Bank of Hawaii chief economist Paul Brewbaker

‘Turn off the TV’ to battle pessimism

Bank of Hawaii economist thinks recovery coming soon

By HARRY EAGAR, Staff Writer

WAILEA – Bank of Hawaii chief economist Paul Brewbaker thinks everybody – including the people he works for – have overdone it with economic pessimism.

Not that there aren’t real problems, he told a breakfast meeting of invited Bankoh customers Thursday at the Grand Wailea Resort Hotel & Spa. He stepped off the plane from Honolulu to be greeted with a Maui News headline that the visitor count was down 22 percent in July. However, he said, he stayed up late to get the release of the national gross domestic product number for the second quarter, and it’s up 3.3 percent.

“I don’t know what kind of a recession has a 3.3 percent growth rate,” he said.

Over the last eight quarters, national GDP has fluctuated between 0 and 4 percent – barely dipping below 0 in the last quarter of 2007. So the question becomes, when does the recovery start? Soon, Brewbaker believes, although he’s having a hard time getting anybody to agree with him.

“I work for people who think there is a recession going on,” he said.

“Turn off the TV,” he recommends and wait for the actual numbers. “This thing (the idea that a recession is under way) is in people’s heads. The reality doesn’t matter at this point. . . .

“We’re bombarded with all this information, much of which is spurious and most of which is redundant. Just turn off the TV and you’ll be fine.” Turning the numbers into graphs, Brewbaker says he sees something that looks similar to what happened in Hawaii after the attacks of Sept. 11, 2001. Visitor arrivals went down then, but over a period of about two years they came back.

As for the credit shock, the graph there looks similar to what happened when several bubbling Asian economies burst in the late ’90s. Again, after about two years, the spike had disappeared. He dates the shock in the credit markets to last August, so we’re already about halfway through the work through.

The visitor shock came at the end of April, when Aloha and then ATA airlines folded. Brewbaker says he had already been predicting a slowdown from 2007 (a record year for tourism), but he hadn’t expected the Aloha failure.

Taking these and several other hints, he says he expects a return to better times by the end of 2009.

Between now and then, “it will be challenging.” A question mark is air lift. Maui and the Big Island felt the failure of Aloha and ATA more than Oahu. The difficulty of finding aircraft and financing and the high cost of petroleum will restrain new entrants, but he predicts that about half the lost seats will be recovered next year. Eventually, vacationers will “figure out they’re getting a bargain” and start traveling again. Resorts will have to decide whether to try to advance that impression by cutting prices or hold firm and endure a longer period of low traffic.

“It’s still Maui. Eventually people are going to want to come back here.”

A more recondite calculation suggests that the residential real estate slump is nearing its bottom and might soon turn up – in California. For decades, price trends in Maui real estate have closely tracked Orange County, with a lag of about two quarters.

Brewbaker says people with money have been able to arbitrage the difference. Or, as he puts it, they say to themselves, “I can sell my house in Corona del Mar and buy the same house in Wailea and God gives me $200,000?”

That was the story for the past decade or so. Now that Orange County (and California) prices are declining, the arbitrage works the other way: Sell your house in Maui’s relatively unscathed market and go bottom fishing in Anaheim.

“Here’s the problem,” he said. Since Orange County prices are going down, then six months from now, Maui prices should follow. However, a regression analysis suggests to him that California real estate is just about to reverse

direction. He cited the widely studied Case-Shiller index of housing sales. The latest numbers were down 18

percent. People fixed on that, he says, without noticing that the second regression of the trend suggested an uptick is near.

He believes that lenders are now charging a risk premium (around 200 basis points, or 0.2 percent of the loan) that is not justified by the numbers. That damps down investment. In the question period, he was asked about the future price of oil. “I have no clue,” he said. According to various assumptions, “$145 was as probable as $75, and we’ve seen both in the last 12 months.”

He recommended basing business strategy on the assumption of $145, and if it does go lower – as it is this week – enjoying the break.

* Harry Eagar can be reached at