will allow for re-opening of the visitor industry by the last week of July, but that the pace of visitor return will be very slow. Specifically, we assume third-quarter arrivals recover to only 28% of their fourth quarter 2019 level, and that capacity use will linger at low levels through the end of the year, held back by consumer reluctance to resume long-haul travel, pocketbook challenges, and the probability of localized virus flare-ups in some visitor markets or in Hawaii itself. By December, only half of the arrivals lost to the pandemic will have been recovered in our baseline scenario. 

The pace of recovery of the non-tourism economy will be more rapid than for tourism, but will still be measured. We assume that the process of reopening businesses will continue gradually in May, and that once the stay-at-home order is lifted, local consumption will ramp up slowly at first as businesses and consumers adjust to a “new normal.” In May and June, we assume the return of 35-45% of the business activity lost during the most extensive period of local economy shut-down in April. By December, 75% of economic activity lost due to the stay-at-home order will have been reversed. The less-than-complete recovery reflects macroeconomic weakness, ongoing costs of measures to preserve social distancing, and spillover effects from persistent low levels of tourism.

Job Losses and Recovery

Note that the projected gradual re-opening of the economy should be enough to offset most of the drag that will come when the Paycheck Protection Program is phased out at the end of the second quarter (however, July will see a net decline). By the fourth quarter of this year, of the 220,000 lost jobs due to COVID19, 110,000 will have been recovered. While this will represent significant progress, the unemployment rate will likely remain well into double-digits at year end. 

Needless to say, these calculations require heroic assumptions about a number of factors, including the progression of the pandemic, the pace of policy change, behavioral responses of local residents and visitors, and the impacts of sustained low levels of activity and higher operating costs on business survival or failure. In formulating our baseline scenario, we are making our best judgment about these issues, given information available at this time. Because of the tremendous uncertainty, we turn next to a discussion of what we think represent reasonable alternative scenarios. 

A more pessimistic scenario is fairly easy to envision. On the tourism side, the challenges of screening, testing, and contact tracing are daunting, relying both on Hawaii’s readiness and willingness to accept significant visitor numbers and access to—and confidence in—testing measures that can be required of potential visitors. Continuing mainland virus spread and flare-ups are not unlikely, considering the way the virus has marched across mainland states and communities and the possible resurgence in areas where premature reopenings are made. In our pessimistic scenario, then, we assume no significant tourism reopening until the last week of September, eliminating all of the summer high season. Progress thereafter is slow, and the winter high season is still below 50% of normal. A delay of significant tourism reopening will pose tremendous challenges for the industry, and, absent significant additional federal support, will very likely lead to bankruptcies and additional loss of jobs. With a more attenuated recovery of tourism activity and business failures in the industry, the recovery of the non-tourism economy will face increased drag from overall macroeconomic weakness. Further, “local” restaurants or other businesses that rely only partially on tourism spending—and operate with thin margins in the best of times—may either fail to reopen or begin to fail once federal support has ended.

Assumed Recovery of Capacity Utilization: TourismAssumed Recovery of Capacity Utilization: Non-Tourism

A more positive scenario than what we have established as a baseline is very much dependent on testing capacity and the spread of the virus. For tourism, the optimistic scenario is consistent with rapid increase in test availability nationally within just the next two months, so that a moderate return of visitors is possible by late summer. Good control over the virus on the US mainland and abroad would permit further recovery as the year progresses. Even under this optimistic scenario, we see lingering traveler concerns, high business costs of maintaining social distancing, and a deep US and global recession combining to limit the extent of visitor industry recovery this year. Visitor arrivals losses would remain significant through December. For locally-focused firms, the main developments that would support a more optimistic outcome are a robust public health environment, with testing, tracing, and isolation efforts that contain the virus in Hawaii and a speedier pace of tourism recovery that generates direct spillovers and a stronger macroeconomic environment. In the optimistic scenario, we assume that by autumn businesses catering primarily to the local market recover about 80-85% of the decline in their level of activity. Persisting social-distancing measures would continue to impose significant ongoing costs. 

