By Shayndi Raice
Elkhart, Ind., is flashing a warning sign that a recession could
be just ahead.
Capital of the country's recreational-vehicle industry, the
northern Indiana city and the surrounding area are watched by
economists and investors for early indications of waning consumer
demand for luxury items, often the first sign of economic
anxiety.
Shipments of recreational vehicles to dealers have fallen about
20% so far this year, after a 4.1% drop last year, according to
data from the RV Industry Association. Multiyear drops in shipments
have preceded the last three recessions.
"The RV industry is better at calling recessions than economists
are," said Michael Hicks, an economist at Ball State University, in
Muncie, Ind. Mr. Hicks says softening consumer demand for RVs
coupled with rising vehicle prices due to tariffs suggests the
economy is either in a recession or soon headed for one.
The Dow Jones Industrial Average posted its largest one-day
decline of the year last Wednesday, when yields on the 10-year
Treasury note briefly fell below yields on two-year notes for the
first time since 2007. The phenomenon is often viewed as an
indicator of a recession.
Elkhart has long offered its own economic bellwether -- with
captains' chairs and onboard bathrooms.
About 65% of recreational vehicles in the U.S. are made in the
Elkhart region, as well as many of the tires, wheels, appliances
and furniture that goes into them. Elkhart ships its RVs to
dealers, who are careful to avoid carrying too much inventory and
pull back orders when they sense cooling desire for a luxury item
like an RV.
A drop in consumer demand can ricochet back to Elkhart.
Unemployment in Elkhart County, which has a population of 200,000,
was 3% in June, below the national rate of 3.6%, according to
federal data. But it is up from a low of 2.1% in April 2018. Weekly
hours worked fell by half a percent in June.
During the last recession, Elkhart's unemployment rate hit a
high of 20% in 2009.
RV manufacturing giant Thor Industries Inc., based in Elkhart,
said it was cutting back production of RVs and shifting its staff
to a four-day workweek. LCI Industries, another Elkhart
manufacturer, consolidated some of its facilities to address the
slowdown.
Baird analyst Craig Kennison said he estimates based on
proprietary data that retail sales of RVs this year are down
mid-to-high single digits and expects a similar decline next
year.
Many manufacturers attribute the slowdown to overbuilding after
an increase in demand in 2017. When demand started slowing in 2018,
dealers were left with too many RVs and began ordering fewer
vehicles.
Still, shipments remain historically strong. Executives say they
expect inventory levels to balance out by the end of the year. The
RV Industry Association is forecasting a 2.5% increase in shipments
to dealers for 2020.
Bill Murnane, chief executive of LazyDays Holdings Inc., a
national dealership based in Tampa, Fla., doesn't think 2020 will
bring the relief some manufacturers anticipate. He said consumer
demand began to weaken last fall and he didn't see it recovering
soon.
"You need food, you need clothes but you don't need an RV," he
said. "When people are starting to feel less confident about their
job prospects, their 401(k), the broader economy, they're going to
feel less confident about buying an RV. And that's what you're
seeing right now."
RVs can range in price from about $12,000 for a folding camping
trailer to $212,000 for a high-end motor home, according to average
retail prices collected by the RV Industry Association.
The prices have been sensitive to the U.S. tariffs imposed on
some Chinese goods. The industry estimates that as many as 523
items could be hit by the tariffs, everything from the toilet-seat
covers that go into RV bathrooms and cow hides for leather
furniture to the aluminum or steel used throughout the
vehicles.
Divya Brown, the president of Houston.-based TAXA Outdoors, a
small RV manufacturer, said her company bought most of its parts
from Elkhart. Her suppliers are raising their prices to account for
the hit they are taking from imported goods such as aluminum and
steel. Ms. Brown said the company saw a 22% jump in the cost of
steel and a 9% jump in the cost of aluminum.
"When our suppliers are having price increases, we're seeing
price increases," she said.
Marc and Julie Bennett, who have been living on the road for the
last 3 1/2 years, said they decided to buy an old RV for $25,000
and rehab it themselves for $12,000 after estimating something
comparable on lots today would have cost them close to $350,000.
The Bennetts say they think the economy is headed for a slowdown
and didn't want to be stuck with a quickly depreciating asset like
an RV, which they saw happen to owners during the 2008
recession.
"We couldn't justify that amount of money, even though it's a
full-time home, on a depreciating asset," Mr. Bennett said.
Write to Shayndi Raice at shayndi.raice@wsj.com
(END) Dow Jones Newswires
August 19, 2019 05:44 ET (09:44 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.