Prestemon recently led a study that projects softwood lumber demand under different economic growth scenarios represented by real gross domestic product.
Housing demand is a key factor. A third of all U.S. lumber is used to build new homes or apartment buildings. Prestemon’s model uses three variables to predict the number of housing starts: the rate of economic growth, the number of houses built in the past, and mortgage delinquency rates. Mortgage delinquencies spike during recessions but otherwise occur at fairly stable rates. According to the study, those three variables can predict 90 percent of the quarter-to-quarter variation in the national total number of housing starts.
The scientists tested several future economic growth scenarios represented by real GDP through the year 2070. For the past 15 years, GDP has grown by an average of 2.4 percent each year. In the future, if real GDP grows by two percent, the model suggests 1.1 million new homes will be started. In that scenario, lumber demand would stay roughly the same as today, neither increasing nor decreasing substantially.
If GDP grows faster than 2 percent, lumber demand will increase. But if GDP grows more slowly than 2 percent, demand for lumber will likely fall. People would be more likely to repair old houses, use less new wood, and become more efficient in how much wood they use in new houses.
Since 1950 the inflation-adjusted rate of economic growth in the U.S. has slowed by an average of 0.04 to 0.05 percent of GDP each year. The U.S. population is also growing more slowly, down from 1.8% per year in the 1950s to less than 0.9% per year in the last ten years.
The U.S. housing sector is a key driver of demand for wood products, and it’s also important for the broader economy. “We didn’t set out to model a shrinking population,” said Prestemon. “We modeled forest sectors under different economic scenarios. One of those was low economic growth, which could be caused by low population growth.”
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I wonder how many millions of dollars were wasted to tell us a correlation between GDP and lumber consumption that a third grader could figure out!