What Caused the Lumber and Computer Chip Shortages?
Updated: Aug 26, 2021
Provided by Robert Warther, Warther Private Wealth
Although lumber and computer chips are very different products, they are both suffering shortages for similar reasons currently. Both shortages were fundamentally caused by past downturns, which led to a lack of capital investment and failure to respond to surges in demand. Lumber for example, experienced a decrease in production capacity following the 2008 housing crisis. Since then, lumber production has still not reached the levels that it was at in 2006.
While it seemed like a solid business decision to keep production capacity low, the reopening has put strains on inventory. Between 2017 and 2019, the number of new houses was only half of what it was before the housing crisis in 2003-2005. The federal reserve also estimates that sawmills were operating at nearly identical capacities preceding the Covid pandemic and during the 2008 housing crisis. The problem is that demand for lumber has increased very fast. Since July of 2020, Americans have bought nearly 50% more homes each month than they did prior to the pandemic, and this rate seems to be going up still. Many houses that go up for the sale are only one the market for a few weeks. The only way some builders have been able to keep inventory is by selling houses that they haven’t even started building yet!
Unfortunately, it takes time for these sawmills to boost capacity, so the market itself has been rationing lumber in the form of high prices. In March of 2020, the number of employed people working with wood products decreased by over 34,000 employees, which led to a slow down in production and we have still have not hit the employment levels we had prior to Covid. This lack of production along with the sudden demand caused lumber prices to increase by about 89% over prices from April 2020.
Source: Bloomberg (Lb1 Comdty)
This graph shows that lumber prices have ranged anywhere from $650 per 1,000 board feet to over $1,000 per mbf, just in the first few months of 2021. We saw a similar spike in price last year as well, but prices never reached the levels they are at today.
Now let’s talk about how the chip shortage is actually very similar. During the late 1990’s and early 2000’s America had a strong semiconductor industry. 2000 was its biggest year, bringing in 94 billion in sales at its peak, but only a year later sales had dropped to just 66 billion. The printed circuit market followed a similar pattern, falling from its $37 billion peak in 2000 to just $24 billion by 2002. Businesses then responded to this decline in sales by limiting the amount of money they invested in property, factories and equipment. During the sector’s peak in 2000, capital spending on manufacturing capacity was $33 billion, while in 2019 it was just $25 billion. For the last two decades, global manufacturers have been able to make up the difference in supply as demand in the United States and the rest of the world increased. However, just like American Sawmills, foreign manufacturers were unable to handle the surge in demand for chips that was brought on by the Covid Pandemic. Not only did Covid surge consumer demand for chips, but businesses also had to spend more on computers, phones and other devices that use chips to support a remote workforce or to adapt to the pandemic itself.
This increased demand has had similar effects to that of lumber on the housing market. Instead of home builders cutting back on the number of new houses they build, we have automakers who must limit production due to the chip shortage. Both General Motors and Ford have even temporarily closed or “idled” some of their factories due to the shortage. It is estimated that this shortage will cut $60 billion in revenue from the global automotive industry in 2021.
In the end the only way to fix these shortages is higher supply and less demand. Unfortunately, we do not know how long this will take. Capital investment takes time and businesses want to be sure that the current demand isn’t a short-term thing, or else they might get stuck with excess capacity. The best plan to fix the current shortages is to keep the boom going, which seems to be the plan of the Federal Reserve and elected officials.
Robert Warther may be reached (239) 276-7939, or bob@wartherprivatewealth.com.
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Sources:
- https://www.census.gov/construction/nrs/index.html
- https://www.businessinsider.com/why-is-lumber-so-expensive-prices-disaster-for-housing-market-2021-5
- https://fred.stlouisfed.org/series/WPU081
- https://www.cnbc.com/2021/04/08/gm-cutting-production-at-several-plants-due-to- chip-shortage.html