COVID-19 and US lumber markets

A Fastmarkets RISI Viewpoint

Over-the-shoulder sector helping drive the over-performance in lumber demand thus far in the COVID-19 epidemic

The impact of COVID-19 has undoubtedly had an extremely disruptive effect on the wood products industry.

As Tuesday's Census report indicated, housing starts plummeted by 30% from March levels as home-buying activity was encumbered by social distancing measures that limited open houses and home purchases were delayed or canceled due to skyrocketing unemployment, pay cuts and tightening credit availability.

Builders in some states and municipalities, meanwhile, also grappled with restrictions or outright bans on construction activity, which in some cases halted projects in the pipeline.

The collapse in lumber demand from the sharp drop in new residential construction along with weakness across industrial and commercial markets has prompted a massive wave of curtailments that reduced wood products production by at least a quarter in April. While the quick response by the industry was warranted to prevent supply from overwhelming demand, lumber consumption has arguably surprised to the upside of expectations in recent weeks, driving a significant run in prices for most species of lumber as supply cuts overshoot the drop in demand.

A major source of that over-performance appears to be coming from the home improvement and renovation market, reflected in the impressive pricing run we've seen in popular home center items like decking, studs, shorter length dimension lumber, appearance grade boards and fencing. These "over-the-shoulder" items popular with DIYers are providing a surprising amount of support to the lumber market despite the painful effects of COVID-19.

So, what does the data say? Looking at April retail sales data released on Friday, it's clear that building supply and garden centers have been a source of resilience for consumer spending activity. While total US retail sales cratered by an unprecedented 21.6% in April versus 2019 levels as lockdowns and restrained spending impacted spending in many sectors, sales in building supply and home and garden stores actually rose slightly year-over-year. Further corroborating this data point, two of the biggest players in the space, Home Depot and Lowes, just released their quarterly earnings reports this week, which indicated very strong performances of 7.1% and 10.9% year-over-year, respectively, in their first quarter earnings, which ran from March through early May.

What explains the exceptional over-performance in spending in home and garden centers and building supply stores in the midst of the lockdown? First and foremost, most home, garden and building supply stores were deemed essential businesses during the core of the lockdowns which took place in April and May. Being able to remain open during the peak of the lockdown was a major advantage over other retail segments that were unable to transact business in many states and municipalities during this period.

Another critical factor that helps explain the strong spending trends is that many homeowners are working in jobs unaffected by layoffs from the COVID-19. Most of the layoffs or cuts to hours stemming from the closure of nonessential businesses have affected retail, food service and hospitality workers, who are disproportionately renters.

When doing a quick tally, many homeowners still working full-time probably have more money in their pocket when accounting for stimulus checks of $1,200/person plus $500/child being issued in April to households through the CARES Act. That comes on top of freed-up discretionary income as vacations, social events and other plans were canceled.

Even those on unemployment making under $50,000/year in many cases are finding themselves making more money now than they were they were working after factoring in the top-up of $600/week for unemployment insurance administered through the CARES Act. The recent surge in the savings rate reported by the Bureau of Economic Analysis also seems to confirm this point as well.

To summarize, there's been a lot of money injected into the economy in a short period of time to support households during the COVID-19 pandemic, and relatively few traditional retail and service channels to spend it in while in lockdown mode. This seems to have worked out well for home supply stores, as Americans have occupied their new found free time (e.g., no commute, furloughed, minimized social and recreational events) with home projects including painting, yard work, maintenance and basic construction.

Unfortunately, we do not have access to any sort of high frequency, real time data in these channels to effectively gauge how much of the spike in spending in home and garden centers is going toward lumber.

Pricing data available through sources like Random Lengths and a regular visit to any home supply or hardware store are decent for gauging the trend, but it is hard to pinpoint the degree to which Americans are stocking up on building materials for home projects, including lumber.

As an experiment to try and better understand this, we conducted a simple search on Google Trends to understand what types of DIY activities that are lumber intensive are currently of interest in the US. Google's search frequency data essentially creates an index for the desired search phrases, with 100 being the highest level of frequency in a given month, while everything lower is scaled accordingly.

We can see that certain key search phrases are seeing record surges at the moment. For example, "building a deck", the search phrase with the highest average frequency, has seen almost double the normal search traffic compared to the seasonal high, which comes around Memorial Weekend (May and June). Other searches like "build a porch", "build a fence", "build a shed", even "build a swing set" are all seeing significant surges in search activity on the internet.

It seems clear that as homeowners grapple with the reality of more time spent at home this summer and as uncertainty around the virus' trajectory persists, interest in projects to improve their living space, particularly outdoor projects that are more DIY friendly and do not require the presence of professional contractors, is extremely high at the moment.

It's hard to imagine the strength in DIY spending that is currently helping support lumber demand continuing over an extended period of time as the toll of high unemployment, wage cuts and CAPEX reductions ripples through and dampens the rebound in economic activity as we bounce off the April lows.

Additionally, most states are at least starting to slowly reopen their economies as caseloads for the virus flatten or decline, meaning less time to work on home projects as people head back to work. However, the strength in this space is certainly a welcome lifeline for the industry as it grapples with the impact of COVID-19 and uncertainty on the new construction side of the market.

That's enough reading for today, now go finish that deck!

Dustin Jalbert, Senior Economist, Lumber, leads the lumber analysis on Fastmarkets RISI's Wood Products team, where he is responsible for the monthly Lumber Commentary and the North American Lumber Forecasts.

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