Hardwood sales rise

As late as June the overall market outlook was strong enough to support a forecast of 27.2 billion sq. ft. of U.S. structural panel production in 1988. This small increase over the 27 billion feet of 1987 would have been the sixth consecutive growth year for the industry. But through the late summer and early fall there was a weaker housing market linked to rising interest rates. Although demand in other major panel markets has continued to be strong, the home building decline may prevent us from achieving that sixth consecutive annual production record.

Story at a Glance

Big structural panel marketexpansion in next quarter century. nonresidential, home repair & remodeling, industrial uses all growing increased diversification necessary.

Next year, APA expects a continuation of higher interest rates, which will keep housing subdued, but not crippled. Some other markets may also moderate slightly, resulting in a down year for total demand.The outlook beyond 1989 is brighter as interest rates are expected to decline with inflationary threat receding. APA is projecting a short and modest market decline starting now and ending in early 1990.

By Ernest J. Stebbins Executive Manager National Hardwood Lumber Association

A LTHOUGH my crystal ball is no clearer than any- ll one else's in predicting what lies ahead for the hardwood lumber market in 1989, I remain mildly optimistic judging from my impressions at the recent NHLA convention in New Orleans, La. Everyone is very much aware that the U.S. economy has been expanding for the past 60 months. It is totally out of step with the historic trend of a cyclical economy, which enters a recession usually in cycles of three to three and one-half years. Because demand for hardwood lumber, both at the industrial level for pallets and packaging and at the consumer level in fine furniture, flooring and archi-

At the same time, when everyone is employed, consumer discretionary income goes up and furniture purchases and remodeling projects eat up a lot of hardwood lumber.

During the NHLA convention we heard a knowledgeable economist, Sarah Meyerrose of First Tennessee Bank, Memphis, Tn., point out that many of the economic indicators point to a slow-down in the economy. However, Ms. Meyerrose herself noted that one year ago at the NHLA convention in Washington, D.C., following the stock market crash of Black Monday, Senator

Sam Nunn in addressing the NHLA general session made much the same prediction: that the year ahead offered a poor prospect for the U.S. economy. Senator Nunn could not have been more off the mark, and Ms. Meyerrose qualified her predictions on that basis. During the past three months the index of leading economic indicators has first fallen, then risen slightly, and in the most recent months recorded, fallen slightly again. This unusual behavior is confounding economists and is another characteristic of this long drawn-out economic expansion. The Gross National Product is still growing, although growing at a slightly lower rate in the last quarter. So while the indicators out there are that the expansion of the U.S. economy is slowing, the majority of economists believe that a recession is unlikely in 1989. Add to this prediction a factor important to the hardwood market, the significant increase in hardwood exports during the past two years. The hardwood lumber market is no longer a domestic market, but entirely a world market. Perhaps as much as one billion dollars in sales will go overseas in 1988, up from approximately $750 million in 1987another record. This overseas market can cushion for a time any reduction in demand in the domestic market.

If you read the weekly price newsletters that are pub-

Overheating economy

By Dr. Randall Johnston Pozdena Assistant Vice President Federal Reserve Bank of San Francisco

lleNY economists expected that the 1988 economy lUlwould be dominated by the effects of the Oct. 19, 1987, stock market crash. However, the economy remained strong throughout the year. This raises the prospect that 1989 will be a year coping with the effects of an overheating economy.

One effect, and the most immediate threat in this regard, is an upsurge in the price level. Signs that such an increase is in the offrng are already apparent in some modest acceleration in price indices. Should the dollar weaken (a prospect widely embraced by economists), the prices of foreign goods would rise, putting additional upward pressure on U.S. prices.

A second sign of an overheating economy may be seen in labor markets. The current unemployment rate (at about 5.50/o at this writing) likely is lower than the current natural unemployment rate of the U.S. economy of 60/0. This suggests that any further expansion of the economy may have the effect of putting upward pressure on wages with an ultimate inflationary effectin a costpush manneron the general price level. Some measures of labor compensation already show such upward movement.

A third factor is the level of utilization of industrial capacity. The Federal Reserve Board's index of capacity utilization is near a l0 year high at present. While new industrial capacity is being added at a relatively high rate, it is unlikely that total capacity will grow enough to dampen pressure on the prices of industrial output. In addition, as the capacity limits of our industrial plant are breached, the rate of real growth in the economy must slow.

In summary, I expect rising inflation and a slowed rate

Story at a Glance

Hot industrial & consumer hardwood markets. overseas sales could reach $1 billion oversupply, lower prices will contlnue in'89.

lished in the hardwood industry, you can see that some species in some grades are selling at lower prices than in recent months. Analysts attribute this not only to conservative inventory practices at furniture plants, but also to the real efficiencies in the hardwood lumber industry. Lumber prices are a function of both changes in demand and changes in supply. At this point in time it appears that the hardwood sawmiller has added enough capacity through second shifts and additional machinery coming on line to produce more lumber than the market will bear at this time. Therefore, the recent downturn in some prices is more attributable to an over-supply situation than falling demand and may continue this way through the first of the year.

Story at a Glance

1989 will cope with rising inflation, slower growth rate. weak housing higheroil prices, lower dollar could change everything.

of growth in the U.S. economy in 1989. In 1988, real growth proceeded at a pace of about 3.250/o for the year. The growth rate of real GNP in 1989 is likely to be more nearly 2.250/o to 2.50/0. Combined with a forecasted growth rate of price inflation of 4.50/o or so (versus 40lo in 1988), this yields a forecasted growth rate in nominal GNP of about 7ol0.

The sectoral effects of this outlook presage another weak year in new residential investment measures. In 1988, the rate of residential investment declined by about 3.20/o.In 1989. another decline is likelv as a combined result of a slorler economy and someivhat higher inflation (which may be incorporated in higher nominal mortgage rates). The strength of the decline is likely to be tempered, however, by the fact that housing and housing-related debt continue to provide important tax shields.

There are several provisos to this outlook. The behavior of both oil prices and the dollar/yen relationship in the last year have surprised many analysts. The price of oil has remained low, and the dollar has remained relatively strong against the yen. Both of these factors have tended to keep price pressures low, but also have tended to stimulate U.S. growth. Should either of these trends reverse sharply, the rate of price change and the rate of growth of the economy would be altered.

The opinions expressed here are those ofthe author and do not necessarily represent positions of the Federal Reserve Bank of San Francisco or the Federal Reserve System. Dr. Pozdeha is the author ofthe recent book, The Modern Economics of Housing (Quorum Books, llestport, Connecticut, 1989-ed.