How weak RV sales could mean a recession in 2023.
If you still have doubts about whether the US will fall into a recessionperhaps this will dispel them: the recreational vehicle industry it is weakening significantly.
A drop in RV sales has long been considered an early warning sign of a broader economic downturn because an RV is a discretionary and expensive purchase. Therefore, it reflects a change in the mood of the American consumer towards other types of spending, the theory goes. Y consumption it represents about 70% of the United States economy.
The Elkhart, Indiana metro area, where about 80% of RVs are produced, is similarly seen as a leading indicator of where the US is headed because the region is highly industry dependent.
In November, recreational vehicle shipments from manufacturers to dealers fell 50.4% from the same period a year earlier to 24,445, according to the RV Industry Association (RVIA). Through the first 11 months of 2022, wholesale RV shipments totaled 472,691, down 15.6% from the prior-year figure, the trade group says.
“If production doesn’t pick up, that’s a very strong sign that we’re going into a recession next year,” says Michael Hicks, an economics professor at Ball State University who studies the industry.
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Keep in mind that the industry saw record shipments of 600,240 in 2021 as people are wary of traditional travel options during the pandemic or frustrated by airline restrictions related to COVID-19 wasted on recreational vehicles and hit the open road. Shipments continued to break records through May 2022 before moderating in June and falling sharply in the second half of the year.
RVIA says manufacturers have simply been reducing production to historic pre-pandemic levels as the health crisis has subsided.
“What we are seeing now is the expected normalization of that record production as the industry returns to production levels more in line with our 10-year average,” RVIA said in a statement. “The desire for outdoor experiences and travel remains strong among the American public.”
This year marked the third strongest for RV shipments, the group says. Monika Geraci, a spokeswoman for RVIA, says that “it’s important to look at the whole year to get the full picture.”
But Hicks said the slowdown in recent months represents more than a return to the pre-COVID trend, noting that November was the second weakest month since 2016.
What happens when the Fed raises interest rates?
The drop, he added, can be attributed to the aggressive policy of the Federal Reserve interest rate hikes to reduce inflation, with the Fed’s benchmark rate rising by more than 4 percentage points this year. That has greatly increased borrowing costs for RV buyers, who almost always finance their big purchases, Hicks says.
RV prices average between $5,000 and $63,000 for a trailer and $80,000 to $140,000 for an RV, but can go as high as $1 million, RVIA says. Interest rates to finance purchases now average between 4.89% and 11.89%, according to Bankrate.
With rising rates and mounting recession fears, “you’ll be very careful” when financing an RV, Hicks says. “He’s still going to go to a restaurant or take a trip.”
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But as rates rise and hit Americans’ pockets harder, they will curtail even those activities, sparking a recession, Hicks says. Recreational vehicles, she adds, are a good warning sign because the impact on the industry is greater and occurs earlier than other sectors.
High gas prices have also helped curb sales and shipments of gas-guzzling RVs (even if they’re towed), though that’s been less of a factor recently as pump costs have fallen, Hicks says. .
What is the current state of the economy?
Other economic indicators have recently been mixed. Housing and manufacturing have weakened substantially. Consumer spending has softened but remains strong, in part because household finances are in good shape. job growth It has slowed down but has held steady. And business investment has held up surprisingly well.
Most economists expect a mild recession next year, as Federal Reserve interest rates go ever higher to consumers and businesses, according to monthly surveys by the Wolters Kluwer Blue Chip Economic Indicators. But some research firms, including Goldman Sachs and Moody’s Analytics, believe the United States will narrowly avoid a recession.
Hicks says he had forecast a “soft landing” for the recession-dodging economy, but changed his forecast after studying the latest RV numbers.
Although every recession in the past four decades has been preceded by an RV slump several months earlier, most, but not all, declines in RV shipments have been followed by recessions, Hicks says. He says he’s more certain a recession is coming this time because the decline in RV shipments has been dramatic.
“Falling RV sales is not always, by itself, an indicator of recession,” says Gus Faucher, chief economist at PNC Financial Servicers Group. But, he said, “I think what’s happening with RVs at the end of 2022 is an indication that high interest rates are starting to hit the economy… The economy will feel the impact of those high interest rates.” more fully and extensively”. in 2023″.
The Elkhart area saw its unemployment rate rise to 2.8% in November, the highest since June 2021, but still well below the nation’s unemployment rate. So far, most RV manufacturers are cutting hours and extending production breaks over the holidays rather than lay off workers due to long-standing worker shortages, Hicks says.
What does it mean when the yield curve is inverted?
RV sales aren’t the only economic indicator flashing red.
Typically, interest rates are higher for longer-term bonds than shorter-term ones because investors need to be rewarded for risking their money over a longer period.
However, the 2-year Treasury yield has held above the 10-year Treasury since July and is still about half a percentage point higher. Such “yield curve inversion” It has been a reliable sign of a coming recession as investors move their money into safer long-term assets, raising their prices and lowering their yields, when the economic outlook becomes more dim.
But the length of time between a yield curve inversion and a recession has been imprecise in recent decades, reaching as long as 22 months, according to research firm Statista.
This article originally appeared on USA TODAY: Will there be a recession in 2023? Falling RV Sales May Be a Warning Sign