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24 PalletCentral • January-February 2019 Overall Economic Situation Still Favorable efore turning to the revised outlook for lumber prices, I wanted to provide a short update on the situation for the overall economy. Fueled primarily by strong consumer spending, overall economic growth continued near 3% in the second half of 2018. Industrial production also turned in good growth in 2018. The output of manufactured goods was running 3% ahead of year ago levels in December. Despite the recent government shutdown (which hopefully will only affect January), economic growth should continue to grow near 3% in the first half of 2019. Consumer spending is postured to fuel overall growth. The consumer remains very optimistic about the future because of employment growth (over 2 million jobs added last year) and low unemployment (below 4%). This optimism coupled with rising wages will keep consumer spending healthy. Wage growth is finally starting to reflect the low unemployment rate. Wages are currently running 3% above year ago levels, significantly better than in the last few years. Although low unemployment is great for the U.S. consumer, it is creating headaches for some regions and segments of the economy. For instance, trucking and construction are seeing wage increases significantly above 3%. The difficulty of finding labor is one constraint for the housing recovery. If economic growth stays near 3%, then wage pressures will continue to build in 2019. Wages Growth Another bit of good news was the recent change in expected interest rate hikes by the Federal Reserve (Fed) this year. First, inflation has continued to be subdued—currently near 2%. Second, the Fed is growing concerned about both U.S. and global economic growth. The sharp drop in oil prices reflect slower growth rates around the world. Given the fragile situation in our financial markets, the Fed is likely put off the next rate hike until mid-year. Even then, it will depend on economic conditions at that time. Lumber Prices Collapse in late 2018 Now let's turn to an issue that is very important to pallet producers. As mentioned in the last PalletCentral article, lumber prices were falling back to cost support levels. The fall continued however in the fourth quarter. Some lumber prices fell below the average variable cost to produce lumber. For instance, the price of a Douglas Fir Green 2x4 (a good key line indicator for western U.S. lumber mills) went from $580/mbf in June to $240/mbf in early January. (With log prices lagging the drop in lumber prices, lumber mills in the west are currently losing money.) Lumber Prices The drop is clearly good news for pallet producers that use softwood lumber. It is also a harbinger of things to come. The price correction reflects MARKETS Lumber Price Outlook: Some Very Good News B By Lynn Michaelis The drop [lumber prices] is clearly good news for pallet producers that use softwood lumber. It is also a harbinger of things to come. The price correction reflects both domestic market conditions as well as a decline in China's demand for North American lumber and logs.

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