RV Shipments: This Recession Predictor Refuses To Take A Month Off

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Includes: CWH, LCII, PATK, THO
by: Shock Exchange
Summary

Investors are starting to wonder if the U.S. economy has peaked.

The continued decline in RV shipments implies the next recession is here.

Avoid RV-related names like Thor Industries, Camping World Holdings, LCI Industries and Patrick Industries.

RVs on a dealer

Source: Reuters

The U.S. economy has expanded for over a decade now. Bailouts, record-low interest rates and tax cuts have created distortions pursuant to the economy's vital signs. There is now an international manhunt for clues as to whether we are in a recession or headed for one.

The Atlantic believes RV shipments are a reliable predictor of recessions:

RV sales turn out to be a pretty good predictor too: When RV sales are doing well, the economy follows; when RV sales tank, the economy is soon to tank too... The RV industry has repeatedly fallen in advance of more widespread economic troubles. RV sales started dropping in 1999; the economy did not crash until 2001. Between 2006 and 2007, RV sales again dropped - this time 9.5 percent. The GDP still grew in that period, at an annual rate of 4.5 percent. But between 2007 and 2009 GDP growth slowed to 1.7 percent, and dropped 2 percent between 2008 and 2009.

This makes sense in that RVs are big-ticket items. Motorhomes can sell for $90 thousand and up. Given the value of materials, parts and labor that go into these vehicles, RV sales can definitely move the needle for the economy. Since RVs are considered discretionary items, a pullback in sales could also be a harbinger of a fall in other discretionary items.

RV shipments were white at the end of 2017. Record low interest rates and favorable demographics - consumers between the ages of 55 and 74 have been growing - helped. Shipments began to fall off in the second half of 2018, as RV dealers may have been oversupplied. The decline in shipments has continued this year.

RV shipments for April 2019

RV shipments for the month of April were 40,243, down 15% Y/Y. Through year to date April 2019, shipments were 140,219, down 24% Y/Y. The decline has likely been exacerbated by dealers' need to rationalize inventory. The slowdown has already hit RV suppliers like Patrick Industries (PATK) and LCI Industries (LCII). In its most recent quarter, Patrick's RV-related revenue fell 9% Y/Y; LCII's RV-related revenue fell by double digits.

Will Declining RV Shipments Reverberate?

At some point, declining shipments of these big tickets have to reverberate through the economy. Another proxy for the impact of declining shipments could be unemployment in Elkhart, IN, the RV capital of the world. RV manufacturer Thor Industries (THO) is also headquartered in Elkhart. The company recently cut production rates and moved to a four-day work week:

CEO update: "As dealers continue to rationalize inventory levels following the unusually high seasonal order and wholesale delivery patterns in the first nine months of fiscal 2018, the company has taken steps to adjust its production levels accordingly. A number of Thor's production facilities have reduced their production unit rates, while others have shifted to four-day production weeks."

According to the Bureau of Labor Statistics, unemployment in the Elkhart-Goshen, IN area was 2.6% in April 2019, up from 2.1% in the year-earlier period. Unemployment for the entire country was 3.6% in April 2019, down from 3.9% in the year-earlier period.

Elkhart-Goshen uemployment April 2019

Rising unemployment in the Elkhart, IN area appears to confirm the slowdown in RV shipments and the RV industry as a whole. The white-hot shipments for 2017 may have reflected animal spirits in the economy. When a sector becomes overheated, the pullback could become even more pronounced. The pullback in RVs could potentially metastasize to other sectors. Thus, recession fears could be warranted.

Conclusion

The next recession may have arrived. Sans more government stimulus, the economy could wind down slowly. I believe this is a stock picker's market. Investors should avoid LCII, PATK, THO and other RV-related names like Camping World Holdings (CWH).

Disclosure: I am/we are short LCII, THO, CWH, PATK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.