How has economic uncertainty impacted pallet demand in the US?
In our most recent commentary, which we finished writing up on July 31st, we alluded towards the end that despite a few months of uncertainty and turmoil, the US economy had weathered much of the storm. Higher input costs hadn’t yet been fully passed onto consumers, hiring was holding up, and now that much of the tariff uncertainty seemed to be behind us – this Economic Policy Uncertainty chart for trade policy gives some sense of that notion – we could look forward to stronger customer demand, and in turn, pallet demand.
Unfortunately, that cautiously optimistic outlook was blunted the following day by some dire numbers in the July jobs report, so in this viewpoint we’ll be examining the outlook for the US pallet market through this slightly altered lens.
July’s nonfarm payroll report showed just 73,000 jobs were added, well below the 115,000 consensus forecast, and the two prior months were revised down by a staggering 258,000 jobs combined. Meanwhile, core personal consumption expenditure inflation – the Fed’s preferred inflation gauge as it strips out the more volatile food and energy components – remained stuck at 2.8%, above the Fed’s 2% target. This combination of persistent inflation and a softening labor market has revived murmurs of stagflation risks.
While unemployment remains relatively low at 4.2%, the labor force participation rate has now declined for three straight months, hitting its lowest level since late 2022. Critically for the market, short-term Treasury yields fell sharply after the jobs report, indicating that they expect Federal Reserve interest rates to fall, and CME FedWatch now shows a 93% chance (at the time of writing) of a 25 basis point rate cut at the Fed’s next meeting, up from just 40% prior to the release.
What policy changes encouraging pallet usage?
Yet even as the macro picture clouds, there are glimmers of opportunity for the pallet industry.
Non-store retail sales remain resilient, continuing to expand at an impressive rate despite the broader deceleration. While growth rates understandably tailed off slightly in the last couple of months, it’s still putting up incredibly strong figures over the last 5 years. This trend, coupled with recent developments around the de minimis tariff exemption, has the potential to reshape US import logistics in favor of pallet usage. With Trump’s executive order eliminating the de minimis exemption for low-value commercial shipments effective August 29, 2025, and full enforcement by mid-2026, we may soon see a structural shift away from small-parcel imports toward bulkier, palletized container shipments as exporters from Asia (the main beneficiaries of this exemption) look for ways to save costs on shipping.
For pallet demand, this is a meaningful pivot. As parcel air freight gives way to containerized ocean freight, warehouse throughput increases and palletized supply chains gain traction. Especially as direct-to-consumer brands pivot to avoid new tariff burdens, bulk shipping will likely boost demand for pallets used in cross-border intermodal freight and warehousing.
While this policy shift is a potential tailwind, the broader economy’s weakening signals also warrant attention. With goods-producing sectors shedding 37,000 jobs over the past three months, there are clear signs that industrial activity is cooling. A portion of the blame for this can be attributed to the uncertainty around tariff permanence discouraging capital investment in domestic manufacturing, with firms wary of committing to US production capacity that could be undercut by future policy reversals.
How have tariffs impacted the US pallet market?
Moreover, the levels that tariffs have been placed at haven’t had their intended effects, and in some cases, hurt domestic producers. Currently, a finished car imported from Japan faces a 15% tariff. In contrast, building that same car in the US would incur far steeper costs: a 50% tariff on steel, aluminum, and copper; 55% on Chinese components like batteries and rare earths; 25% on electronics from South Korea; 25% on parts from Mexico; and 35% on components from Canada, and all of this on top of higher US labor costs.
In effect, tariffs have been set at a level that discourages domestic production without fully deterring imports. That imbalance will ultimately filter through to consumers in the form of higher prices, adding pressure to inflation and complicating the path forward for interest rates.
As interest rate cuts grow more likely, housing affordability could begin to improve, reviving demand in residential construction. This would be a positive medium-term catalyst for pallet producers that would see higher demand and higher prices from the knock-on effects of more residential construction, as the prices of low-grade lumber used to build pallets always follow the price used for framing lumber, something we discussed in more detail in our June newsletter.
