The following is a brief recap of Forest Economic Advisors’ (FEA) March 25 webinar on the effect of COVID-19 on the US economy, housing and wood product markets. Brendan Lowney provided a macroeconomic overview of its potential impact on the US economy and US housing market, while Paul Jannke, Greg Lewis and Rocky Goodnow spoke to the potential demand, supply and price implications for the lumber, panel and timber markets, respectively.

 

 

Starting with FEA’s baseline forecasts prior the COVID-19 crisis, Brendan Lowney noted that the long-awaited US housing boom had finally arrived, with housing starts in the 1.6 million range. Contributing to their positive outlook were strong fundamentals in the form of past under-building, the aging housing stock and an abundance of millennials in their prime home-buying age. Also positive was the health of households as measured by their financial obligations and the strong job market.

 

But it’s all moot according to Lowney, with the US effectively in recession already—as measured by the depth and dispersion of the decline in economic activity. And although any forecast is fraught with uncertainty, he estimates the job losses in four hard-hit sectors alone (food services, accommodation, recreation and retail) will cause the unemployment rate to jump from 3.5% in February to about 16.5% in May. And this excludes the multiplier effect on suppliers and downstream industries.

Although the duration of the recession is a big unknown, Lowney expects the US economy, as measured by GDP, to shrink 3.5 percent over four months, followed by a transition quarter of low growth and then two quarters of high growth. The key unknown being the duration of the recession which depends greatly on consumer psychology and the speed and magnitude of government’s response. Lowney notes that if the government rescue package is as proposed, the US federal debt/GDP situation will be similar to post-WWII levels.

With respect to the impact on US housing starts, Lowney estimates a 50% reduction in the next quarter, a gradual recovery in the summer and a delayed-boom in the fall. Overall, the housing sector is expected to outperform the wider economy, due in part to its ‘essential industry status’ in some states and the repair and remodelling (R&R) sector, which should recover quicker.

 

Speaking to the potential fallout on lumber markets, Paul Jannke expects 2020 consumption to decline 3%—versus the 6% rise forecast previously. Monthly lumber consumption will decrease by 400 MBF by May, 2020 and then gradually increase such that at year end it will be near the same level as prior to the crisis. A strong bounce back is then expected in 2021 with consumption forecast to rise 14%.

As consumption falls, Jannke expects lumber prices to drop $140-$170/MBF, although it will vary by product/region and Western SFP will drop much less, given that it is already down considerably. To the extent that these prices force mills into a loss position—particularly in Canada due to the softwood duty—short-term production reductions are expected.

On the panel front, Greg Lewis expects OSB demand to plummet in Q2, before rebounding over the next two quarters, resulting in a 6% drop in 2020. This will be followed by a strong recovery in 2021 with growth in the 15%-18% range. Similarly, plywood, particleboard and MDF demand will be down 2-4% in 2020 and up 8-10% in 2021.

Finally, on timber markets, Rocky Goodnow expects production curtailments at wood-consuming mills will undercut timber demand, causing timber prices to decline in the short term. Although income will suffer in 2020, no immediate impact is anticipated on the underlying value of timberland.

To access the full webinar or for more information on FEA, contact Dave Battaglia at dbattaglia@getfea.com.