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Thursday, November 20, 2008

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RV Index Continues to Slump

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Retail RV sales have climbed in both unit and retail Dollars since 1980 with the exception of the 1984-1986, 1988-1991, and 1999-2001 recessions (Figure 1). This article looks at the macroeconomic factors that drive the recreational vehicle industry and its prospects for continued growth.

Figure 1

Retail RV sales have seen several recessions.

• 1978-1980

• 1984-1986

• 1988-1991

• 1999-2001

One industry driver that is often suggested is the shifting demographics of the buyers as well as the population in general. According to a University of Michigan survey, the median age of the RV buyer dropped from 60 to 54 in 1997 to 2005. This bodes well for RV sales as the Census Bureau predicts that the fastest growing segment of the population will be the 45-64 group (Figure 2). Given the prediction for increased population growth in absolute terms from 282 million to 309 million in 2010 (a 9.6%) increase, all else being equal, we should see similar growth in recreational vehicle sales through 2010.

Figure 2

The key age group for RV purchases will be the largest and fastest growing segment of the population.

But all things are not equal. The industry has shown cyclicality. Among the factors that can be correlated to the cyclicality, one can  imagine GDP, interest rates, consumer spending, fuel prices, and unemployment. But these are not all necessarily causal in nature

Recreational sales as a percentage of GDP have ranged from as high as 0.18% of GDP to as little as 0.04% between 1978 and 2005 (Figure 3). Since 1991 there has been a significant uptrend from 0.06% to 0.12% of GDP, a doubling that is not likely to continue. With the exception of the 1999-2001 recession, the economy has seen robust growth and a low interest rate environment. We will most likely see oscillation between 0.08% and 0.12% of GDP going forward.

Figure 3

Retail RV sales as a percentage of GDP have continued to climb since the fuel and credit crunch of the late 70's and early 80's.

Retail RV sales track interest rates (Figure 4). This should be no surprise as most people can't afford to plunk down the cost of a recreational vehicle (Average Sales Price is in mid-$30,000's for the total industry). This was probably a less significant factor in the late 70's and early 80's than fuel availability. Remember waiting in long lines to fill up on odd or even days depending on your license plate? Even so, the effect of interest rates on monthly loan payments, usually the main cost of owning an RV, no doubt significantly affects the purchasing decision. The prime rate as of May 2006 is 8%. This places it squarely in the sweet spot for achieving nominal growth in recreational vehicle sales. However, with the Fed continuing to hike rates, there will be downward pressure on RV sales.

Figure 4

Retail RV sales track interest rates. This was probably a less significant factor in the late 70's and early 80's than fuel availability. Remember waiting in long lines to fill up on odd or even days depending on your license plate? Even so, the effect of interest rate on monthly loan payments was the real deal breaker.

Fuel prices have not moderated RV sales as much as one might might have expected. A slowdown in sales can be seen during periods when fuel prices rose rapidly. Given today's $3/gallon prices and fears of $4/gallon, we can surmise that fuel prices will also place downward pressure on RV sales in 2006.

Figure 5

Fuel prices do not seem to have had much of an effect on RV sales. We'll cover cost of ownership in another piece, but suffice it to say that fuel prices are not a significant purchasing or use factor.

Lower taxes are good for the economy as well as for RV sales (Figure 6). Lower taxes allow consumers to keep more of their money and to decide how to spend it rather than have politicians squander it on their favorite pork or entitlement program. Consumers spend more efficiently than government, they have to. Consumers just can't tell their employer they're going to take a bigger piece of their employer's pie to cover their spending. They can't print money legally and they can't borrow like there's no tomorrow. So spending on recreational vehicles is 100% discretionary.

Figure 6

Lower taxes are good for RV sales, like the rest of the economy.

Figure 7 illustrates that RV spending generally tracked consumer spending and GDP. There gap between the two reflects the availability of discretionary income.

Figure 7

Lower taxes are good for RV sales, like the rest of the economy.

To put average spending on RV's in perspective, take a look at the percentage of personal consumption expenditures that go towards motor vehicles and parts, fuel, and transportation in general relative to RV (Figure 8). RV spending is miniscule on an average basis but to the RV owner, it is a significant incremental piece of discretionary spending.

Figure 8

Other transportation expenses have remained relatively flat as a percentage of personal consumption expenditures.

One indicator that we have not seen discussed in the literature is the ratio of RV unit sales to auto and truck sales. As shown in Figure 9, the ratio has more than doubled since 1980. Another doubling is unlikely to happen and we would expect this ratio to settle around 1.5-2.0% in the long run.

Figure 9

RV retail units have climbed steadily as a percentage of auto and truck sales.

Lastly, unemployed people don't buy recreational vehicles (Figure 10). With unemployment at the sub-5% level, we would expect a favorable effect on RV sales. However, the workforce is still faced with concerns over whether the economy is really humming despite all objective measures including low unemployment, high GDP growth and near record levels in the stock market. Many fear that they will lose their jobs to such trendy practices as outsourcing to China or India, but that's a whole other subject.

Figure 10

Unemployed people don't buy RV's.

In summary, the RV industry will continue to grow in the next 10 years due to demographic trends. Major economic factors affecting industry growth are GDP growth, interest rates, and consumer confidence as reflected in personal consumer expenditures. Rising fuel prices have not slowed growth.