Assumptions of the type laid out here are necessary as we continue to work on updating our forecasts for the Hawaii economy. They are of course fraught with challenges. As others have pointed out, the vast uncertainty inherent in the current environment argues for a scenario approach that envisions alternative possible futures rather than excessive focus on a single numerical baseline path. Even with this in mind, it is important to acknowledge that the scenarios we are developing can in no way encompass the range of all possible outcomes. These will depend of course on medical aspects of the crisis: the epidemiological course of a wholly-new virus and an unknown period before which a vaccine becomes available. They will also be affected by the extent of additional policy responses to the pandemic and to the macroeconomic fallout. Finally, there are uncertainties about the way that people will adjust their behavior under a new normal that for some time will include social distancing measures and fear of close social interaction. As clarity on these issues emerges, we will be updating these scenarios to inform the range of possible outcomes for the Hawaii economy.

---30---

UHERO BLOGS ARE CIRCULATED TO STIMULATE DISCUSSION AND CRITICAL COMMENT. THE VIEWS EXPRESSED ARE THOSE OF THE INDIVIDUAL AUTHORS.

[1] Thanks to Chamber of Commerce Hawaii, The Hawaii Island, Kauai and Maui Chambers of Commerce, The Retail Merchants Association of Hawaii, the Pacific Resource Partnership, Hawaii State Bar Association, Hawaii Restaurant Association, the Chinese Chamber, Kalihi Business Association, the Hawaii Food Manufacturing Association, and Hawaii Foreign-Trade Zone for help promoting the survey.

[2] Our estimate of the number of jobs lost in April is higher than the 200,000 initial unemployment claims to allow for the likelihood that some workers have been unable to file claims, or they have not yet been processed. Our estimate is also consistent with the results from the UHERO/COC survey results. Finally, note that the number of jobless claims reported in the press appears to be the number of applications received for unemployment insurance and apparently includes duplicate applications, and may include self-employed claimants who are not yet included in the weekly initial claims data.

HNN: When will tourists be welcomed back? The best-case scenario is predicting the end of July

Links

TEXT "follow HawaiiFreePress" to 40404

Register to Vote

2aHawaii

808 Silent Majority

808 State Update AM940

ABCDEFG Blog

ACA Signups Hawaii

ACCE

ALEC

Alliance Defending Freedom

Aloha Life Advocates

Aloha Pregnancy Care Center

American Council of Trustees and Alumni

American Mothers of Hawaii

AMVETS-Hawaii

AntiPlanner

Antonio Gramsci Reading List

A Place for Women in Waipio

Astronomy Hawaii

Audit The Rail

Ballotpedia Hawaii

Better Hawaii 

Blaisdell Memorial Project

Broken Trust 

Build More Hawaiian Homes Working Group

CAFR Hawaii

Castaway Conservative

Children's Alliance Hawaii

Children's Rights Institute

ChinaTownWatch.com

Christian Homeschoolers of Hawaii

Citizens for Recall

Cliff Slater's Second Opinion

Coffee Break

CSIS Pacific Forum

DAR Hawaii

DeedySupport.com

DVids Hawaii

E Hana Kakou Kelii Akina

E Māua Ola i Moku o Keawe

Farmers For Choice Hawaii

FIRE

Fix Oahu!

Follow the Money Hawaii

Frank in Hawaii

Front Page Magazine

Frontline: The Fixers

Genetic Literacy Project

Get Off Your Butts!

