Steady Growth or Economic Shock? The Hardwood Industry in 2025

The hardwood industry’s future depends on more than just trade policy. Inflation, labor trends, and consumer demand also drive market conditions. This article explores the economic outlook for 2025 and what businesses should anticipate.

Recent political changes contrast with a fairly stable economy. The United States had solid economic momentum entering the year, and policy turmoil will probably have less impact than news reports would suggest. The hardwood industry will likely see relatively steady conditions, with tariffs constituting the greatest uncertainty about the outlook.

Last year’s economic growth surprised many people who had expected higher interest rates to sock the economy. Instead, most key measures, including GDP and employment, looked fine relative to their long-run trends. Major forces of expansion and contraction, as well as inflationary pressures, appeared balanced. Without political change, the forecast would be a simple extrapolation of recent trends. But, of course, politics has complicated the outlook.

This article will begin with key political issues but strictly from a forecasting perspective. After that, the article will roll into the major economic sectors that affect the hardwood lumber industry.

POLICY EFFECTS
Although political zealots of either side will claim that good policies will have hugely positive effects and bad policies hugely negative effects, the forecaster must quantify just how good or how bad policies will be. Usually, the effects are much smaller than the claims of politicians on both sides.

Tariffs will likely have the biggest impact on the hardwood lumber industry of any policy change from the Trump administration. Unfortunately, we do not know how the tariff controversy will play out. When tariffs are imposed by one country, other countries usually retaliate. Sometimes, the retaliation is broad-based, affecting all of a country’s products. Frequently, though, it is targeted at a key industry with strong political support. For example, in 2018, China retaliated against U.S. tariffs by adding tariffs on U.S. soybeans (our largest agricultural export to China), automobiles, and aircraft. China also set lower tariffs on all goods or a wide range of goods. The hardwood lumber industry was hurt by over one billion dollars worth of sales.

Last year, the total lumber and mill product (including softwood) exports came to $3.4 billion. Our top three export destinations are the countries targeted by President Trump: China, Canada, and Mexico. Together, these nations bought 59 percent of our lumber exports. It’s impossible to know the ultimate tariff impact on hardwood lumber, but it could swing industry sales dramatically. Most likely, tariffs will have a harsh impact and then be dialed back somewhat, but with a lasting change somewhat milder than the initial effect.

Immigration restrictions will likely reduce the growth rate of the labor force, though an actual reduction of available workers seems unlikely. This will have the greatest impact on agriculture, construction, and hospitality businesses.

Deregulation will make business a little easier in some sectors, partly because of Trump’s administration policy and partly because of recent Supreme Court decisions about government rule-making. The greatest effects will be on energy, transportation, and construction activity.

Layoffs of government employees will have minimal impact on the aggregate economy. Although some individuals will have a difficult time transitioning to the private sector, the economy is generally labor-constrained. Most laid-off workers will find employment elsewhere.

GENERAL ECONOMIC OUTLOOK
In the last two years, the U.S. economy has moved from pandemic recovery to trend growth. Employment surged with increased immigration during the middle of President Biden’s term of office. Then, immigration declined in 2024, even before the election. Now, the economy runs with constrained labor force growth.
Higher interest rates brought inflation down, but not entirely to the Federal Reserve’s target. That last little bit of inflation is proving stub-born. With solid job growth and unemployment steady at a low rate, the Fed sees no reason to ease interest rates any time soon.

This pace of growth, inflation, and interest rates could continue for quite a while. The resolution of the tariff issue will likely determine whether the economy accelerates or slows, with steady growth the most likely path.

ECONOMIC OUTLOOK FOR KEY SECTORS
The industrial sector of the U.S. economy has run flat for the last two years. Total manufacturing production has hardly changed. Consumers have prioritized services in recent years, meaning that the need for pallets and crates has not changed much. A drop in interest rates would be needed to boost industrial activity, and that’s unlikely this year.

Exports, in general, will edge upward slightly, absent the effect of tariffs mentioned above. Global economic growth is running at a stable three percent, inflation-adjusted. However, the dollar has been strong on foreign exchange markets, which raises the price that our foreign buyers must pay in terms of their own currency. Thus, U.S. exports have not grown as much as global spending. The base case indicates continued sluggish export growth, but any forecast must be taken with the tariff uncertainty in mind.

Residential construction will likely be level with last year until interest rates drop. The industry suffers from the lingering effects of the low mortgage rates of 2020 and 2021. First-time home buyers typically find houses offered for sale by move-up home buyers—people looking for bigger, better, or newer homes. But selling a house with a three percent mortgage to buy a house with a seven percent mortgage leaves little room for improving one’s home. Thus, existing homeowners stay put, and the first-timers are stuck in apartments. The bright news for the hardwood lumber industry is that remodeling makes more sense than it ever did. People can keep their low mortgages and use their home equity to borrow what they need to upgrade their current home. That could likely stimulate demand for flooring, cabinets, and new furniture.

Finally, domestic furniture sales could be boosted by U.S. tariffs. That would hardly offset the loss to our export market, but it could cushion the downturn.

BUSINESS IMPLICATIONS
Business leaders will generally find that in this environment, im-proving their own activities is more important than monitoring the economy, except for the tariff issue. Given that huge uncertainty, hardwood business leaders should think through how their own particular lines of business would be impacted by both U.S. tariffs and retaliatory tariffs. Flexibility to handle what comes next should permeate an organization, ranging from sales to purchasing to finance and personnel. Industry veterans have survived some wild rides in the past. With focused attention, they will survive 2025.

Tariff uncertainty is a key factor in 2025. For a deeper dive into trade policy’s immediate effects, refer to the “Forest Products Market Impacts” article in this issue.

Dr. Bill Conerly is a business economist and Forbes senior contributor with a Ph.D. in economics from Duke University. Learn more at www.ConerlyConsulting.com

By DR. BILL CONERLY, Business Economist