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One County's RV Industry Points to Recession Around the Bend

The Wall Street Journal. logo The Wall Street Journal. 8/19/2019 Shayndi Raice
Some manufacturers in Elkhart, Indiana, cut production as tariffs drive up costs of components.© David Kasnic for The Wall Street Journal Some manufacturers in Elkhart, Indiana, cut production as tariffs drive up costs of components.

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.

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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.

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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 3½ 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

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