Lumber Prices: A Canary in the Coal Mine?
It’s been a roller-coaster ride that no one wanted to take. The ups and downs of the economy, mainly the downs, have been jarring consumers and businesses alike. With all the doom and gloom, could there be a light at the end of the tunnel?
Unexpected Effects of a Pandemic
One of the most surprising effects of Covid on the economy was the dramatic increase in demand for lumber. Lockdowns inspired do-it-yourselfers to renovate their homes and take on other long-delayed projects. Added to that unexpected demand for new homes, for a population liberated from the office by virtual commuting. Sawmills had laid off workers early in the pandemic, so inventory was low while demand rose, and supply chain issues compounded everything to make lumber prices soar to historic levels.
In May 2001, Lumber hit a record $1607 per thousand board feet.* A bit more than a year later, the price had plummeted to $648. The huge spike in the cost of lumber might have set off an early alarm off about future inflation for the economy as a whole.
Bubbles Do Pop
Almost as soon as prices peaked in May, they fell dramatically. Prices fell 47% the next month alone. By late 2021, prices ramped up again as home builders built inventory for what looked like a strong 2022. Prices went from $400 in August 2021 to more than $1400 five months later. This second bubble burst as lumber and commodities traders feared the negative effects of interest rate increases on demand.
Graph courtesy of yahoo.com
What is the Canary Telling Us?
There is a seasonal component to lumber decreases in the summer, but this seasonality doesn’t explain such a dramatic drop in prices.
Darin Newsom, president and founder of the eponymous market analysis firm, told Fortune:
“[Lumber] was an indicator that we were going to see this rapid expansion in the overall economy last year and that once it peaked, we were going to start seeing it contract,” Newsom said.
“It is certainly an indicator of expansion and contraction,” he added.
The Fed is trying to control inflation through interest rate increases. The Fed needs to slow down demand so that price increases slow down or reverse somewhat. We’re already seeing some contraction in the economy and a definite cooling of demand for housing which is highly sensitive to interest rates.
“And that cooler demand for real estate is an indicator that inflation could begin coming down soon as well, given that rising housing costs accounted for 40% of June’s core inflation numbers.”
“The way lumber behaves in the fall—when the commodity’s prices traditionally rise—could also be a big signal as to how bad an economic contraction will be.
“It will be interesting to see if [lumber] starts to move back up,” Newsom said. “It would tell us that the U.S. economy is starting to sift through all the interest rate hikes and the inflation and that the economy may not be as bad as what many people think it will be.”