BUSINESS BANKING COUNCIL REPORTS THE HAWAII ECONOMY ON SLOW DECLINE

The Business Banking Council, sponsored by American Savings Bank, reports that respondents to its twentieth Hawaii Economic Indicator Study say the economy has begun a slow decline. The major indicator of this trend is the pre tax profit measure. Forty-two percent of the businesses polled reported increases in profit before taxes. One year ago 48% posted pretax profit increases. Twenty percent report profits before taxes have remained the same, compared to thirty-one percent reporting static pretax profit last year, and twenty three percent report a decline in pretax profits, compared to seventeen percent that reported a decline a year ago. When the data is tracked from year to year, the percent reporting increases in pre tax profits is continuing a slow decline, which started in the first quarter of 2007.

The Performance Indicator at 120 is down from 124 reported one year ago. The Optimism Index at 117 is relatively unchanged from the first quarter of this year. Twenty-four percent of the businesses polled believe the economic outlook for the State will improve in the coming years. This is compared with thirty two percent who expected continued growth one year ago. Fifty-five percent of respondents expect little or no change in the economy and eighteen percent feel things will actually get worse. Thirty-one percent of respondents feel a downturn on the economy would be caused by an overall increase in the cost of doing business.

Employment number are relatively unchanged from the first quarter of this year, with twenty-three percent of the study participants saying they have increased their staffing levels over the last year. Sixty-two percent say staffing levels have not changed and fourteen percent say their staff counts have declined.

Study respondents were not over joyed with the results of the 07 legislative session, at least as it related to the passage of laws aimed at helping local businesses. Respondents used a four point rating scale with very good being assigned a value of four and very poor being assigned a value of one. Only one percent of the respondents felt the legislature did a very good job this past session. Twenty-four percent felt they did somewhat of a good job and thirty-three percent said the session was somewhat poor. Twenty-five percent of the respondents felt that the legislature did a very poor job this past session. The average score for the most recent legislative session was 2.0 out of a possible 4.0.

With the challenge of searching for and retaining employees on the minds of most business owners, study respondents were asked if their company's required employees to submit to drug testing. Overall twenty-nine percent of study participants require their employees to submit to drug testing. Study participants were also asked another employee recruiting question, which asked them to rate the overall preparedness of students graduating from local high schools as it related to their own businesses. Respondents quantified their perceptions using a four point rating scale with very prepared being assigned a value of four and very unprepared being assigned a value of one. Only three percent of the businesses polled consider the high school graduates they employ to be very prepared for the workforce. Thirty-nine percent rate high school graduates as being at least somewhat prepared. Thirty-two percent consider local high school graduates to be somewhat unprepared and fifteen percent consider them to be very unprepared. The average score given to the preparedness of local high school students to enter the workforce was 2.3 out of a possible 4.0.

"Although the study results indicate a slowing of the economy , the construction sector has managed to take advantage of relatively low interest rates, a strong appetite for commercial projects, residential renovations, and the continuation of government projects that have supported this sector's performance as foundations for their overall optimism. Projects such as Target Stores, Capitol Place, and Kapolei Commons are representative of not only a healthy industry, but a trend towards developing quality projects in Hawaii", said Gabe Lee, Senior Vice President, Commercial Markets of American Savings Bank.

Section Two- Construction Industry Focus

Businesses that identified themselves as being involved in the construction industry or doing a majority of their business in the construction sector are slightly more optimistic then the general study respondents and they reported a performance indicator that beat the general study respondents by twelve points.

Each study participant in the construction sector was given some facts about the construction industry including the following details:

• In 2006 the value of building permits increased 8 percent.
• In 2006 the total value of government contracts awarded was 854 million.
• 2005 construction study respondents reported growth of more then 5%.

Based on this information, respondents were asked about the growth of their own companies. Forty-one percent of the construction sector respondents reported increases in total revenue of more then five percent over the last year. Twenty-six percent report just around a five percent increase while eight percent reported growth of less than five percent. Eleven percent of the construction sector respondents reported actual decreases in revenue compared to one year ago.

The average construction firm does 60.8% of their projects on Oahu while 31.7% of their workload is projects based on the neighbor islands. Only 7.6% of respondent firm's work is done outside Hawaii.

