Slow but positive growth

By Alan M. Gayle Corporate Economist United Virginia Bank

opposite directions are the traditional markets for southern pine lumber and the newer markets.

Housing is the traditional market, of course. The industry has long watched the levet of housine starts as a barometer of lumbei demand. But two things are hap- pening with housing: levels are dbclining due to demographic shifts; and that market is less critical for southern pine lumber as new markets have been cultivated.

Today, the southern pine lumber market is divided into thirds: a third for treated lumber; a third for components or engineered systems; and a third for commodity lumber for framing.

Nationwide, the demand for treated lumber has more than tripled since 1975 to more than five bifiion board feet this year. Abour four billion board feet of that is southern pine, used for decks, patios and fences and permanent wood foundations. It's a booming market, with_^industry forecasters looking for 500/o more growth in tolal treatl ed wood demand through the balance of this centurv.

Engineered wo6d systems are also growing, as architects and builders turn to wood as a compo- nent material more aesthetically pleasing and less costly than metai.

Both the treated and the compo- nent markets draw upon southern plqg's unique advantages of treatability and high strength values. As producers aim more squarely at these two markets, they will turn out lumber suited to those uses and make sure commodity framing grades aren'l forced to play a role they aren't up to.

T

HE ECoNoMl' in 1986 has I been a series ofsurprises to virtually-everyone. Few people expec- ted $10 per barrel oil'or ihe subse- quent rebirth of OPEC. Few people thought that there would be tax reform of any kind in an election year. A number of economists expected a lower dollar to revive domestic production.

They also thought that lower interest rates would be the needed stimulus to jump-start the economy out of the sluggish period of the past I 8 months. These are just a sample of events that did not proceed quite according to the prevailing wisd'om. However, if we examine the impact of these events on the economy in

1986, it may give us some idea as to what to expect in 1987. Against this backdrop of a conservative business sector and overextended consumer, it is difficult to build a case for the impending eco- nomic rebound which has-been forecasted since the beginning of the year. If the 1986 peiformance (l'leust' tunt to page 30)

Story at a Glance lmproved trade deficit. .. low inffation ...2o/o real GNp... possible cut in interest rates ... improved economic activity late in year. .limited residential construction improvement.

Result: the real and the per- ceived quality of southern pine lumber will escalate dramatiiallv next year and in the year's thereafter.

It can be anticipated thar southern pine producers will increasingly turn lo the treated and component markets in the future because their lumber is so well positioned for those end uses. Few species accept preservative treatment as well as southern pine; few species possess the high working stress values of southern pine. Hardly any species can niatch southern pine in both treatability and strength.

By shifting rhe focus of its markets away from housing, southern pine manufacturers will find less competition. That will leave a fierce dogfight in the declinins housine market for Canadian lumbei imports and competitors from other producing regions.

The U.S. economy may very well be dependent on how government takes the lead in improv- ing the efficiency and productivity of the nation. The coming year could be the benchmark Period for soending reform. This could create a'windoi of short term gloom from which the light of a long term Picture of economic strength can emerge.

Early in 1987, I would expect retail sales to be rather flat as the economy will be sluggish and inflation sh6uld not be a factor. Consumers continue to get little good news and consumer confidence should not be greatly imProved'

I see little economic imProvement until we begin to solve our country's largest economic Problem. the continued exPansion of the budget deficit. The new tax reform will not have the desired impact on the nation's confidence wifhout a decrease in government soending. '

We witt not really make significant economic Progress until we bite the bullet and enact the spending cuts necessary to balance our budget. Over the Past 20 Years our eovernment has collected taxes at Ihe approximate average rate of l9olo of the GNP. In 1986, we will spend at a rate approximately 240lo oTttre GNP. ObviouslY, to maintain the current deficit, we must sPend at a rate equal to the income rate (taxes). To reduce current debt, spending must be brought to a rate lower than the collection rate to reduce the deficit.

With this action, I believe we will have a short term negative impact on the economy, but it appears Congress is readY to face facts and act on this issue. As our government faced major reform of the income structure of the country in 1986, they now must focus on establishing more efficient spendine habits.-ln view of the preceding. onlY those of us who operate efficientlY will prosper through these trying times. Old rules do not aPPIY as demonstrated by companies like Price Club, who trulY established a new method of retailing. If we measure our own efficiencY ratios