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Paper and forest products industries earning and economic performance have been on a steady decline for seven quarters since they reached their high point in the summer of 1995 and are expected to drop even further in the immediate future despite the tradition of cyclical changes. Paper prices are dropping and the construction industry demand for lumber will be impeded by increased interest rates. Investors who require good year-ahead performance should avoid involvement with paper and forest products companies whose equity prices are already near all-time highs.

Production of paper and paperboard fell 4% and 5% respectively in May 1996, due to high customer inventories and eroding prices in the spring of 1996. Even though markets for some individual products remain chaotic, prices in other market sectors may stabilize in the second half of 1996. Lumber prices were also volatile in the 2nd qtr of 1996, ending with an 11% gain. Most investors should not seek stocks in this industry in 1996.

Stocks in the paper industry have outperformed the market since June 1995. The balance between demand and supply of most paper grades is favorable and prices are expected to rise 5% in Oct 1995. Kraft board, boxboard and linerboard prices rose 30%-50% over 1994 prices, and lumber and other wood product prices also increased in June 1995. Stocks with favorable pricing forecasts are recommended for investment.