The looming Canadian lumber supply shock
And now turning to the effects of the upcoming Canadian lumber duties. The US Department of Commerce has announced sharp increases to Canadian softwood lumber tariffs.
Countervailing duties are set to rise from 6.74% to 14.38%, while anti-dumping duties will climb from 7.66% to 20.56%. Once finalized – expected on August 8th but could come in the coming weeks – this will lift the average duty burden above 34%, the highest since the last Softwood Lumber Agreement expired in 2015.
These hikes will significantly raise breakeven costs for Canadian mills, tightening supply from the US’s largest foreign source of softwood lumber. At the same time, a blanket tariff on all offshore suppliers – expected under the ongoing Section 232 review and likely to exceed 25% if past precedent holds – would further restrict import availability (luckily for Canadian mills, lumber is exempt from US tariffs and is not subject to the 35% rate as it’s USMCA compliant).
Replacing Canadian lumber supply in the US
Both Dustin Jalbert and Austin Lamica have recently underscored why quickly replacing Canadian supply is no simple task.
As Dustin notes, even at full utilization, US softwood sawmill capacity would still be short by more than 3.2 BBF of operable capacity to fully replace Canadian imports, and that’s even after we assume that all US lumber exports would end up being used domestically. While the US South has added roughly 8 BBF of Southern Yellow Pine capacity since 2015, production expansion faces a very clear speed limit to substitute for the fall in imports.
This is because, historically, US softwood lumber output has grown no faster than 4–5% per year even in favorable pricing environments, due to bottlenecks in milling, logging, and labor. Assuming production growth of 10.0% and in 2025 and 7.5% in 2026 respectively, followed by 5.0% in the following years, it would still take until 2029-30 for US production to fully replace Canadian supply.
Austin’s analysis points to similar constraints. Although federal lands in the Pacific Northwest are well-suited to replace Canadian-equivalent softwood species, there are again more roadblocks. Even with the 25% increase in federal harvests called for from Trump under his Immediate Expansion of American Timber Production order from March 1st, output would rise by only 0.35 BBF per year – far short of the very conservative 3.5 BBF needed to offset Canadian supply.
The challenges are compounded by an aging workforce, declining logging employment (down 24% since 2015), and recent federal budget and staffing cuts that have seen 10% of USFS employees laid off.
The impact on lumber prices
We’ve put together some analysis compiling Fastmarkets data, alongside Virginia Tech estimates for historic pallet production, to give a sense of how this would affect the pallet industry.
In 2024, US pallet producers used about 8.45 BBF of softwood lumber. Given that last year 24% of total softwood was imported from Canada – and recognizing that the more lucrative framing lumber will see a higher amount imported, as it has a higher value proposition than the low-grade lumber used for pallets – we’re assuming a figure of 10% of low-grade lumber used for pallets comes from Canada, leaving the US with a shortfall of 0.845 BBF.
For the reasons given above, we would see immediate upward price pressure once Canadian supply tightens.
This does, however, raise the prospect of hardwood regaining some market share. Since the duties focus exclusively on softwood, higher softwood prices could prompt some pallet buyers to switch to the more expensive, yet far more durable, hardwood pallets once softwood loses its relative price advantage.
As shown in the graph above, as pallet usage has grown, softwood has become the dominant material used in pallet manufacturing due to its abundance and cost-effectiveness. Hardwood mills were hit hard, and many saw closures, after the Chinese property market collapsed as that was its biggest end-use market. This Canadian softwood lumber supply shock does certainly leave the door open for the hardwood pallet to regain some market share.
In conclusion, supply and demand indicators are certainly pointing to higher prices towards the end of 2025 and into 2026, after what’s been a largely uneventful 2 and a half years for this sector. If you’d like to stay abreast of movements in the pallet market to avoid shocks to your supply chain, sign up for our pallet commentary here.