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February 23, 1979
Timber!
Lumber prices, after spiralling upward
throughout most of the last four years,
are finally showing some signs of weakness. Softwood-lumber prices ill general turned down in January, and Douglasfir prices dropped for the second month
in a row. Softwood-plywood prices
moved against this trend in January, but
on Iy to the extent of offsetti ng a steep
December decl i ne.
The recent softnessreflects the uncertain
outlook for housing. Wholesalers have
been holding off their orders for spring
delivery, waiting to see whether the
recent slowdown in homebuilding is
merely weather-related or whether
homebuilding has begun to enter a longpredicted period of cyclical decline.
Both producers and wholesalers are
worried that their industry will go
through a repeat of the dismal 1973-75
experience. When housing slumped
during that period;
softwood
lumber consumption dropped at a 10percent average annual rate.
u.s.
A closer examination of the fundamentals underlying housing and other key
markets suggests,however, that any
decline in lumber consumption this year
will be relatively mild. Moreover, production could be restricted by the high
cost and limited availability of timber,
mitigating any downward price pressures from the supply side. Thus, any
decline in prices should be quite
moderate, and yearly-average prices
could just about match 1978's peak
levels.
. The recent softness comes on the heels
of an almost uninterrupted 4-year pat-
tern of price increases, which made the
lumber and wood-products category
by far the fastest-rising major component in the industrial price index.
Between November 1974 and November 1978, wholesale prices of softwood
lumber increased at a 26-percent annual rate, whilethe plywood index rose
at a similar pace.
Demand, supply strains
The upsurge in lumber and plywood
prices was induced by a sharp cyclical
expansion in demand imposed upon a
limited increase in supply. The demand
pressures stemmed primarily from the
increased requirements of the housing
industry - the outlet for almost onehalf of the entire domestic consumption
of softwood lumber and plywood.
Housing starts rose steadily from 1.2
million units in 1975 to 2.0 million
units in 1978, pushing up lumber requirements accordingly. Meanwhile;
the volume of lumber required in other
uses - repair and remodeling, nonresidential construction and materials
handling - also boosted demand, but
to a lesser extent.
In an effort to meet these heavy
demands, domestic mills raised their
softwood lumber production over the
1 975-78 period by 16 percent (to 31
billion board feet) and their plywood
production 19 percent (to a record 18.7
billion square feet). But consumption
rose even more rapidly, so that wholesalers were forced to turn increasingly
to foreign mills to meet their customers'
requirements. As a result, thevolumeof
lumber imported from Canada and
other foreign sources rose from 14 to 25
percent of total U.S. softwood-plywood
consumption over the 1975-78 period.
(continued on page 2)
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Domestic production was hampered
by the soaring costs and limited supplies of the industry's basic raw
material, timber. While housing starts
rose 73 percent over the 1 975-78 period, sales of timber from the National
Forests in Washington and Oregon
showed little overall increase. In fact,
sales actually declined from 11 to 9
billion board feet over the fiscal 197577 period before regaining the original
level again in fiscal 1978. Consequently,
stumpage prices on those forests nearly
doubled over the three-year period, with
a 27-percent average annual increase.
for sale [wrll'd given foresi may be even
lower than the potential if the agency
concerned does not receive sufficient
governmental appropriations to administer that volume of sales. Furthermore,
the set-aside of productive forestland
for wilderness use (or study for possible
wi Iderness designation) reduces the
amount of timber available for sale,
because it removes productive forest
land for inclusion in the harvestdetermination process. The Roadless
Area Review and Evaluation Process
(RARE II) thus has adversely affected
National Forest timber sales.
Timber problems
Pricesin 1979?
The unresponsiveness of National
Forest timber offerings to market
conditions reflects in part the "sustained-yield" model followed by the
U.5. Forest Service and other agencies
in determining the potential harvest on
public lands. Their essentially biological approach limits the potential
harvest - what used to be called the
annual allowable cut - to a quantity
that can be removed from the forest in
perpetuity on a sustained-yield basis.
Sustained-yield connotes perpetual
mai ntenance of the productive capacity of the forest without reference to,
variations in harvest within or among
decades. But the Forest Service has
defined it as basically a non-declining
even-flow policy in which potential
yield or harvest is assumed virtually
constant for a ten-year period.
This year, U.S. lumber and plywood
consumption are likely to decline as a
result of the expected drop in housing
starts. But despite the many similarities
between the current period and the last
housing peak in early 1973 - including double-digit inflation in home
prices and mortgage interest ratesthere is I ittle reason to expect a repetition of that earl ier period's subsequent
steep and prolonged contraction in
homebuilding. On the contrary, most
analysts expect housing starts to drop
from a yearly total of just over 2.0 million in 1 978 to about 1 .7 million in
1 979 and then to turn upward again in
1 980. This amounts to a one-year decline of 15 percent - nothing like the
three-year decline during the 1 973-75
period when housing starts dropped at
an average annual rate of 17 percent.
