Michael and Shea S. from Boise, ID asked: Hi Mitch, my wife and I own a fencing business in Idaho, and we have witnessed soaring lumber prices first-hand. We’re curious how long you think this will go on, and whether it is showing up in other parts of the economy.
Mitch’s Response:
Thanks for emailing, Michael and Shea. In owning a fencing company, you have direct exposure to the lumber markets, so you can see first-hand just how quickly prices are rising. In fact, wood prices have now pushed into record territory.1 As you can see in the chart below, lumber prices are not only pushing into new highs, the pace of acceleration has also been sharp over the last few months:
Producer Price Index: Lumber
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To answer your question about ‘how long this will go on,’ I think it is important to first understand the sources of the price pressures. In this case, as ever, prices are being influenced by supply and demand forces.
Let’s start with supply. When the pandemic ravaged the economy last year, sawmills let workers go and slowed production down to a trickle. By April 2020, 40% of North America’s sawmill capacity was offline. Decision-makers at sawmills cannot be blamed for shutting down – it seemed like the pandemic was going to cause a lot of collateral economic damage and the housing markets did not seem immune to the downturn.
But, as we now know today, the housing market did not falter during the pandemic – it strengthened considerably! This unexpected outcome saw demand return to the markets far faster than anyone anticipated, and pushing production back up to pre-pandemic levels has been a major challenge for producers. Even today, wood product production is 16% lower than it was in 2006, which was the peak of the previous housing cycle. Mill owners are backed up with orders through mid-summer.
On the demand side, the pandemic nudged many first-time homebuyers into the market, as high numbers of millennials opted to leave cities for more space in the suburbs. Housing demand has remained very firm, and housing prices have seen significant jumps over the last twelve months. Builders are reporting record home sales, and more buyers are at the ready. To answer your question, I think lumber prices will continue to rise as long as these supply and demand dynamics remain, which I think is at least the next few months if not the balance of the year.
As for whether price inflation is showing up in other parts of the economy, we are definitely seeing pressures in commodities and input costs rising at factories, which I think will trickle down to consumer prices as well. Supply chain bottlenecks have been contributing to price pressures, and rising M2 money supply opens a door for too much money chasing too few goods. These are all issues we should be keeping an eye on.
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Disclosure
2 Fred Economic Data. April 9, 2021. https://fred.stlouisfed.org/series/WPS081#0
3 ZIM may amend or rescind the free guide “8 of the biggest retirement mistakes investors should avoid” for any reason and at ZIM’s discretion
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