These articles are posted on Yahoo Finance:

Fannie Mae Sees Strong Housing Market The U.S. housing market will continue its strong performance through 2001 as the economy rebounds and long-term interest rates remain low, housing finance giant Fannie Mae said on Wednesday.

Georgia-Pacific Closes 3 Gypsum Plants Paper and wood products giant Georgia-Pacific Corp. said Wednesday it will close three plants and cut production at others -- affecting more than 500 workers -- to reduce gypsum wallboard production in North America by 45 percent.

The first article infers that the housing market is booming. Is that disinformation? Is it merely refinancing they are talking about or new construction? If one or the other, then why not say so?

The second article is in direct conflict with the booming housing market inferred in the first article. Gypsum wallboard is a key ingredient in construction and yet they are going to close plants.

Links to first and second articles:

http://biz.yahoo.com/rb/010613/business_economy_housing_dc.html http://biz.yahoo.com/rb/010613/business_timber_georgiapacific_dc_2.html

Here is a quote from the Georgia Pacific article:

It said the move was necessary because prices for gypsum wallboard, a key material for interior walls in housing and commercial construction, had fallen so low that the business was becoming unprofitable.

How can prices for a key ingredient in a booming industry fall so low that its becoming unprofitable?

If anybody can help me with understanding this discrepancy I would be most appreciative.

-- Guy Daley (guydaley1@netzero.net), June 13, 2001

Answers

SPIN

-- spider (spider0@usa.net), June 13, 2001.

Guy, the two articles are actually talking about two different trends. Housing remains (relatively) strong outside Silicon Valley and other dot.com death traps, true. But lumber and wallboard prices are notoriously cyclical and have weakened in the US due to overproduction and the expiration of a Canada-US lumber import agreement. International Paper, for example, recently bought two profitable lumber mills in Maine from Champion and within a few months closed both of them to reduce competition with its own mills and to "stabilize prices" (meaning: push them higher).

-- Cash (Cash@andcarry.com), June 13, 2001.

No, Cash, I do not believe that they are independent of each other. If the demand for drywall was strong, Georgia Pacific wouldn't be closing plants in the eastern U.S. It costs a lot of money to layoff and shutter plants. They are paying a ton of money just on property taxes alone. This would suggest that demand has dropped considerably.

The only thing you can build without drywall is a log cabin and thats only if it has no interior walls or if they also are made of logs. There is a glaring discrepancy between these two articles and since Fannie Mae is a quasi government agency I tend to believe what Spider has mentioned. Its government SPIN, in other words lies and misinformation. Those plants that are being closed would supply eastern states. Drywall is a very heavy material and it would be cost ineffective to transport it very far. It would have to meet the needs of those states in the immediate area therefore demand has dropped dead in those states where they are closing the plants.

-- Guy Daley (guydaley1@netzero.net), June 13, 2001.

Here is a quote:

The company said it will close wallboard plants in Savannah, Georgia; Long Beach, California, and Winnipeg, Manitoba. The company also will indefinitely idle commodity wallboard production lines in Acme, Texas; Sigurd, Utah, and Blue Rapids, Kansas. In addition, it will reduce operations at its remaining 13 wallboard production facilities to a maximum five-day work schedule for as long as current market conditions persist.

This is evidence in direct contrast to the strong housing market suggested by Fannie Mae as it appears to be a NATIONAL problem not just devastated dot.com areas.

-- Guy Daley (guydaley1@netzero.net), June 13, 2001.

May I suggest the difference between "leading" and "lagging" economic indicators may be at play here. Data from a corporation about its own sales, and the planning decisions that flow from those sales data, may (I speculate) "lead" the accelerating downturn in home construction. On the other hand (I speculate again), the official government data may well be collected in such a fashion that the gov't data "lags" behind, possibly by a number of months.

It's sort of the difference between driving by looking out your car's front windshield, versus driving by looking out the rear at the road behind you. I've seen the sarcastic comment that economists are always in the situation of looking backward. Notice how they always say they can't tell whether we're in a recession until after the formal data are in (and of course, long after everyone else knows how bad things have gotten)?

You need to know more about how exactly the various data are collected and compiled before assuming it is necessarily "spin." No doubt, spin goes on, but more often I think it's in the so- called "news" reports and talking-head comments on the meaning of the data, rather than the numbers themselves.

I write the above without knowledge of the building industry nor government econometrics, but coming from the viewpoint of a sophisticated user of datasets and statistics in general in my occupation (public health/epidemiology).

-- Andre Weltman (aweltman@state.pa.us), June 13, 2001.

One more point: the first article cited above about Fannie Mae actually contains mostly wishful thinking about the future...i.e., the "building boom WILL continue" (we hope and pray). This is not at all the same as hard data about current, day-to-day construction.

In that regard, I do recall seeing the comment somewhere that construction as reflected in "housing starts" is fundamentally a lagging indicator...from the time someone declares they want to build a home and they sign the paperwork with the bank and the builder, to the time when the new house actually goes up, may be 3 or 6 months. So the builders are presumably working *now* on contracts signed *at the end of last year* or early this year.

The real question is, how much *new* business --new telephone calls "I want you to build me a house" -- is coming in to the general contractors this month versus last year at this time? The Georgia Pacific actions, driven by demand for actual building materials, suggest this more realistic measure is in fact about to fall off a cliff.

-- Andre Weltman (aweltman@state.pa.us), June 13, 2001.

Uh, Guy, not to be argumentative here, but I know the business and the trends in lumber and other building materials. It's like a lot of forest-products industries, hugely cyclical in ways that have little to do with actual construction numbers. It's one reason newsprint prices (if you're in that business) swing back and forth with little or no relationship to the larger economy. The companies overbuild capacity, prices crash, companies close mills or factories, prices rise, companies overbuild capacity ... It's the nature of the beast. The only difference these days is that so many people are looking for signs and portents that the larger world is paying more attention.

-- Cash (cash@andcarry.com), June 13, 2001.

Thanks Andre, I believe your response has a lot of merit, i.e. leading and lagging indicators because mortgage interest rates did hit there ebb a number of months ago (January?).

Thankyou Cash as well for your input. Yes, I can understand cyclical prices to a point but not to the extent that you have to shut down numerous factories and scale back production at others. This would have to come about (I would think) because of additional outside factors. For example: The aluminum industry is dead while electricity is too high. I've read numerous times about how foreign steel makers are dumping steel at or below cost in our country at the detriment of our domestic steelmakers but I've never heard of gypsum wallboard being dumped. I do know one thing as a prior drywall subcontractor is that the more its handled the more its damaged and therefore becomes worthless. Again on the cyclical pricing issue is that copper has become too expensive to produce because of the cost of energy (at least for Phelps Dodge, domestically).

Maybe I'll hear reports from Domtar and U.S. Gypsum concerning there plants. If so, then that will be all the confirmation I need that demand has fallen off a cliff. Therefore real estate prices should be coming down in the next 6-12 months.

-- Guy Daley (guydaley1@netzero.net), June 13, 2001.