Lumber prices are sinking. And while that might make a trip to Home Depot cheaper, it’s also a sign that the global economic recovery and the U.S. housing rebound are in danger of stalling.
Only a few months ago, inflation was the main worry of many economists. But falling prices for the raw materials of many industries, including lumber, have set off deflation warning bells for some economists, who worry that they could signal another global economic downturn.Prices for framing lumber have tumbled 21% from their peak only five weeks ago, according to figures from the National Association of Home Builders. Prices are also falling for a wide variety of other industrial materials in recent weeks.
While consumers love falling prices, deflation can cause far more damage to growth than inflation can. Lower prices cause businesses to cut back production, which can lead to layoffs, which can then cause further declines in demand due to falling incomes and consumer spending, creating a downward spiral.
If prices continue to fall, it could cause some producers to cut back production or go out of business because they can no longer cover their manufacturing costs, according to Eric Schooler, CEO of The Collins Companies, a Portland, Ore.,-based lumber producer.
Now there are plenty of markets that are doing just fine in this economy. It is only a matter of if you are willing to go forward with something different or fall back into what you have always done.
The problem is everyone is doing what they have always done, and that is getting you next to nowhere ahead of everybody else.