(Bloomberg Opinion) -- Last summer something strange started happening in the recreational-vehicle business. Even as President Donald Trump proclaimed “an economic turnaround of historic proportions” and his top economic adviser, Larry Kudlow, asserted that “this is a boom that will be sustainable frankly as far as the eye can see,” RV manufacturers shipped out 11.4% fewer vehicles and trailers in June 2018 than in the same month a year earlier. Shipments rebounded in July but turned negative again in August, and have been falling short ever since.
Then again, that’s not a big sample size, and there were modest RV-shipment dips in the mid-1980s and mid-1990s that turned out not to precede recessions. “I do want to be clear that we don’t have long enough time series to make a strong causal inference between RV sales and recessions,” emailed Michael Hicks, a professor of economics and director of the Center for Business and Economic Research at Ball State University in Muncie, Indiana. “But if this were a medical trial involving declining RV sales as a drug to cause recessions, the drug would be approved by the FDA.”
I checked in with Hicks recently because (1) my wife and I were about to pay a visit to the RV/MH Hall of Fame (the “MH” can stand for either motor home or manufactured home) in Elkhart, Indiana, the headquarters of the global RV industry, and (2) he has been warning since last fall that the decline in RV shipments might presage bad times ahead. It’s not that the RV industry is itself huge economic force — the combined trailing-12-month revenue of publicly traded RV biggies Thor, Patrick, and Winnebago ($11.7 billion) amounts to just 7.4% of Ford’s. The theory behind an RV-sales/recession link is that they function as an early signal of other problems.
“As consumers become less optimistic about their future finances, they postpone major purchases,” explained University of Michigan professor Richard Curtin. Because RVs are big-ticket discretionary items (that is, they aren’t strictly necessary) they tend to be the “first to be postponed,” ahead of vehicles and homes. But Curtin, whom I consulted because he is both director of Michigan’s much-watched consumer sentiment surveys and author of the RV Industry Association’s annual and quarterly forecasts, warned that RV shipments by manufacturers aren’t the same thing as RV sales, and a decline in the former might represent overproduction by manufacturers or over-ordering by dealers rather than an actual drop in consumer demand.
The shipments get most of the attention because they’re reported publicly every month by the RV Industry Association, with data available back to the early 1980s. Statistical Surveys, a Grand Rapids, Michigan, research firm, does track retail sales based on vehicle registrations but only occasionally releases the data to the media. In January, when the South Bend Tribune (South Bend is one county over from Elkhart) quoted Hicks warning that the drop in RV shipments represented at the very least “slowing demand,” Statistical Surveys president Scott Stropkai countered with the news that RV sales were up 3.6% for the first 11 months of 2018. Now sales are down too: Last week Stropkai shared 2019 monthly numbers through July with trade publication RVBusiness that show a 9.1% decline over the same period a year before.
The Statistical Surveys data do show retail sales handily outpacing shipments by manufacturers this year, meaning that the industry is working through its excessive inventories. But the fact that inventories piled up is in itself informative. Curtin’s latest forecast for the RV Industry Association has shipments dropping 23% from 2017 through 2020. “To suppose that is simply the result of retailers overestimating demand is astonishing,” Hicks argued. “These are sophisticated small businessmen, not some set of local rubes.”
The likeliest culprit for the mismatch? Manufacturers increased RV prices to cover higher component costs brought on by the Trump administration’s tariff hikes, Hicks said, pointing to reporting earlier this summer by Reuters columnist Tim Aeppel. Hicks again:
The RV industry is secretive about pricing, but for most of the more expensive models, where sales are lagging, there seems to be a lot of price haggling going on. With higher costs, retailers will have less wiggle room on trade-ins and sales. I believe this is the source of declining sales.
Whatever the cause, by this point nobody is denying that the RV industry is in a downturn. An inventory correction has given way to an actual decline in sales, and overall consumer sentiment seems to be weakening too. And yet, said Curtin, “I do not anticipate a decline anywhere near the disaster of the Great Recession.” The Great Recession was historically awful, bringing a nearly 60% decline in annual RV shipments and an unemployment rate in the Elkhart-Goshen metropolitan area that hit 20% — not to mention a lot of bad times everywhere else.
As of July, the Elkhart-Goshen area’s unemployment rate was only 3.6%, but it does seem to be on the upswing.
Nationwide, the manufacturing sector has stopped growing, with the Federal Reserve’s industrial production index trending downward since December and the Institute for Supply Management’s purchasing manager’s index showing a contraction in August. That’s ominous news for Elkhart, which has the most manufacturing-intensive metropolitan-area economy in the country, with the sector accounting for 49.8% of nonfarm payroll employment in July. It’s also not great for Indiana, which is the state leader in that particular metric, at 17.1% (it’s followed by Wisconsin at 15.9% and Iowa at 14.4%).
Nationwide, though, manufacturing’s share of nonfarm employment is just 8.4%. Manufacturing activity contracted in the U.S. in 2015 and 2016, yet overall economic growth never turned negative (it did come close in the fourth quarter of 2015, with real gross domestic product growing at just a 0.1% annual pace). The kinds of inventory fluctuations that tripped up the RV industry over the past year once drove the U.S. business cycle, but they don’t seem to play such a decisive role anymore.
They could still play a decisive role in the 2020 election. The 2015-2016 “mini-recession” may have driven voters in a few swing states with struggling manufacturing sectors toward Trump. Now he’s the incumbent, and, as Bloomberg’s Shawn Donnan reported last week, several of those same states are now seeing declines in manufacturing employment.
RV customers may be a relevant constituency as well. A 2011 survey by Curtin found that RV ownership was about as common as working in manufacturing, with an estimated 8.5% of vehicle-owning U.S. households owning some kind of trailer, camper or motor home. RV ownership was most prevalent in the West and Midwest, and the median owner nationwide was 48 years old, with a household income above the national median but not wildly so. My impression from a lot of recent highway driving and my visit to RV/MH Hall of Fame is that the overwhelming majority of RV owners are white, and just for logistical reasons I find it hard to imagine that many of them hail from big cities or their inner suburbs. There is probably a lot of of overlap, in other words, between RV owners and 2016 Trump voters. Which is one more reason to keep an eye on those RV shipments and sales numbers.
Forest River, the second-biggest RV manufacturer after Thor Industries, is a subsidiary of Berkshire Hathawaythat isn't big enough (in the admittedly massive context of Berkshire) to have its results reported separately, but its annual revenue is likely in the range of $5 billion to $6 billion.
To contact the editor responsible for this story: Sarah Green Carmichael at sgreencarmic@bloomberg.net
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Justin Fox is a Bloomberg Opinion columnist covering business. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”
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