Forest product outlook

By Randall J. Pozdena* Economist Federal Reserve Bank of San Francisco

fHEpastyear f was clearlv one of the worsi in the history of the Western forest industry.

A weak economy, coupled with high nominal mortgage rates, cut the annual level of housing starts to less than half of recent levels nationally, and by substantially more in areas with inventory overhangs from previous construction activity. Since housing accounts for roughly half of the demand for Northwest forest products, the impact on the industry was direct and severe. In addition, special circumstances-such as the high-cost stumpage contracts into which many producers are locked-have added critical additional stresses to the industry's condition.

Will 1983 offer any respite from these conditions?

The answer would seem to be a qualified "yes," for the following reasons. First, although the Reagan Administration policy often has been criticized as the source of the current weakness of the economy and the high interest rate environment, economic policy lags make it more likely that these circumstances are the result of previous policy actions and any recovery must similarly lag an initiation of new policy. That policy change-the Federal Reserve System's efforts to bring down money growth and the Administration's budget policies (based on the belief that private spending is ultimately more stimulative than public spending)-will have been in place for l8 months or two years when 1983 rolls around. This is likely to provide stimulus to the economy as a whole by 1983.

The recovery is unlikely to be rapid, recoveries from serious illnesses rarely are, but it will provide some demand-side boost to all sectors, including housing and other wood-products dependent markets.

Second, it is clear from the high levels of housing rents in many locales that the underlying demand for shelter remains strong. Because of the high nominal mortgage rates, the mode of shelter demand shifted from owner-occupancy of new homes to rentals or increased density of occupation of existing units. The demand is there and will express itself as interest rates reach manageable levels. On the other hand, unless there is a dramatic shift in Federal economic policy which refuels inflation expectations, housing demand is likely to be less heated than in previous periods since it will lack the speculative element. Although this is a stabilizing factor and in the best long-run interests of the forest products industry, it is likely that housing prices will remain soft on average even during the recovery period. This softness will particularly have an impact on those holding inventories of

Story at a Glance

Some boost to wood depen. dent markels from the national economic recovery . . . less housing demand than in the past . . . lower consumer indebtedness a plus as is increased savings.

buildable land. It will also affect the construction component of housing.

Finally, cautious households have increased their savings dramatically (as a percentage of disposable income) in the past year or so and these liquid funds are poised to stimulate a recovery in both residential and industrial investment activity. Consumers also have worked off much of the installment indebtedness that would have made a strong re-entry into the housing market impossible.

Needless to say, the economy is in a precarious position, and there will be

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IThese are the author's personal opinions and do not necessarily represent opinions or policies of the Federal Reserve System.