(BIVN) – Researchers say the Hawaiʻi economy is moving beyond last year’s mild recession, but the recovery will be gradual. 

“After job losses tied to a tourism downturn and federal job cuts, payrolls have begun to edge upward,” reported the University of Hawaiʻi Economic Research Organization’s (UHERO) in its first quarter forecast for 2026, released on February 27.

International visitor markets have languished, but “a resilient U.S. economy and continued strength in construction are providing support”, UHERO says. “Tepid job and income growth will become the new normal, because of anemic population trends and structural underperformance (relatively low long-run growth trend).”

Of the three counties in Hawaiʻi, real visitor spending fell the most on Hawaiʻi island, ending the year down 2.2%, the report stated.

UHERO says it expects Hawaiʻi’s economy to expand at a modest rate over the next several years.

The report was discussed in the latest UHERO Focus video.

The major takeaways of the February 27 report, according to the University:

• The U.S. economy has held up better than expected, with solid consumer spending, investments in artificial intelligence and improving productivity. Economic gains slowed in the fourth quarter of 2025, partly because of the federal government shutdown. UHERO expects growth to remain near 2% this year before slowing somewhat in 2027. It is too soon to know the effects of the recent Supreme Court decision invalidating the administration’s broad tariffs. Globally, conditions have improved modestly, but continued trade tensions and policy uncertainty present ongoing risks.
• Tourism has stabilized but is not yet expanding. In 2025, the average daily visitor census dropped 1.3%. The Japanese recovery has resumed at a moderate pace, but arrivals from other international markets have fallen sharply, reflecting adverse reaction to U.S. federal policy. Domestic visitors have helped offset these losses, and spending rose last year even as visitor numbers declined. Arrivals will stabilize this year, but a more substantial recovery in visitor headcounts is not expected until 2027.
• The local labor market has improved modestly after contracting in the first half of 2025. UHERO now expects a small net increase in payroll jobs this year. Construction, health care and the accommodations and food service sectors will continue to add jobs, while federal civilian employment losses will pull down growth numbers. The unemployment rate will remain near its current low 2.2% level.
• Inflation in Honolulu is expected to peak just above 3% in the second half of this year, although persistent U.S. inflation and the recent Supreme Court ruling on tariffs introduce considerable uncertainty. Local inflation will then ease to a 2.5% trend. Mortgage rates will remain near 6%, weighing on housing affordability even as construction activity overall remains elevated.

“Real income will grow by about 1% annually,” UHERO wrote. “Real GDP 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.”