As the economy reopens and demand increases across the board, supply chain disruptions fueled by the COVID-19 (coronavirus) pandemic have led to various shortages, fueling drastic rises in the price of specific goods. One of the most visible of these is a sharp rise in the price of lumber, which has been reflected in higher prices for housing and furniture.
First, the previous recession
The roots of this shortage go back to the previous recession. After the Great Recession, home prices cratered, leading home builders to slow construction activities to a halt in response to low demand. As a result, lumber prices declined sharply in turn. This forced sawmills and wood producers to consolidate, as many smaller companies were pushed out of the industry and cut capacity to the bone.
Then the latest recession
As the coronavirus pandemic hit, many large buyers of lumber, including home builders and household furniture manufacturers, reduced their inventories in expectation of a prolonged period of low demand. Lumber inventories were already at a somewhat low point, as the United States raised import duties on Canadian lumber in 2017 over complaints that the Canadian government unfairly subsidizes its lumber industry. Many sawmills were also initially shut down in the beginning of the pandemic, reducing production.
Then the (early) recovery
As 2020 continued, demand for single-family homes recovered unexpectedly quickly. Many individuals working from home wanted more space, and people who were previously living in cities responded to the coronavirus pandemic by attempting a move to the suburbs. As a result, home builders experienced an unplanned surge in demand, even as their supply of lumber remained constrained.
Additionally, as individuals spent more time at home, or potentially bought a new home, they also demanded more home furniture, leading to an unexpected boost in demand for household furniture manufacturers as well.
Who’s benefiting?
The high price of lumber has enabled home builders to charge higher rates for their services, benefiting industry revenue and contributing to high housing prices. The Real Estate Sales & Brokerage industry is expected to benefit from higher housing prices, boosting the size of their commissions and fees from real estate sales. Sawmills have also been able to charge higher rates for their services, contributing to growth in industry revenue and boosting profit.
Potential longer-term challenges
Several industries across the economy will likely be able to experience some short-term benefits from this rise in lumber prices. However, the trend must be closely monitored: a resurgence in demand combined with supply chain issues across the economy has the potential to lead to some degree of inflation. Whether this will be transitory inflation or a longer-term issue is still unknown.