God, Freedom, America

Grassroot Institute

Habele.org

Hawaii Aganst Assisted Suicide

Hawaii Aquarium Fish Report

Hawaii Aviation Preservation Society

Hawaii Catholic TV

Hawaii Christian Coalition

Hawaii Cigar Association

Hawaii Coalition Against Legalized Gambling

Hawaii ConCon Info

Hawaii Credit Union Watch

Hawaii Crime Victims' Rights

Hawaii Crop Improvement Association

Hawaii Debt Clock

Hawaii Defending Marriage

Hawaii Defense Foundation

Hawaii Families for Educational Choice

Hawaii Family Advocates

Hawaii Family Forum

Hawaii Farmers and Ranchers United

Hawaii Farmer's Daughter

Hawaii Federalist Society

Hawaii Federation of Republican Women

Hawaii Firearm Community

Hawaii Fishermen's Alliance

Hawaii Future Project

Hawaii Gathering of Eagles

Hawaii History Blog

Hawaii Homeschool Association

Hawaii Jihadi Trial

Hawaii March for Life

Hawaii Meth Project

Hawaii's Partnership for Appropriate & Compassionate Care

Hawaii Public Charter School Network

Hawaii Rifle Association

Hawaii Right to Life -- Big Island

Hawaii Right to Life -- Oahu

Hawaii Shield Law Coalition

Hawaii Shippers Council

Hawaii Smokers Alliance

Hawaii State Data Lab

Hawaii Together

Heritage Foundation

HI Coalition Against Legalized Gambling

HIEC.Coop 

HiFiCo

Hiram Fong Papers

Homeschool Legal Defense Hawaii

Honolulu Homeless Crisis

Honolulu Navy League

Honolulu Traffic

Horns of Jericho Blog

House Minority Blog

House Republican Caucus YouTube

HPACC

Hump Day Report

I Vote Hawaii

If Hawaii News

Imua TMT

Inouye-Kwock, NYT 1992

Inside the Nature Conservancy

Inverse Condemnation

Investigative Project on Terrorism

Iowa Meets Maui

Jackson v Abercrombie

Jihad Watch

July 4 in Hawaii

Kahle v New Hope

Kakaako Cares

Kau TEA Party

Kauai Co GOP

Keep Hawaii's Heroes

KeyWiki

Land and Power in Hawaii

Legislative Committee Analysis Tool

Lessons in Firearm Education

Lingle Years

Malulani Foundation

Managed Care Matters -- Hawaii

Malama Pregnancy Center of Maui

Mauna Kea Recreational Users Group

MentalIllnessPolicy.org

Middle East Forum--The Legal Project

Mililani Conservatives for Change

Military Home Educators' Network Oahu

Missile Defense Advocacy

MIS Veterans Hawaii

Muslim Brotherhood in America

NAMI Hawaii

NARTH

Natatorium.org

National Christian Foundation Hawaii

National Parents Org Hawaii

National Wind Watch

New Zeal

NFIB Hawaii News

No GMO Means No Aloha

Northwest Economic Policy Seminar

Not Dead Yet, Hawaii

Now What I Really Think

NRA-ILA Hawaii

Oahu Alternative Transport

ObamaCare Abortion Hawaii

Obookiah

OHA Lies

Opt Out Today

OurFutureHawaii.com

Pacific Aviation Museum

Patients Rights Council Hawaii

PEACE Hawaii

People vs Machine

Pritchett Cartoons 

Pro-GMO Hawaii

P.U.E.O.

RailRipoff.com

Rental by Owner Awareness Assn

Republican Party -- Hawaii State

Research Institute for Hawaii USA

Rick Hamada Show

RJ Rummel

Robotics Organizing Committee

Save Dillingham Airfield

School Choice in Hawaii

SenatorFong.com

SIFE Remington

SIFE W. Oahu 

Sink the Jones Act

Smart About Marijuana--Hawaii

St Marianne Cope

State Budget Solutions Hawaii

State Policy Network

Statehood for Guam

Tax Foundation of Hawaii

The Harriet Tubman Agenda

The Long War Journal

The Real Hanabusa

Time Out Honolulu

Trustee Akina KWO Columns

Truth About Trade & Technology - Hawaii

UCC Truths

Union Members Know Your Rights

US Tax Foundation Hawaii Info

Valor in the Pacific

VAREP Honolulu

Waagey.org

West Maui Taxpayers Association

What Natalie Thinks

Whole Life Hawaii

Yes2TMT