This week features a guest post by MCM analyst Lane Miller.
The cyclicality of the recreational-vehicle (RV) industry is widely acknowledged. Whether it’s the best of times or the worst, the Wall Street Journal argues that northern Indiana RV manufacturers are a hyperbolic expression of broader economic trends.
Typically, the number of units shipped craters during recessions and booms between them. That business-cycle correlation is longstanding. The decline in shipments during the 1970s, however, proved to be secular—that is, shipments generally trended lower even during the subsequent business-cycle expansion—from which the industry took decades to recover. The last 10 years saw a secular buildup to the previous peak from the early 1970s. The recent decline in shipments begs the questions whether the recent weakness is cyclical or the early stages of another secular retrenchment?
Figure 1: RV shipments and the business cycle recessions
The Second Peak
COVID-19 was actually the best of times for many consumer-goods sectors. Stuck at home with stimulus funds to spare, many consumers binged on all manner of material goods. Especially as work-from-home gave way to cabin fever, consumer-goods spending turned toward towable homes on wheels. With demand hot and supply chains snarled, RV manufacturers responded logically: They raised prices. By 2022, Thor Industries, the largest publicly traded manufacturer, saw its revenues double from 2018. Over that same time its net profits were up 160%. These gains are remarkable given the fact that total units shipped was nearly flat. Thor North American shipments totaled 266,220 units in 2018 and 268,365 in 2022[1].
The COVID-19 boom in RV demand was spawned by a confluence of favorable factors, including: a perfect storm of remote work, social distancing, excess consumer savings, and rock-bottom interest rates. Most RVs are financed. They had eminently affordable monthly payments during the pandemic.
A Secular Turn or a Cyclical Fall?
While many positive pandemic dynamics have reversed, none is so economically important as interest rates. The inflation stoked by pandemic forces finally led the Federal Reserve to act in 2022, and it raised interest rates at a pace unprecedented in modern financial history. Within months, RV shipments plummeted.
Figure 2: RV Shipments (white), Recessions (green), 10-year U.S. Treasury Interest Rate (orange)
The magnitude of the current drop in shipments is larger than either of the last two economic recessions (green in Figure 2), though those episodes touched lower absolute monthly shipments than yet seen in 2023. Only the decline in 1973 surpasses what the industry is currently experiencing. In 2008, the decline was cyclical; 1973 proved to be secular. In contrast to both earlier episodes, reported unemployment remains low and consumer spending has been robust through this past October. Industry insiders and pundits alike are left wondering whether this represents a cyclical drop akin to past business contractions or might this be a secular downturn.
It’s difficult to forecast RV demand, as industry shipments are uncorrelated with gas prices, unemployment, or interest rates over time. Fluctuations in these variables did not substantially alter the steady rise in shipments following the last secular drop in the 1970s. Consumer goods don’t always reflect relevant macroeconomic factors.
It’s not just the numbers. Narrative counts for a lot. The 1972 peak coincided with Charles Kuralt’s popular “On the Road” CBS television program traveling by RV, which inspired a wave of suburban adventure seekers to “discover America.” RV shipments doubled in the first four years of the program, with myriad viewers presumably looking to emulate the host. When recession hit in the ’70s, however, the narrative still existed, but it hit consumers differently and couldn’t inspire the demand it had previously.
A different but similar RV narrative exploded during the pandemic, but it wasn’t broadcast on TV. It was shared across social media as the smartphone took over from central broadcasters as the principal purveyor of popular trends. The Wall Street Journal caught a bit of it. Digital nomads were a force even before the pandemic, and RVs were already the preferred means to exploration. That trend only grew during COVID as more folks increasingly took to RVing. Currently, the Reddit board on RV living is in the top 1% of the social network’s communities. RVing is how those who missed #vanlife get to taste that independence with children in tow.
The peak in 1972 was a blow-off top spawned by the Discover America narrative. It’s yet unknown whether the pandemic RV storyline is an analog. If it is, economic changes like those of 1972 may have tarnished its power over consumers such that 2021 would be a secular peak to which shipments will not likely return in the near term. The two episodes may not share many similarities, though, and the current shipment decline may be just another cyclical hiccup.
Prices Are Relative … to Income
In disentangling the forces at play, one factor has occasioned surprisingly little reflection. Like virtually all consumer goods, RVs have risen substantially in price. The relevant metric for high-priced, discretionary, luxury durable goods is cumulative price increases relative to income. This is a difficult dynamic to track as there’s no average price for an RV; prices vary on quality and content. Still, the limited available data are concerning.
