Lumber: What Goes Up Must Come Down
After a historic rally post March 2020, the price of lumber in the US is down by about 50% from its May ‘21 peak. Even though this drop comes after a sixfold rally in prices from their 2020 lows, a 50% selloff in slightly less than 2 months does hint strongly at some kind of underlying change.
In 2020, this change took the form of Covid related disruptions affecting producers’ ability to bring their products to market in a timely and consistent manner; as well as a boom in consumer demand for new homes and DIY upgrades. The result was the sharp sixfold rally shown on the chart above.
The current selloff, by its sheer speed and magnitude, speaks to a similar kind of change in the supply-demand dynamic. Given the optimism engendered by vaccinations and a second re-opening of the country, it would seem that demand for housing related pandemic spending has either topped out, and/or fallen in response to the perceived fading of the pandemic. Of course, lumber producers can also be expected to have played a part, considering that they were heavily incentivized by sky high prices to bring more supply to market.
If this structural shift continues, and producers continue to bring lumber to the market (at what are still relatively very high prices), while consumer demand persists in shifting away from housing related spending; then it would be reasonable to expect lumber prices to keep falling in the near future.
Should this scenario play out, then one of the most visible and discussed sources of recent price inflation in the US would dissipate. While this may tone down the inflation narrative a little, it might not mark the end of inflation hysteria.
This is due firstly to the demand for lumber being driven by only a segment of the US population – those with access to credit. As such, the rally and subsequent fall in lumber prices are not reflective of overall economic strength or weakness.
Moreover, commodities that are more global in nature remain mired in their respective supply chain disruptions. Good examples of this are copper, microchips, and container shipping. Container shipping and microchips in particular, given their pervasive use, will continue to boost global (not just American) prices. With shipping, it’s a matter of the world not having alternatives to transporting manufactured products in bulk. Some products can only be moved by ship, which means higher prices will be passed on to someone down the line. In the same vein, use of microchips in today’s technology is so pervasive that manufacturers and consumers cannot avoid having to pay more.
These prices, unlike lumber prices that only affect those able to participate in the housing market, affect almost everyone. As long as these disruptions continue to plague the production and distribution of goods and commodities globally, prices will be pressured higher. Unfortunately, and contrary to popular belief, these higher prices are not indicative of a booming economy. Instead they represent a threat to economic recovery.
With labor market optimism still nascent, higher prices are yet another burden for consumers to bear. Too much of a burden, and inflation can quickly morph into stagflation, which is a far more pernicious beast.
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