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Market Update: Room for Optimism in 2008
It seems the peripheral industries associated with the housing industry began to feel the effects of the extended slowdown. The housing slump has had a bigger than anticipated impact on the pallet market.

By Jeff McBee
Date Posted: 1/1/2008

   I’m no housing market expert, but the homebuilding industry is such an important segment of our economy – especially to the pallet industry — that I can’t help but keep at least a casual eye on the market.

   The year 2007 was not a good one for the housing industry. There has been a wide range of projections for 2008, from optimistic forecasts by like homebuilders associations to the sky-is-falling predictions from analysts touting the bond market. One thing is certain about 2008: it will not usher in the strong number of housing starts that made the economy hum for several years.

   The pallet industry held up fairly well during 2007 even though the housing industry and automotive-related were both fairly slow all year. However, pallet demand began to show the effects of the prolonged sluggishness in these two key markets as 2007 drew to a close.

   It seems the peripheral industries associated with the housing industry began to feel the effects of the extended slowdown. Real estate, home building and peripheral industries represent approximately 25% of the economy; this sector has accounted for 50%-63% of GDP growth the past five years.

   This is why the housing slump has had a bigger than anticipated impact on the pallet market – even for those not directly serving accounts tied to residential construction. There are so many other aspects of the economy that are tied directly or indirectly to homebuilding. The biggest impact in the forest products industry is lumber for framing, panels for sub-floors, walls and roofs, and wood flooring.

   There are a lot of other materials that go into building a home, and they are shipped on pallets. These include brick and mortar, insulation, siding, roofing shingles, electrical and plumbing supplies – even sod.

   Other businesses feel the fall-out, too. Cabinetry suppliers and furniture companies are impacted. Although much of our furniture production has been lost to Asian markets, lost sales still affect the economy; some furniture companies report the worst business furniture sales in 20 years. Other impacted industries include big box retailers and home appliance makers.

   The housing industry slowdown also affects a number of businesses that provide services — home inspections, appraisals, and moving companies, among others. The mortgage fallout was one of the larger stories of the second half of 2007, too, leading to tighter lending requirements.

   I know this is doom and gloom so far, but stay with me. The forest products industry in general and the pallet industry survived 2007, and there were some encouraging signs as the New Year drew near. For example, starts of multi-family housing units were up for the second consecutive month.

   By most accounts – even the sky-is-falling kind — the housing industry has bottomed out. The question is: how long will it be mired in this trough? When will it begin to rebound? This is where the prognosticators disagree. In any event, we’ve probably seen the worst.

   So 2007 was one of the toughest years in a long time for the housing industry, and it wasn’t a good year for the auto industry, either.

   Despite the slump in these two key industries, which account for a big part of the pallet industry’s sales, the pallet market wasn’t too bad. In fact, there were times in early summer where pallet manufacturers had nearly all of the business they could stand.

   Even in slow months, our contacts reported that it didn’t look so bad once the numbers were in the books. This is a tribute to the continued improvement in the efficiency of the pallet industry. This trend is certainly due to a mature industry recovering money that has been lost in eroded margins.

   The pallet industry east of the Rockies endured some of the tougher conditions because raw materials are so closely tied to grade material and the housing market in many areas.

   I will now defer back to my original statement that I am no housing expert.

   Many of our contacts had less than stellar months in December, but most are optimistic about 2008.

   I am in the optimistic camp as well. Since 2008 is a presidential election year, I expect that all incumbent politicians will do their best to kick-start the economy.

   (Editor’s Note: Jeff McBee is an analyst who researches and writes about the pallet industry and its raw material markets for Pallet Profile Weekly and the Recycle Record, the only newsletters dedicated to serving the pallet industry. For information on subscribing to Pallet Profile Weekly or the Recycle Record, call (800) 805-0263 and ask for Jeff.)

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