Lumber prices are so high that this ordinarily sleepy industry has captured headlines around the world. The generic lumber spot price reached $1,420.50 at time of writing — more than triple the figure of December 2019. The National Association of Home Builders estimates that this has added $24,000 to the average cost of new home construction relative to this time last year.
It’s an unfortunate situation for builders, buyers of newly constructed homes, or anyone else who uses lumber. But it’s also an unavoidable long-term consequence of some horrific policy mistakes that were made after the Great Recession. The only way to deal with this problem sensibly is to keep running the economy hot so that new supply can come online to catch up with demand.
Let’s review some history. During the 2008 financial crisis, the lumber industry was among the worst-hit. The disaster was centered in the housing market, and the immediate effect was a collapse in home construction and residential investment (the primary consumers of wood, along with paper producers). Many lumber companies went belly-up, and those that remained were forced to slash their costs to the bone.
But what happened next was worse. President Obama’s Recovery Act was probably less than half the size of what would have been needed to fix the economy, and by early 2010 he pivoted to austerity to cut the budget deficit. That meant very high unemployment in November 2010, a sweeping Republican victory in the midterms that month, and the end of any prospect of further stimulus until 2016 when Donald Trump took office. Even with a quasi-stimulus in the form of tax cuts for the rich in 2017, the economy remained weak all the way up until the pandemic struck.
The result of these choices was a prolonged depression in housing construction. After 2008, residential investment as a share of the economy plunged to the lowest level recorded since 1947, and recovered with grinding slowness — only returning to the level of the previous record low in mid-2014. So not only did the lumber industry take a massive hit, it did not experience any kind of rebound in demand for over a decade.
As Joe Weisenthal, Tracy Alloway, and Stinson Dean explain on the Odd Lots podcast, all this made the lumber industry deeply pessimistic and conservative. A whole decade passed where wood sales were chronically weak, and anyone who tried to boost production risked bankrupting themselves (particularly because it is very expensive to grow, harvest, transport, and store wood). Firms therefore ran tight operations, with little investment in tree plantations, sawmills, or spare inventory, and were always terrified of the next crisis — thus they shed most of their inventory during the pandemic, for fear of another 2008-style collapse.
Instead the opposite has happened. Especially now that the coronavirus pandemic is slowly ending in the U.S., most ordinary Americans are more flush with cash than they have been since before 2008 (though many are still struggling, of course). Thanks to all the saving during quarantine, and the various payments from the pandemic rescue packages, American balance sheets are generally strong. Meanwhile, the post-2008 weak economy and collapse in residential investment created a huge pent-up demand for housing, and tens of millions of millennials who had been unable to afford houses or family-size apartments are now on the market.
In short, spiking lumber demand is running into constrained supply — hey presto, prices are way up.
But all this implies that the only way out is through. The problem is not excessive demand, the problem is lack of supply consistent with what is needed to provide housing for the American people. Americans are simply going to have to endure a temporary period of higher prices to allow that supply to be built (which ideally would include social housing projects and zoning reform in expensive cities where it is nearly impossible to build houses or apartments), or for alternative products to be developed. Following the advice of conservative economists like Mickey D. Levy and Michael D. Bordo, who argue that the Federal Reserve should be ready to hike interest rates to forestall any inflation, would only strangle the economy so that people are once again unable to afford proper housing. To adapt John Maynard Keynes, this idea “belongs to the species of remedy which cures the disease by killing the patient.”
Alas, the lumber problem will likely take some time to get sorted out. The last quarter of 2020 saw residential investment reach a recent peak of 4.6 percent of GDP, but that barely qualifies as average in the postwar period. It also takes a long time to build new sawmills and warehouses, and decades for trees to grow to maturity.
What policymakers could do is implement regulations and trade rules that ensure that fresh lumber capacity comes in the form of sustainable harvesting, not clear-cutting old growth forests. In Finland, for instance, wood products are a large fraction of its exports, and forests are tightly regulated to ensure that the wood supply remains steady over time. Aside from the environmental damage, it’s simply bad business to chew through whole forests for a one-off profit — this is how timber companies around Chicago drove themselves into bankruptcy in the 19th century.
It’s also important to remember that what is true for lumber is true for many other industries. Semiconductors, copper, agricultural commodities, and many others are running into the same problem of high demand hitting lean supply. For over a decade business has dealt with a low-employment, low-demand economy, and that has created some lasting economic wounds. (Indeed, in many industries weak demand was a problem even before the financial crisis.) A high-employment, high-demand economy will mean some discomfort as the healing process takes place, but it’s what all Americans should want.