Shrinkage in Hawai'i's economy this year may not be as bad as previously thought, according to a revised state forecast released yesterday.

The improved outlook is due to inflation being more subdued than state economists had anticipated, while Hawai'i's biggest economic engine — tourism — is expected to be worse than before and result in increased job losses.

"It is a mixed picture," said Pearl Imada Iboshi, chief economist with the state Department of Business, Economic Development and Tourism.

DBEDT's new report projects that gross state product adjusted for inflation will decline 1.1 percent this year. That's an improvement from the 1.6 percent decline forecast in a May report.

Inflation won't take quite as big a bite out of each dollar spent, as prices for everyday goods are expected to rise less than previously thought.

A report released earlier this month by the U.S. Bureau of Labor Statistics said Honolulu's Consumer Price Index rose a scant 0.3 percent from July 2008 to June 2009. This was the smallest gain in 11 years, and compares with a 4.3 percent gain for all of last year.

DBEDT forecasts inflation will rise 0.6 percent this year, a reduction from 1.2 percent forecast in the agency's previous report.

Imada Iboshi said most of the cooling to inflation occurred in housing costs, though gas prices also haven't risen as much as they did last year.

If they hold true, other changes in the updated forecast, such as bigger declines in employment and visitor spending, will be more painful.

The state expects a 3.0 percent decline in the average job count this year. In DBEDT's May report the decline was projected at 2.1 percent.

The updated report expects personal income this year to rise 0.4 percent after inflation, a significant improvement from the 1.1 percent decline forecast three months ago. But again, the improvement is largely attributed to lower inflation as well as increases in unemployment insurance payments and other government assistance.

Visitor spending is expected to decrease by 11.5 percent this year, the new report said. That contrasts with the May report expecting a 7.9 percent decrease. The worsened tourism industry picture is partly a reflection of vacation prices falling and partly due to visitors shortening their trips a bit, on average.

There was no change in the forecast for visitor arrivals, which DBEDT predicts will be down 5.9 percent for the full year after stabilizing from a 9.8 percent drop in the first half of the year to an expected 1.2 percent decline in the second half of the year.

"We do not believe it is prudent to predict an economic recovery yet, and all indications are that any recovery will be gradual," DBEDT Director Ted Liu said in a press statement.

Next year is when the state expects the local economy to stabilize, followed by modest growth in 2011.

Visitor arrivals next year are forecast to rise 1.2 percent, and visitor spending is expected to grow 2.9 percent, helping gross domestic product rise 0.4 percent after inflation. But personal income after inflation is forecast to be unchanged, and the job count is expected to be down 0.4 percent.