The University of Hawaiʻi Economic Research Organization (UHERO) has forecasted a mild recession for the state over the next year, citing a decline in tourism, stagnant job growth, and rising inflation. The third-quarter report for 2025 indicates that Hawaii's economy is under pressure from a weakening U.S. economy and challenging global trade conditions.
Key Takeaways
- UHERO predicts a mild recession for Hawaiʻi over the next year, with risks of a deeper downturn linked to the U.S. economy.
- The tourism sector has weakened, with international visitor numbers falling and a projected $600 million decline in real visitor spending.
- Construction is the only major sector showing growth, supported by public projects and rebuilding efforts on Maui.
- Inflation is expected to rise to 4%, increasing annual household costs by approximately $1,400.
- Maui's economy is experiencing specific challenges, including a sharp drop in the condo market and the cancellation of a major tourism event.
Economic Pressures Mount Across the State
According to the latest UHERO forecast, Hawaiʻi's economic outlook has deteriorated. A combination of factors, including a slowdown in the continental U.S., is creating significant headwinds. Key international visitor markets are also being impacted by U.S. trade policies, adding to the economic uncertainty.
The report highlights several areas of concern. Visitor arrivals have decreased, job creation has come to a halt, and the housing market remains sluggish. These trends suggest a period of economic contraction is imminent for the islands.
Wider Economic Context
The forecast points to growing signs of weakness in the U.S. economy. UHERO notes that consumer spending has slowed significantly, and job growth outside of the healthcare sector has stopped. Globally, key visitor markets like Canada have entered a recession, and Japan's recovery is expected to slow, which will likely reduce tourism demand for Hawaiʻi.
Tourism Sector Experiences a Sharp Downturn
The visitor industry, a cornerstone of Hawaiʻi's economy, showed clear signs of weakening in mid-2025. Seasonally adjusted visitor arrivals fell by 8% between April and July. The decline has been most pronounced in international markets.
For instance, the number of Canadian visitors dropped by 9%. This shift leaves Hawaiʻi more reliant on the U.S. market, which is itself vulnerable to a recession. UHERO projects that by the middle of 2026, visitor arrivals will be about 5% lower than in the previous year.
The downturn in tourism is expected to result in a decline of more than $600 million in real visitor spending, impacting businesses and state revenue across the islands.
The report suggests a long road to recovery. "Although the falling visitor census will stabilize by the middle of next year, none of the counties except Maui will reclaim their 2024 levels until 2028," the UHERO document states.
Construction Provides a Solitary Boost
While most sectors face challenges, construction remains the single area of strength in Hawaiʻi's economy. The industry is being sustained by several large-scale public and federal projects.
Key drivers include recently announced military construction contracts, ongoing work on the Skyline rail project, and the redevelopment of Aloha Stadium. These initiatives are expected to keep industry employment steady at nearly 40,000 jobs through the end of the decade. Rebuilding efforts on Maui will also contribute to this sector's activity.
However, the construction industry is not without risks. The report warns that U.S. tariffs could significantly increase the cost of building materials, potentially slowing down projects.
Labor Market Stalls and Households Feel the Pinch
Hawaiʻi's labor market has seen its momentum disappear. Payroll job growth has been flat since March, leaving total employment 15,000 jobs short of pre-pandemic levels. Several sectors are now shedding jobs, led by declines in federal government positions and tourism-related roles.
Federal job losses have already surpassed 1,200 and are expected to deepen. UHERO projects that overall payroll numbers will continue to fall through late 2026 before a slow recovery begins.
Inflationary Pressures on Families
While Honolulu's inflation rate decreased to 2.3% in July, UHERO predicts that tariffs will push consumer price inflation up to around 4% by the end of 2026. This increase is projected to permanently raise the cost of living for a typical household by about $1,400 annually.
State income tax relief, valued at roughly $2,000 for a median-income household, will offer some support. However, this will be offset by federal cuts to SNAP and Medicaid benefits, which will disproportionately affect tens of thousands of low-income families.
Maui's Economy Faces Unique and Severe Strain
The economic downturn is particularly acute on Maui. The island's condominium market is currently at its weakest point since 2010. High mortgage rates and soaring insurance costs have contributed to this slump.
The value of condo resales on Maui has plunged by nearly 50% compared to the middle of 2023, reflecting a significant drop in market activity.
Adding to the uncertainty is the proposed Bill 9, which aims to phase out transient vacation rentals in apartment-zoned districts. The unresolved status of this bill has further dampened real estate activity.
Maui's tourism recovery also suffered a setback with the cancellation of the Sentry golf tournament in Kapalua due to water scarcity. "The loss of this high-profile professional golf event will add to the headwinds facing an already lagging tourism recovery on Maui," UHERO noted in its report.
A Cautious Outlook with Downside Risks
UHERO's forecast concludes that a mild recession in Hawaiʻi is imminent, characterized by job losses, reduced economic output, and higher inflation. A gradual recovery is not expected to start until late 2026.
The organization emphasizes that the risks are increasingly tilted toward a more severe downturn. A full-blown U.S. recession, combined with prolonged high tariffs and federal spending cuts, could intensify the negative impacts on Hawaiʻi's economy. Even in a mild recession scenario, higher prices and slow growth will continue to place a burden on households across the state.
