Clarification: "For kiln dried rough lumber, the Rules require the thickness to be NO LESS THAN 1/16" thinner than 1.25, which means the rough thickness can be 1-3/16" minimum in the grading area, etc.
Now, in response to TT.
If you saw and sell green lumber, there is not thickness issue because the NHLA definition only applies when the lumber is graded. When it is graded, it is then that we know what region of the piece of lumber is being used to establish the grade. So, if lumber is graded and the thickness is properly determined, there are no guarantees for the future thickness. So, green lumber could be 5/4 when graded green, but after air drying, it could have shrunk enough to be only 4/4 when it is regraded (if in fact it is regraded).
Now, if you have a green piece of 5/4 quartersawn (which means it will shrink more than twice as much in thickness as a flatsawn piece), it will shrink in air drying about 5% in thickness if it is oak especially. So, if a piece of lumber is 1.25 green when sawn (in the grading areas, etc.), then in air drying it will shrink 5% which is 1/16". So, if graded after air drying, it will be too thin for 5/4 if it was 1.25" green. Continuing with kiln drying, we will see about 6 to 8% total thickness shrinkage in q-sawn (but maybe 4% in flatsawn from the green size). So, at most that would be about 3/32" thinner. So, the 1/16" allowance for shrinkage when drying is OK. So, after kiln drying, it is back to 5/4 IF IT IS GRADED AFTER KILN DRYING. If it is not graded after kiln drying, then the green or air dried grading would apply. Again, if we do not grade it, then we do not know the grading areas and so we cannot get the thickness.
The rule actually allows 10% of the pieces that are under 1.25" to be 3/32" thin on one edge for quartersawn. This would be quite a rare event however.
Of course, to be safe, many folks add 1/16 to 1/8" extra to their average green thickness at the mill, hoping that sawing variation, shrinkage or whatever will not cause a piece to be too thin.
The allowances vary by thickness...you get a large allowance for thicker pieces. For example, 8/4 kiln dried rough can be 1/8" thinner than the green minimum.
Of course, we have not considered warp at all...that is another can of worms indeed.
Of course, you are not sawing lumber for the NHLA, but sawing it for the customer. So, the customer rules, but at the same time, you need to adjust your price to get the income you want...thick 4/4 should get more money than thinner 4/4 (assuming you own the logs).