The key aspect of this supply function is
its unresponsiveness to bid prices, since
it is determined on the basis of biological factors which are independent of
any cost considerations. When demand
shifts upward, the full impact is exerted
on price. To further aggravate the price
pressures, the actual volume available
There are several factors that suggest
that any forthcoming housing decline
will be relatively mild and short-lived.
Demand is likely to be supported by the
high rate of household formations (resulting from the very large number of
24-34 year olds), by the trend toward
two-income households, and by the
2
prevalent belief that home ownership is
still the single best hedge against inflation. On the supply side, there is much
less chance of a "credit crunch" - i.e.,
a drying up of mortgage and construction money - now that savings institutions are able to issue new instruments
that permit them to compete for deposits in an environment of high interest
rates. (For example, deposits are continuing to flow into the new six-month
savings certificates with interest rates
tied to Treasury bills.) The higher cost of
credit for builders and borrowers is
bound to affect the pace of homebuilding, but certainly not to the extent
experienced in past credit crunches.
Growing expenditures for residential
repair and remodeling should help ,
moderate the impact of this year's
expected homebuilding slowdown on
the lumber industry. Theseexpenditures
rose sharply in 1978, and may continue
to do so in 1 979, as many homeowners
decide to improve what they have instead of trying to meet the very high
costs of new construction. Nonresidential construction, at least in certain
sectors, also should help offset the
impact of the decline in homebuilding.
Basedon thesedeveloprnents
and
some further modest growth in lumber's other markets - such as furniture,
containers and other consumer goods
- U.S. softwood lumber consumption
may decline only about 4 percent this
year to about 39 billion board feet.
(Consumption of softwood plywood
may show an even smaller decline,
because historically it tends to outpace
the softwood-lumber market.) Timber
shortages should be lessof a problem in
that environment, and domestic mills
thus shou Id be able to supply an
increased proportion of the nation's
softwood-lumber consumption.
All of these factors on the demand side,
as well as the continuation of relatively
strong timber-cost pressures, should aCt
to prevent anything but a modest decline in the average level of lumber
prices this year. Moreover, once
housing demand rebounds, consumers could face another resurgence in
lumber prices due in part to supply
problems resulting from restrictions on
harvests in the National Forests..
Yvonne levy
1970=100
700
.......:National Forest Timber Prices
(Washington & Oregon)
400
I"
3
"'-
---'
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--
.
. ---Millions
of Units
3
Softwood Lumber
______
"
.......:
Prices
'1 ___
"-------.,.,/_.
200
1970
/
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/
1972
1974
1976
1978
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BANKING DATA-TWELFTHFEDERAL
RESERVE
DISTRICT
(Dollaramountsin millions)
SelectedAssetsandliabilities
LargeCommercialBanks
Amount
Outstanding
2/7/79
120,465
98,336
28,989
35,092
20,223
1,647
7,590
14,539
39,641
29,312
29,702
50,777
41,286
18,765
\t\€ekended
2/7/79
Change
from
1/31/79
90
+
17
+
162
+
108
+
11
+
12
+
32
+
41
+
733
82
29
+
229
84
209
\t\€ekended
1/31/79
Changefrom
yearago@
Dollar
Percent
NA
NA
Loans(gross,adjusted)arid investments*
Loans(gross,adjusted)- total#
Commercialandindustrial
Realestate
Loansto individuals
Securitiesloans
U.S.Treasurysecurities*
Othersecurities*
Demanddeposits- total#
Demanddeposits- adjusted
Savingsdeposits- total
Timedeposits- total#
Individuals,part.& corp.
.' (LargenegotiableCD's)
WeeklyAverages
Comparable
of Daily Figures
year-agoperiod
MemberBankReserve
Position
ExcessReserves
(+ )/Deficiency(- )
20
+
77
99
Borrowings
27
161
56
Net freereserves
(+ )/Netborrowed(- )
7
21
62
+
FederalFunds- SevenLargeBanks
Net interbanktransactions
+ 881
+ 1,363
+ 1,852
[Purchases
(+ )/Sales(-)]
Net, U.5.Securitiesdealertransactions
+ 346
+ 291
+ 616
[Loans(+)/Borrowings(-)]
* Excludestradingaccountsecurities.
# Includesitemsnotshownseparately.
@ Historicaldataarenot strictlycomparable
dueto changes
in thereportingpanel;however,adjustments
havebeenappliedto 1978datato removeasmuchaspossibletheeffectsof thechanges
in coverage.
In
addition,for someitems,historicaldataarenotavailabledueto definitionalchanges.
Editorialcommentsmaybeaddressed
to theeditor(WilliamBurke)or to theauthor....
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