Wood as an economic indicator.

in LeoFinance2 months ago

Experts agree, the last few years have been a crazy ride for timber prices, and this madness is reflected in the economy, as timber is linked to one of the most important economic sectors, real estate.



Hello leofinance friends, I hope you are very well.

Although underestimated, wood can be as good an economic indicator as gold or oil, its link with the real estate sector is stronger than ever and is even expected to increase despite circumstances such as climate change, for some economists, wood worked in the past months as the canary in the coal mine, serving as a warning of what was to come, inflation, exorbitant prices in the real estate sector, and now, a possible recession.

But to understand why some economists attach such importance to the price of wood, you have to understand a little about how it relates to the global economy.

To build a house of about 300 square meters requires about 2,000 square meters of timber. Modern buildings, although their superstructure is made of steel, concrete and glass, the interior partitions are mostly plywood, and then there is all the furniture, both office and home, made of wood and its derivatives.

All in all, the timber market, before the pandemic, and only the market that conforms to U.S. standards [there are parallel markets and a prolific market for illegally harvested timber] totaled nearly $20 billion annually in exports. this, before the madness of the pandemic and all that came after. For context the following image.



As you can see in the last two years, timber prices have broken many historical barriers, reaching more than $1700 per share, when the historical average was between $300 and $400.

The Covid closures, delays in global supply chains, and if we add factors such as climate change and inflation having a retroactive effect, we can understand why lumber reached such extreme points, if we compare this with the average price of housing in the United States, we can see a clear relationship.



In the third quarter of 2020, just as lumber prices begin to rise, we see a spike in housing prices in the United States. This, in turn, is indicative of rising real estate prices.

I should add that while we use US figures, the US is not the only country that uses large quantities of wood in its industry; in fact, the country that imports and exports the most wood is China.



[figures in the image above are from 2016, well before the pandemic and the upturns].
Since we established the relationship between lumber prices and the real estate industry, I must stress that some experts link the exorbitant prices and induced inflation of the real estate sector to the nations overall inflation, estimating that 40 percent of inflation in the U.S. is driven by the real estate sector which is, practically, in a bubble, a bubble that some say could have been seen coming when lumber prices exceeded all their historical limits.
Now, in the post-pandemic economy, and already in the 3rd quarter of 2022, we see lumber prices falling precipitously.

What can we deduce from this?

According to a Business insider report, it is expected that due to rising interest rates, fears of a real estate bubble, and perhaps even a recession, lumber prices will continue to fall. Even if the volume of shares traded increases.

And as we can see, prices have been falling for a while now, so it may be true that as logging companies try to maintain their margins with a falling price, they will need to produce more.

However, factors such as climate change are affecting timber production, pests, and forest fires are destroying the areas designated for logging, so we can expect an average price above historical levels.

Therefore, if the price continues to fall, it may be the unmistakable sign of a shock in the real estate sector, which could end up triggering a recession by dragging the rest of the economy down with it.

And it should be added that the price of lumber undergoes seasonal fluctuations, rising just before fall, as more remodeling and construction work begins in the fall and winter.

We are already close to the beginning of autumn, and the price continues to fall... which is undoubtedly worrying, if we support the theory that the price of wood is like the canary in the coal mine, then we can see that the canary is dying?

A worrying omen, which adds to those of many economists around the world for the coming months....

Thanks for reading. And happy evening to all.

Recommended Bibliographic Reference





Copper is also considered a good economic indicator as it is used in both manufacturing and construction.


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I didn't know about Lumber. Good to know something new.