Article by Rich Donnell,
Editor-In-Chief
It’s difficult to interpret such things, but the results of our Sawmill Capital Expenditure Survey reveal that 66% of U.S. softwood lumbermen expect business to be excellent or good for the remainder of this year and into the near future. That’s slightly down from 67% a year ago, and considerably down from 88% two years ago. However, a year ago, 9% expected business to be poor in the near term; the recent survey shows only 4% expecting it to be poor. Which means more people rose into the “fair” category during the past year.
Still, as it has been my experience that most lumbermen have a Missouri show-me approach, two-thirds anticipating good or excellent is pretty impressive. One reason could be that these lumbermen expect housing starts to at least continue their gentle rise.
The APA-Engineered Wood Assn. monthly housing report showed that both single-family and multi-family starts increased in April, up 6.6% from March, running at an annual rate of 1.172 million units (of which single-family starts accounted for 778,000). APA is forecasting 1.225 million starts (single and multi) for 2016 and 1.340 million for 2017. When you average the forecasts from eight forecasters (RISI, Wells Fargo, APA, Mortgage Bankers, Fannie Mae, Royal Bank of Canada, Forest Economic Advisors and National Assn. of Home Builders), it’s 1.213 million for 2016 and 1.372 million for 2017.
APA did offer some caveats: Ongoing tightening of lending standards is a constraint that adds downside risk to the starts forecast through 2017. The homeownership rate fell in the first quarter, with the decline occurring across just about every age-class. The average size of new homes started in the first quarter of 2016 was below that of the average for the year 2015.
Also, APA noted that U.S. labor productivity on an output per hour basis fell again in the first quarter and is likely to be flat in the second quarter. The lack of growth in productivity is a long-term concern because it implies lesser income gains that will frustrate the desires of people to afford a home. The active rig count for oil and gas exploration in the U.S. continued downward and will remain a drag on real GDP growth in the second quarter.
Despite all that, annual U.S. housing starts are more than double what they were five years ago. Softwood lumbermen who have been able to improve their mill operations during the interim are reaping the benefits, as framing lumber prices have been solid, and as recently as mid-May continued a bounce upward that has been going on since early in the year, as depicted by Random Lengths.
The survey reveals that a lot of lumbermen have done a lot of work to their mills (or are in the process of) since the beginning of 2015. And it also reveals that many of them have future projects on their minds as the current projects wind down.
Another reason for their optimism is that more and more of the Millennials (basically ages 18-36, who already have surpassed Baby Boomers as the largest living generation in the U.S.) should be entering the homebuilding and home ownership stage of life. The going concern is that they’ve been holding back because of too much debt, much of it in the form of student loans. But if that dam breaks loose…