When comparing private versus government projects, the average construction sector study respondent estimates that 74.3% of their workload came from the private sector while 25.7% came from government projects. When asked to project the future with respect to private sector and government projects, forty-six percent of study respondents expect the dollar value of the private sector projects that they are involved in to increase. Thirty-nine percent expect private sector work to remain constant and thirteen percent think private sector work will decline. In general, the construction sector is fairly confident about the workload coming from the private sector remaining steady in the next one to two years.

Forty-two percent of study respondents project the dollar value of their government projects to increase in the next one to two years, which continues an upward trend that began in 2005, the most recent time frame that this study focused on the construction sector. Thirty- six percent of the respondents don't expect many changes in the amount of their government projects and only seven percent expect the dollar value of their government work to decrease.

When comparing profit before taxes to one year ago, fifty-seven percent of the study respondents reported increases in profits before taxes compared to one year ago. Twenty percent report decreases in profits and sixteen percent report no changes. When compared to the overall study respondents, the construction industry as a whole appears to be doing better. When tracking this data point over time, the proportion of construction sector firms reporting increases in profit before taxes is growing.

Profit Before Taxes Comparison Table

	Increase				Decrease				Stay the same
	01	03	05	07	01	03	05	07	01	03	05	07
CONSTRUCTION INDUSTRY	47%	41%	50%	57%	26%	30%	16%	20%	25%	29%	28%	16%
OVERALL SAMPLE	38%	39%	38%	42%	41%	31%	21%	20%	18%	28%	31%	23%

Construction sector respondents were also asked about their projections concerning profits before taxes for an average project in the coming year. Fifty-three percent expect to see increases in profits on their average project while thirteen percent are expecting a downturn in this measure in the near future. Thirty percent expect no change. Comparing this data over time, we see a slight increase in the proportion of firms expecting to see positive changes in profit on their average project.

Businesses in the construction sector performed better then the overall study participants in terms of gross revenue. Sixty-two percent reported increases in gross revenue over last year compared to forty-six percent in the overall study. Only sixteen percent of the construction sector respondents said gross revenues are down while eighteen percent reported no change in this area. When tracking the data over time, there is a greater number of construction industry firms reporting increases in gross revenue. Construction sector respondents were also asked about their projections for gross revenue in the next one to two years. Construction sector respondents expect things to pick up in the near future with fifty percent expecting increases in gross profit on a per project basis and only fourteen percent predicting that sales will decline.

Construction sector respondents were asked their perception of how much construction costs have increased over the past two years. Thirty percent report increases of anywhere from five to nine percent while thirty-two percent said cost increases have ranged from ten to fourteen percent. Twenty-eight percent reported cost increases over the last two years of more then fifteen percent. When asked if suppliers from China have had any impact on the local market, forty-seven percent of the construction sector respondents say the influx of China supplier has had no noticeable impact on the local construction industry. Twenty-two percent say China suppliers have had a positive impact and eighteen percent feel these China suppliers are hurting the local industry.

With the mass transit project looming in the near future, construction sector respondents were asked what they expect the impact of this project will be on the construction industry. Half of the construction sector firms polled agree that the impending mass transit project will impact other construction projects either through the unavailability of labor and/or materials. Thirty-one percent expect no impact from this project.

The Economic Indicator Study was conducted via telephone interviews with a total of 403 companies. The interviews were conducted from June 5, 2007, to June 29, 2007. The sample was broken down based on the number of employees in a company. A sample of this size has a margin of error of +/- 4.9% points with a 95% level of confidence. Small businesses were divided into two sub-groups. Businesses with three to nine employees were designated as very small, and those with 10 to 49 employees were designated as small. Medium-sized firms were those with between 50 and 99 employees while companies with more than 100 employees were classified as large. A targeted sample of 100 businesses in each sector was the goal. A subset of 100 self described construction industry businesses across all sizes were asked additional questions focusing on this industry group.

The Economic Indicator Study has gathered information on the construction industry since 2001 to better predict performance of this segment in years to come.

This series of studies is conducted to present a true picture of Hawaii's economy from a businessperson's perspective. These studies allow the Council to continually track changes among firms in Hawaii such as changes in employee numbers; changes in gross revenues and profits; and changes in disposable income and how it is used.

The Business Banking Council, sponsored by American Savings Bank, assists the business and banking community in providing products and services to help businesses grow and become more profitable. Council members represent a cross section of the business community and come from all types of industries and businesses of all sizes. The Council meets once each quarter to discuss banking products and services that could better support the business community, address economic issues that impact the community and provide advice and input to help American Savings Bank meet and exceed the expectations of its business customers.