Figure 3: Data pulled from historical advertising and 2012 dealer pricing data
The preceding table shows prices on entry-level units in the travel-trailer market. It’s difficult to glean consistent, longitudinal pricing data through past advertising copy, but even firmer recent data are telling. While interest rates, fuel prices, unemployment rates, and savings rates have all varied, the upward pricing of RVs relative to median real incomes has continued unabated.
The RV of the 1970s was basically a box on wheels. Today it has solar panels and slideouts—and is simply larger. Consumers rightly complain about the rising price of housing relative to incomes. It bears mentioning, though, that the homes of the 1980s didn’t have dishwashers, LEED (Leadership in Energy and Environmental Design)-grade insulation, air-exchange systems, and smart-home technologies. They were also smaller. As quality (or at least complexity) increases, so does price. Relatively low interest rates obscured this dynamic in both housing and RVs. The difference is that we need houses, while RVs are a luxury.
Figure 4: The price of 2024 models is established before the year begins and real median household income (MHI) is assumed to rise only modestly in the next 12 months.
RV models are diverse. Brands change floorplans, options, and prices annually. The Jayco Eagle travel trailer, however, has been in existence for decades. This allows an unusual longitudinal study of price. The chart above demonstrates the rising portion of median household income that the 38-foot Eagle has commanded in the market since 1998. As the price peaked in 2022 and 2023, consumer demand plummeted. It is not surprising, then, to see the fall of the MSRP (manufacturer’s suggested retail price) as for 2024. Still, that base price is only back to 2020 levels, with a different interest-rate environment and demand pulled forward over recent years.
The 2024 Eagle is testament to the hottest buzzword nowadays in Elkhart, Indiana (the capital of RV manufacturing): “decontenting.” It’s time to simplify. In short, RVs had gotten too expensive. If the industry faced a mere cyclical hiccup, this trend would not be a central agenda in RV boardrooms. To avoid embedding a perception of RVs as beyond the reach of the average consumer, some adjustments are being made. Economic changes can blunt the power over consumers of particular narratives, metastasizing a cyclical event into a secular shift. The industry wants to avoid this. The question is whether the still-high price is justified with the slimmed-down options. While price might be coming off the boil, in an inflationary environment the competition for consumer dollars will be more intense than previously, and at times narratives can change more quickly than manufactures can track them.
The Production Side
As is generally the case in economics, the reality on the ground is more complex than the aggregate data reveal. Not all RVs or manufacturers are equal. That’s another way of saying there are good and bad (and somewhere in-between) businesses in the industry. Some manufacturers have seen the writing on the wall and helped their dealers empty their sales lots of expensive and fully loaded pandemic inventory. Some have not. As new models with fewer features roll off the very slowed production lines, manufacturers caught flatfooted are likely to find the going difficult. Similarly, dealerships that have poorly managed inventory—and are already selling off old models below inventory cost—will have to consider extreme measures.
That short-term pain aside, the fantastic last 15 years of RV production leave essential questions for the industry. Current production capacity has never contended with 9% RV loans. Where is the equilibrium between price, consumer monthly financing payments, and manufacturer costs? Presently, the industry has stepped back from the overbuilding and overpricing precipice. For the most part, though, it hasn’t had to wrestle with durably higher interest rates. While shipments aren’t directly correlated with interest rates, the price of an RV during the last high-interest-rate regime was simply a lower proportion of median household income. The secular-versus-cyclical duel question largely comes down to the cost of monthly financing payments. If rates remain materially higher than trend and wages do not make up the difference, it is a decline in price that would balance the monthly financing equation. As RV price increases have far outstripped incomes for at least a decade, the share of RVer income required to sustain the hobby finally surpassed the level acceptable for industry growth. It is yet unknown where the acceptable level is.
A reckoning may never come. If the Fed quickly returns to its low-rate policy, RV shipments may surge again. Much of Wall Street seems convinced that the central bank has weak resolve. The last decade of the central bank’s low-interest-rate policy was partly enabled by globalization, which has been deflating consumer-goods prices for a generation. With the surge in reshoring and a possible preference for tighter supply chains after the pandemic, that dynamic might be fading. The masters of financial engineering may find themselves with less latitude to lower rates without inflation re-emerging. Other factors, like higher energy prices and the abnormal federal deficit spending, could also play a role in secularly higher inflation.
The numbers aside, an abrupt change in financing costs is the sort of event that could alter the consumer narrative long-term. This is perhaps the most importance and least quantifiable dynamic in play. Narratives are mostly only seen in retrospect. What is known is that we’ve found the price ceiling for RV buyers and a subsequent retrenchment is coming into focus. For the sake of the thousands of workers dependent on the industry, we hope this means we’ve also seen the basement for shipments.
[1] Thor 10K reports.