Hawai'i's economic expansion will likely slow next year as construction and tourism ease off their record-setting pace of the last few years, according to a forecast released today.

A sharp decline in the Mainland housing sector raises the risk of a bigger slowdown in the Aloha State, said the University of Hawai'i Economic Research Organization in its final quarterly economic forecast of the year.

"The risk of something like that occurring is certainly higher than it was four to six months ago," said Byron Gangnes, a University of Hawai'i associate professor of economics. "We're more nervous about the conditions outside of Hawai'i. It's always difficult to know exactly how that will unwind."

However, barring a slowdown in the U.S. economy, the state's economy will continue to expand but at a slower rate than during the first half of the decade.

"We're at high levels of economic activity, but the potential for further growth in the next few years is not so great," Gangnes said.

The UH forecast is in line with expectations of state and private-sector economists, which generally predict slower economic growth, but no recession for the state. The cooling comes as both the construction and tourism sectors plateau after a robust run-up during the the past several years.

Hawai'i's construction sector should not be as hard hit as the Mainland's, according to UH economists.

It is possible that a severe housing downturn on the Mainland could cut U.S. economic growth, which in turn may mean fewer Hawai'i visitors. Tourism remains the largest component of gross state product, despite efforts to diversify Hawai'i's economy.

Other factors weighing on Hawai'i's economy during the next two years include high inflation, which is forecast at 5.1 percent this year due to rising housing and energy costs. UHERO expects inflation to be 4.4 percent next year and 3.4 percent in 2008. That means real, or inflation-adjusted, income will suffer this year and next. Real income growth this year is forecast to improve just 1.1 percent, followed by 1.8 percent growth next year. That's down from the 2.8 percent growth rate set in 2005.

Among Hawai'i's job sectors, agricultural job losses next year will be much larger than expected because of the acceleration of Del Monte layoffs. The pineapple producer is eliminating 551 jobs in January as it exits Hawai'i. Healthcare and social assistance jobs also have been exceptionally weak this year, and only modest growth is seen in 2007, UHERO said. The public-sector job outlook also is weak.

Despite a deceleration of visitor arrivals and home-sales growth, the number of jobs in Hawai'i is forecast to rise this year by 2.6 percent and next year by 1.5 percent.

Reach Sean Hao at shao@honoluluadvertiser.com.