Sawmills and lumber yards are where Powell looks to understand the snarled supply chains that have pushed up prices across the economy and sparked concern that the Fed is mismanaging the recovery. Even as he acknowledged quickening inflation last week, Powell pointed to the recent roller coaster in the lumber market to explain why it will subside.
Lumber prices rose more than 260 percent over the past year, as the pandemic reshaped Americans’ spending patterns and disrupted industrial pipelines. But since early May, those prices have plunged by nearly half.
The abrupt turnabout offers lessons that are likely to guide policymakers as they run the economy at full throttle, accepting what they regard as a temporary bout of inflation in hopes of generating more than 10 million new jobs. Lumber’s wild gyrations show that today’s hiring troubles and shipping delays reflect short-term reopening kinks, not a lasting shift that will push prices higher and higher.
“Our expectation is that these high-inflation readings that we are seeing now will start to abate. And it’ll be like the lumber experience,” Powell told reporters on Wednesday. “Prices that have moved up really quickly because of the shortages and bottlenecks and the like, they should stop going up. And at some point, they, in some cases, should actually go down. And we did see that in the case of lumber.”
Indeed, lumber’s recent cooling appeared to vindicate Powell’s easy-money policies even as the government reported the sharpest 12-month rise in wholesale commodities prices since records began in 1974.
Former treasury secretary Lawrence H. Summers has repeatedly warned that by keeping interest rates near zero and by buying $120 billion in bonds each month, the Fed is risking a repeat of the inflationary spiral that began in the late 1960s.
After a majority of the Fed’s policymaking committee said it may raise rates in 2023, sooner than first forecast, Summers on Friday said the central bank was coming around to his view that overheating is now the main economic risk.
The Fed has increased its inflation forecast for the next three years, but the lumber market shows why Powell is staying the course — at least for now.
When the pandemic first hit, sawmills furloughed workers and cut production to prepare for a punishing recession. But while housing starts fell to their lowest level since the financial crisis a decade before, they rebounded by summer, catching sawmills with low inventories and covid-thinned crews.
Panic buying set in, as consumers remodeling their houses for the work-from-home era rushed to avoid being caught short. Prices peaked May 7 at $1,686 per thousand board feet, a standard measurement, up from about $460 before the pandemic.
“Shutting down an industry and restarting it, it’s not a flip of a switch,” said economist Dustin Jalbert, who heads the lumber team for Fastmarkets RISI, a data and research firm.
Lumber costs this year added roughly $36,000 to the price of the average single-family home, according to the National Association of Home Builders. That was bad news for consumers, but it helped drive record profits for wood product makers and residential construction companies.
On Thursday, Lennar, a Miami-based home builder, reported $831 million in second-quarter net earnings along with the fattest profit margins for that period in the company’s history.
Weyerhaeuser, the largest U.S. lumber producer, reported $681 million in profit for the first three months of this year, its best first-quarter results since the collapse of the housing bubble. The company’s stock is up 47 percent over the past year, rising more than four times as fast as the broader market.
“We’ve been in a great environment for lumber pricing here over the last several months. It’s really been a result of extraordinarily strong demand that hasn’t been met by the available supply,” Devin Stockfish, Weyerhaeuser’s CEO, said at a June 9 investor conference.
The lumber market shows that basic economic laws are reasserting themselves amid the nation’s sometimes clumsy economic reopening.
Lumber prices fell over the past month as some potential home buyers recoiled from soaring home prices and seasonal forces took hold. A return to normal life meant consumers began spending at restaurants, movie theaters and ballparks rather than on home remodeling projects. Sawmills, meanwhile, boosted output as furloughed workers were lured back to their jobs by higher pay and new machinery came on line.
“There’s been a decrease in demand combined with an increase in production,” said Paul Jannke, a lumber specialist with Forest Economic Advisors in Littleton, Mass. “Mills are making piles of money. They’re spending it on de-bottlenecking and investing in technology.”
Home builders also slowed construction of new homes, as lumber, windows, appliances and other essentials remained in short supply. In May, the number of new homes that contractors obtained permits to build but did not begin work on rose 53 percent from the year-ago level to 142,000 units, according to the Census Bureau. That was the highest figure in nearly 15 years.
“The need to rush out and buy has lessened a bit,” said George Staphos, senior wood products analyst for Bank of America Merrill Lynch.
The action in lumber markets reflects broader supply chain headaches throughout the economy.
The pandemic-inspired economic chill was unlike a typical recession. Instead of an across-the-board slowdown, the health scare prompted consumers to shift spending from dining out or going to the movies to buying laptops and televisions they could use while stuck at home. Millions of Americans also opted to buy new homes in the suburbs or remodel the ones they already owned.
Like the Fed, White House economists say the wood products market offers lessons about the future of supply chains throughout the economy. Lumber’s recent fall from record highs is “an early sign that some shortages may be short-lived,” two economists with the Council of Economic Advisers wrote Thursday in a blog post.
But the volatile market illustrates the complexity of the Fed’s challenge in steering the post-pandemic economy.
Forecasting lumber prices requires Fed economists to track sawmill expansion plans, trucker staffing, housing permits and the infestation of western Canadian forests by ravenous pine beetles. The central bank also must factor in the impact of more than $5 trillion in government spending and the aftereffects of a once-in-a-century medical emergency.
“This is an extraordinarily unusual time. And we really don’t have a template or any experience of a situation like this. And so, I think we have to be humble about our ability to understand the data,” Powell told reporters. “It’s not a time to try to reach hard conclusions about the labor market, about inflation, about the path of policy. We need to see more data. We need to be a little bit patient.”
Lumber prices’ decline since early May signals that the worst of the price increases is over, market analysts said. While lumber prices have dropped significantly in recent weeks, they are not likely to revert to pre-pandemic levels.
As prices rose last year, lumber producers began sketching plans to expand capacity. West Fraser Timber, North America’s largest lumber manufacturer, says it will invest $150 million at five of its mills in the Southern United States to boost output.
Yet wages for sawmill workers are up more than 10 percent over the past year. And strong demand for new homes, to make up for years of subpar construction following the housing bubble, is expected to outpace supply and keep prices higher than the historical average, industry executives said.
Analysts say prices will remain elevated compared with pre-pandemic marks, though well below the recent peak. Eric Cremers, CEO of Potlatch Deltic, a forest products company based in Spokane, Wash., said this month that he expects prices to settle around $800 per thousand board feet by year’s end.
“The direction points down for prices over the next 12 to 24 months,” said Jalbert, of Fastmarkets RISI. “But it’s going to be a really bumpy ride.”