Hawai'i's economy is growing at a faster pace than previously thought, helped by the surging tourism industry and solid gains in inflation-adjusted personal incomes, University of Hawai'i researchers reported yesterday.

The residential construction sector also "continues to perform at an exceptionally high level" and is expected to generate 10 percent more jobs this year than last, according to the University of Hawai'i Economic Research Organization's quarterly economic outlook.

About the only dark cloud on the horizon is rising inflation, fueled by a combination of Hawai'i's strong economic growth and a spike in global energy prices, wrote Carl Bonham and Byron Gangnes, the report's authors.

Stronger-than-expected visitor traffic from the Mainland in the third quarter prompted the two to revise their forecast for overall 2005 arrivals to a 6.7 percent increase, from a predicted rise in September of 6.4 percent.

Visitor traffic from the Mainland and Japan is expected to grow at a slower rate in 2006, with overall arrivals forecast to increase just 2.4 percent.

Personal incomes, after adjusting for inflation, are projected to rise 4.3 percent in 2005, up from the previous forecast of 3.7 percent. "It is unlikely that such robust income growth can be sustained much longer; we expect slowing to 2.7 percent in 2006," according to the report.

Labor market conditions remain "extremely tight," with payroll jobs forecast to grow by 2.7 percent this year, then slow to 1.8 percent growth next year.

The inflation rate for Oahu, which was 3.3 percent in 2004, is forecast to rise to 3.7 percent in 2005 and 3.9 percent in 2006.

"Local inflation will remain above the national average for the foreseeable future," according to the report.

The full report is available at www.uhero.hawaii.edu.