After several years of sizzling growth in tourism, Hawai'i's No. 1 industry is cooling off.

When the final numbers for 2007 come in this week, analysts say, they will show that tourist arrivals fell for the first time since 2003.

The 1-percent-plus expected drop from the previous year stands in stark contrast to the 7-percent-plus growth in arrivals in 2004 and 2005.

The slowdown in tourism, which accounts for one-quarter of all spending in Hawai'i, is starting to have an impact on workers and local businesses.

It's also been felt at the state Capitol, where lawmakers were told to expect tax revenue to come in $37 million below previous predictions in part because of the decline in tourist arrivals.

Hawai'i's economy is getting hit from three sides, economists say. Most importantly, from the economic slowdown on the Mainland, followed by the decline in construction and then the drop in tourism.

While the decline is nowhere near what the state experienced after Sept. 11, the slowdown is beginning to take its toll.

Pua Akamu, a seamstress and housekeeper at the Big Island's luxury Hapuna Beach Prince Hotel, has felt the pinch as some of her co-workers' hours were cut back.

"These are full-time workers who have been put on call because occupancy is low," Akamu said. "You've got to worry about where the next dollar is coming from next month."

Hotel veteran David Uchiyama, director of tourism marketing for the Hawai'i Tourism Authority, said 2007 arrivals likely declined by 1.2 percent to 1.3 percent, which means about 75,000 fewer visitors in the Islands than the 7.46 million who came in 2006.

The slight decline in 2007 will likely be followed by flat or slightly fewer visitors this year, economists say. Visitor expenditures could rise, but not fast enough to offset increases in inflation and the cost of doing business, according to University of Hawai'i economics professor Carl Bonham.

Real visitor expenditures — nominal expenditures minus inflation — were down at least 3 percent in 2006 and 2007, Bonham recently told state legislators.

What's more, the risk of a negative shock to Hawai'i's visitor market has increased amid concerns of a possible U.S. economic recession, Bonham said. A U.S. economic downturn could sap demand for leisure travel at a time when Hawai'i is particularly dependent on domestic visitor arrivals, he said. And that could have a ripple effect throughout the economy.

"Any way you cut it, the Hawai'i economy is still dependent on tourism," Bonham said. "It makes up 20 to 30 percent of our economy; that's a large share."

LONG, SLOW SLIDE

Bank of Hawaii economist Paul Brewbaker said that factoring in inflation shows that revenue from tourism has been down for a long time. "If you do adjust for inflation, it's $2 billion less than it was in 1988," Brewbaker said. "So tourism hasn't been a growth leader for a really long time."

The slowdown in tourist arrivals has been felt most by retailers, many of which are adjusting their strategy.

Maui Divers, a 60-store jewelry chain, is changing its merchandise mix, introducing more lower-priced items, said Bob Taylor, president and chief executive. Maui Divers had a slight drop in sales in 2007, the first drop since 2001, Taylor said.

Hilo Hattie is changing its styles to meet the market demands, according to chief executive officer John Reed.

"That flattening (of tourist arrivals) really started in mid-year 2006 and continued through 2007," Reed said. "We did have a really difficult year last year."

Retailers are preparing for more challenges ahead as one of Norwegian Cruise Lines' three Hawai'i-based cruise ships leaves interisland service at the end of February.

Taylor estimates his company will lose $2 million in sales because of that one ship setting sail for European waters.

Hilo Hattie's Reed said some of the industry decline has been disguised by a sharp increase in hotel room rates. "They've gone up 40-some percent in the past three years," he said.

He estimates that the higher rates reduced the number of core "middle American visitors" who walk into his stores and has translated to a "single-digit" dip in sales.

The pricier end of the hotel spectrum has kept its occupancy — and its rates — high, which has helped inflate visitor revenues.

"I'm not sure that (the slowing of visitor arrivals) has a great impact immediately but it is obviously a warning sign," said Murray Towill, head of the Hawai'i Hotel and Lodging Association.

JAPANESE SURCHARGE

In addition to the dampening Mainland economy, a top concern for Hawai'i's tourism industry is the surcharge Japanese airlines are tacking on tickets. The two could put a dent in arrivals from Hawai'i's top two markets.

Hotel executive David Carey wants the Hawai'i Tourism Authority to take action, with more money spent on marketing.

Carey, president and CEO of the Outrigger Enterprises Group, said, "We need to really pay attention to marketing." He is recommending a concerted push to help break away from the current trend of flat spending.

He noted that the industry and community moved quickly together after Sept. 11.

"We upped our ante and Hawai'i saw a much quicker recovery."

Reach Robbie Dingeman at rdingeman@honoluluadvertiser.com.