Our July 16, 2018, post “The Future of America’s Economy …” began with the phrase that headlined a Wall Street Journal feature on April 13. The Journal characterized Elkhart thusly: “From Bust to Boomtown: Life in a Comeback City.” The Midwestern city has risen from the ignominy of being singled out as having the nation’s highest unemployment rate of 22% in 2009 to having one of the lowest in 2018 at 2.7% in May of this year.
The Journal went even further, noting that the local unemployment rate is actually closer to zero—9,500 jobs have no takers. Each day about 25,000 workers commute to Elkhart, a city with a population of 50,000.
Just like the bust, the boom has repercussions. In trying to ameliorate labor shortages, the RV (recreational vehicle) industry has cannibalized workers from other employers in the area, universalizing labor problems throughout the region. Not surprisingly, wages are on the rise; so too are home prices.
As economist Herb Stein famously observed, “If something cannot go on forever, it will stop.” The RV industry produces and markets a relatively high-ticket luxury/recreational consumer durable good, a reality that is often forgotten or ignored during the good times. In May, 2018, year-over-year (YOY) shipments declined a modest 1.7%. We encouraged readers to keep an eye on June’s shipment numbers.
In the months since, YOY shipments have continued to decline.
The winter months are not likely to see an improvement, as various manufacturers have announced non-seasonal plant closures through the end of the year. The hump in shipments is clearly visible on the graphic below.
The Industry Take From Elkhart
If the Q3 earnings call of LCI Industries (formerly Lippert Components) is any indication of industry consensus, manufacturers believe that this is a correction as retailers right-size their inventory. Indeed, Camping World (the largest RV dealer in the world) disclosed during its Q3 earnings call in early November that it had proactively reduced its inventory from $1.1 billion to $900 million in 2018.
Camping World’s headwinds were more than inventory overages, however. During the first three quarters of 2018, year-over-year revenue and growth in units sold both declined. So did average selling price. In the third quarter they were -7.6%, -4.4%, and -3.4%, respectively.
One obvious force that adversely affects both Camping World and its retail customers is the rising cost of money. Moreover, although it hasn’t shown up yet in consumer-confidence measures, continued uncertainty in the equity markets may further dampen retail demand.
Apart from the acute cyclicality of the RV industry, if sales growth at Camping World continues to decline—hardly a foregone conclusion at this stage—the outlook for shipments from the manufacturers will continue to deteriorate.
RVs and Recessions
We argued this summer for the utility of RV shipments plotted against recessions, as documented by the National Bureau of Economic Research:
“The chart leaves little doubt that the industry is a leading indicator for downturns in the economy at large.”
The slowing of the industry has not escaped the attention of investors in the leading RV companies, as all have seen significant stock declines since February.
Figure 1: RV stocks’ percentage decline year-to-date.
Could it be that “the bloom may be off the boom”? If, as the Wall Street Journal opined back in April, “The Future of America’s Economy Looks a Lot Like Elkhart, Indiana,” the broader market, like the shares of RV companies, may be telling us something that almost no one wants to hear.