Hawaii's Economy Now Mirrors Struggling States: Watch for Out-Migration and Reduced Local Demand

A University of Hawaii Economic Research Organization (UHERO) report has placed Hawaii's economic performance on par with states like Alabama, West Virginia, and Mississippi. This classification, despite Hawaii residents earning average national incomes, suggests underlying structural weaknesses that could precipitate significant operational and market shifts for Hawaii-based businesses.

The Change

The UHERO report, released in early February 2026, benchmarks Hawaii's economic health against national averages. Its findings indicate that while per capita income remains comparable, the state's overall economic dynamism, measured by factors like job growth, industry diversification, and productivity, lags behind most of the nation. This divergence suggests that Hawaii's economy is increasingly susceptible to the same challenges faced by states with historically weaker economic foundations, such as high poverty rates and limited job opportunities.

Who's Affected

This economic reclassification has broad implications across various sectors:

• Small Business Operators: Businesses, particularly those catering to local consumers (restaurants, retail, services), face a double threat: potential difficulties in retaining and attracting staff due to out-migration of skilled workers and a contraction in local purchasing power as residents face economic pressures. Expect margins to be squeezed if operating costs rise while consumer spending falls.
• Real Estate Owners: A sustained period of economic underperformance can lead to reduced demand for both commercial and residential real estate. Businesses may scale back expansion plans, and residents facing economic uncertainty might delay major purchases or relocate, impacting rental demand and property values.
• Investors: Investors in Hawaii-specific ventures, including real estate and local businesses, should reassess risk profiles. The report implies a slower growth environment, potentially leading to lower returns on investment and increased capital risk compared to more dynamic economic regions.
• Tourism Operators: While this report focuses on the domestic economy, a weaker local economy can indirectly affect tourism. Reductions in local disposable income might mean less spending on local tours and attractions by residents, and a perception of economic stagnation could potentially influence long-term visitor perceptions, though short-term impacts are less direct.
• Entrepreneurs & Startups: Attracting and retaining talent is often a key challenge for startups. If Hawaii's economy shows consistent underperformance, it could exacerbate the 'brain drain' phenomenon, making it harder for new ventures to secure the skilled workforce needed for scaling.
• Agriculture & Food Producers: Reduced local consumer spending power directly impacts sales for agricultural producers selling within the state. While export markets offer an alternative, increased competition and logistical challenges remain.
• Healthcare Providers: While healthcare demand is often resilient, a struggling economy can lead to increased uncompensated care and impact patient ability to afford elective procedures or specialized treatments. Stricter adherence to insurance regulations and potential shifts in consumer need for basic versus specialized care are risks.

Second-Order Effects

Hawaii's unique island economy means that shifts in economic performance have pronounced ripple effects:

• Economic Underperformance → Reduced Local Spending → Lower Business Revenues → Increased Business Closures → Decreased Local Tax Base → Slower Public Services → Reduced Quality of Life → Increased Out-Migration. This cycle, if left unchecked, can create a downward spiral.
• Reduced Job Growth → Skilled Labor Out-Migration → Labor Shortages in Key Sectors (e.g., tourism, healthcare, trades) → Increased Wage Pressure for Remaining Workers → Higher Operating Costs for Businesses → Potential Price Increases for Consumers. This impacts everything from restaurant prices to construction costs.

What to Do

At this juncture, the UHERO report serves as a signal to closely monitor key economic indicators rather than implement drastic immediate changes. The economic trajectory described is unlikely to manifest overnight but could unfold over the next 6-18 months.

For Small Business Operators:

• Action: Begin scenario planning for reduced local demand and potential staffing challenges. Review operational efficiencies and explore diversification of revenue streams if possible.
• Monitor: Local employment statistics, wage growth in key sectors, and consumer confidence indices. Watch for any significant increases in business failures or bankruptcies.
• Trigger Condition: If unemployment rises by more than 1.5% year-over-year, or if local consumer spending shows a sustained decline of over 5% for two consecutive quarters, re-evaluate hiring plans and marketing spend.

For Real Estate Owners:

• Action: Monitor commercial lease renewals and tenant stability. Assess long-term development plans against evolving market demand.
• Monitor: Vacancy rates in commercial and residential sectors, property sales volumes, and average rental rate changes.
• Trigger Condition: Sustained increases in commercial vacancy rates above 10% or residential vacancy rates above 5% should prompt a review of leasing strategies and property management.

For Investors:

• Action: Conduct enhanced due diligence on Hawaii-based investments, focusing on businesses with strong export potential or those less reliant on local consumer spending. Adjust portfolio risk assessments.
• Monitor: Venture capital and private equity inflows into Hawaii, business formation rates, and the financial health of key local industries.
• Trigger Condition: A significant and sustained drop in new business registrations or a clear trend of established businesses scaling back operations should signal a need to reduce exposure.

For Tourism Operators:

• Action: Focus on maintaining high service standards and exploring value-added packages to cater to evolving visitor expectations. [
• Monitor: Visitor arrival numbers, average daily rates (ADR), and length of stay. Also, track inbound logistics costs which could be impacted by a general economic slowdown.
• Trigger Condition: If ADR or occupancy rates begin a consistent decline beyond seasonal fluctuations, investigate shifts in consumer spending power or global travel trends.

For Entrepreneurs & Startups:

• Action: Prioritize building a strong local network and explore partnerships that can mitigate talent acquisition challenges. Begin documenting why your business must be in Hawaii despite economic headwinds.
• Monitor: Local university graduate employment rates, the availability of co-working spaces, and government incentives for local businesses.
• Trigger Condition: If key talent pools demonstrably shrink or if the cost of acquiring specialized skills rises significantly (e.g., 15% YoY), reassess expansion timelines or consider remote/hybrid models.

For Agriculture & Food Producers:

• Action: Strengthen relationships with distributors and explore opportunities to expand distribution channels beyond the local market.
• Monitor: Local food price indices, farm-gate prices, and the cost of agricultural inputs.
• Trigger Condition: A sustained drop in local wholesale food prices or a significant increase in unsold inventory could indicate reduced local demand, prompting a pivot to export or value-added products.

For Healthcare Providers:

• Action: Review billing and collections processes to optimize revenue cycle management and prepare for potentially increased self-pay or uncompensated care.
• Monitor: Insurance claim denial rates, patient co-payment delinquency, and local demographic shifts.
• Trigger Condition: A consistent increase (e.g., >5%) in uncompensated care or a significant rise in patients delaying non-essential medical services should trigger an operational review.