The steep national decline in new-home construction is taking its toll on the Inland Northwest lumber industry, and it's not expected to let up any time soon, industry observers say.

Duane Vaagen, president of Colville, Wash.-based Vaagen Bros. Lumber Inc., says 2009 already has proved to be a difficult year following the layoffs of dozens of employees last year, although the company has been able to hire some of those employees back.

The Idaho state Department of Labor estimates the wood-products industry employed 1,690 workers in North Idaho in May 2009, down 25 percent from 2,239 workers a year earlier, and down 40 percent from May 2005, the peak year for housing starts.

Even mills that are operating at near full production aren't sure whether their orders will last through the recession.

Spokane-based Potlatch Corp.'s St. Maries complex, in St. Maries, Idaho, has been running at full capacity since it added sheathing to its production in May, says Mark Benson, the company's vice president of public affairs. Sheathing is a lower-grade plywood used in roofs, walls, and subfloors.

The St. Maries complex employs 250 people, Benson says.

"We're watching the market week by week," he says. "We don't expect significant changes in the overall U.S. lumber demand in coming weeks."

Potlatch also has reopened its particle-board plant in Post Falls, where it operates two shifts currently. The plant was closed late last year due to weak markets and supply problems.

"At least for now, the market is allowing us to operate," Benson says.

Spokane-based Clearwater Paper Corp. closed its sawmill in Lewiston, Idaho, for two weeks in March, but has since returned to full production, says company spokesman Matt Van Vleet.

"Lumber prices are making it very difficult, but we are able to match production with the orders we have," Van Vleet says.

Earlier this year, Vaagen Bros. curtailed production at its Colville, Wash., log yard and sawmill for more than a month, citing weak lumber prices that were 40 percent lower than in 2008. At one point, its work force at its Colville and Usk, Wash., mills dropped to a combined low of 50 employees.

Vaagen Bros. currently employs a total of about 130 people at both mills. At full capacity, it would employ close to 200 people, Vaagen says.

"We were hit hardest the first quarter," Vaagen says. "In the second quarter, we were able to put some people back to work."

That doesn't mean, however, that the market is turning around yet.

The average number of annual U.S. home starts, which drives the lumber industry, has been around 1.5 million for the last 50 years, Vaagen says. Last year, new home starts fell to about 1 million, and this year, they're expected to be half of last year's level, so the industry will be a year behind on production in just those two years, he says.

"I don't know if there is pent-up demand for housing, but 2010 isn't stacking up to be a good year," he adds.

The Portland-based Western Wood Products Association, which represents lumber manufactures in 12 states, says U.S. housing starts won't reach 1 million until 2012, but "that's only two-thirds of average," Vaagen says.

Random Lengths, a Eugene, Ore., publication that reports lumber prices, says its composite price for framing lumber was $213 per thousand board feet as of June 12, down from $269 a year earlier.

Vaagen says mills can't operate indefinitely at current lumber prices.

"Prices are incredibly low," he says. "At under $300 it doesn't work for some mills."

He says Vaagen Bros. has retooled over the last 15 years to manufacture lumber more efficiently and from smaller-diameter timber.

"A lot of the industry is going to have to be retooled," Vaagen says. "Hopefully, we'll be able to make a little bit of a profit level and sustain operations for the next few years" until demand improves.

For 2009, Western lumber production is expected to decline by 26 percent from 2008, to a volume of 9.7 billion board feet, the lowest level since the 1930s and about half the volume Western mills produced five years earlier, says Butch Bernhardt, spokesman for the Western Wood Products Association.

The association forecasted in March that 432,000 houses will be started in 2009, down by more than half from 2008 and about one-fifth of total home starts in 2005.

North Idaho's wood-products manufacturers' payrolls dropped to $18.9 million in the 2008 fourth quarter, down by 28 percent from $26.2 million in the year-earlier quarter, says Kathryn Tacke, a labor economist in the Coeur d'Alene office of the Idaho state Department of Labor.

While many mills there announced production cutbacks, two big North Idaho mills closed permanently in the last year or so, Tacke says.

Last September, J.D. Lumber Inc., in Priest River, closed what Tacke says was the largest lumber mill in North Idaho, putting 216 people out of work.

In May 2008, Stimson Lumber Co. closed its DeArmond Mill, in Coeur d'Alene, which employed 120 people. That closure had been planned, but was moved up because of low lumber prices, Tacke says.

While market conditions are expected to begin improving next year, some remaining mills probably won't resume full production anytime soon, she says.

"Now that the recession is worldwide, local producers will have to compete in a global market with foreign producers and vice versa," Tacke says.