The failure of domestic sawmills to sufficiently boost output in the face of ongoing strong home buyer demand was a primary factor that contributed to record-high lumber prices and price volatility in 2021.
Soaring lumber prices, combined with delays and higher costs for other building materials, continued to be a significant limiting factor for home building throughout 2021 despite a mid-year three-month lumber price decline.
With a historically low level of overall housing inventory and solid demand due to low mortgage interest rates and favorable demographics, new construction has been unable to add additional needed supply to the market, resulting in unsustainable gains for home prices.
The following economic data track estimates concerning the sawmill industry (NAICS 3211) and clearly indicate that domestic production has not kept pace with the gains for home construction since mid-2020.
A cited reason for the lack of lumber production in the U.S. has been challenges with labor, a limiting factor for the overall economy in both the manufacturing and construction sectors.
However, Bureau of Labor Statistics data indicate that sawmill industry employment is higher than a year ago. As of October 2021, the most recent data available, sawmill employment was 90,100. This is a 2.4% increase from October 2020, or a net gain of 2,100 jobs. Residential construction employment was up 4.0% or 118,500 net jobs over the same period.
With the increase in workers, sawmill output did increase over the 12 months ending September 2021, albeit along a choppy trend. Data from the Bureau of Economic Analysis demonstrates that the seasonally adjusted rate of sawmill output in September 2021 (the most recent available) was 1.2% higher than in September 2020. However, output in Q3 2021 was 1.3% lower than it was in Q3 2020.
Total sawmill output in 2020 was up 3.3% compared to 2019 due to a year-end upswing in production. This uptick continued over the first nine months of 2021 as output through September was 3.1% higher than it was over the same period in 2020. Compared to 2019, however, output was just 1.6% higher.
The 2020 increase in output was insufficient to keep up with the demand from residential construction and this has remained the case in 2021. The following graph presents single-family starts and sawmill output indexed so that 2012 levels equal 100. The growing gap between the two measures, particularly in 2020, is the reason for the dramatic increase in lumber prices. It is important to keep in mind that single-family starts were up 13.6% in 2020 and are up 15.7% year-to-date in 2021.
This impact on price can be seen by adding an indexed measure of the Random Lengths Framing Lumber Composite Price. These data indicate that given the inability of the domestic industry to rapidly increase lumber production, the result was an unprecedented increase in lumber costs. After falling from record highs in 2021, prices began to climb in August and have more than doubled in the months since. The production gap, and the material cost impact, can only be closed via a significant increase in domestic production, more U.S. imports of lumber, or a significant substitution to other building materials.