2008 Year-End Review and 2009 Forecast

March 12, 2009

• Wholesale Shipments Continued Downward Spiral into 2009

• Consumer Confidence Hits All-Time Low

• Industry Shake-Out and Consolidation in 2009

• Unemployment Rising - Tops 10% in California

• Gross Domestic Product Down 6.2%, Personal Consumption Spending Down 4.3% in Q4 2008

• Consumers Scaling back on Credit

• Real Estate Market Bottoms in 2009 - But Home Equity at Record Lows

• Recreational Vehicle Stock Index Hits All Time Lows in 2009

• Significant Erosion in RV Index Component Financial Performance

• Forecast: Wholesale Shipments below 100,000 - Worst Year since 1980; Retail Sales Below $5 Billion

The RV industry suffered its worst year since 1992 in 2008 and 2009 is shaping up to be the worst year since 1980. RV wholesale shipments continue to fall sharply. Furthermore, a quick check of dealer inventory suggests that dealers  may be holding 12 months of inventory or more compared with the typical 3-4 months. So far in 2009 we've seen Berkshire acquire Coachmen, Monaco Coach shut its doors, and Country Coach forced to file for bankruptcy and it's only March and the worst is yet to come. The industry's misguided strategy of vertical integration as a means to reduce cost has come back to haunt it as it tries to get costs in line with sharply reduced volumes. The RV industry needs to take a page from the semiconductor capital equipment industry where 50% swings year-on-year are not that unusual and outsourcing is the norm. Far more complicated than RV's, equipment for making chips typically contain far fewer assembly and test hours and can be delivered in less time than the typical Class A motorhome. 

According to the BLS, both the number of unemployed persons (11.6 million) and the unemployment rate (7.6%) rose in January.  Over the past 12 months, the number of unemployed persons has increased by 4.1 million and the unemployment rate has risen by 2.7 percentage points. Of the states where most RV's are sold, California and Florida have taken the hardest hits. Even Texas which was at 4.2% a year ago, hit a four year high of 6.0%. The feds are planning for the national unemployment rate to be over 9% in 2009.

• California - 10.1%

• Florida - 8.1%

• Texas - 6.0%

• Arizona - 7.0%

Gross Domestic Product Down 6.2% and Personal Consumption Spending Down 4.3% in Q4 2008

Highlights from the fed report:

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- decreased at an annual rate of 6.2% in the fourth quarter of 2008, (that is, from the third quarter to the fourth quarter), according to preliminary estimates released by the Bureau of Economic Analysis.  In the third quarter, real GDP decreased 0.5%.

In the advance estimates, the decrease in real GDP was 3.8%. [Editor: That's quite a revision!]

The decrease in real GDP in the fourth quarter primarily reflected negative contributions from exports, personal consumption expenditures, equipment and software, and residential fixed investment that were partly offset by a positive contribution from federal government spending.  Imports, which are a subtraction in the calculation of GDP, decreased. Most of the major components contributed to the much larger decrease in real GDP in the fourth quarter than in the third.  The largest contributors were a downturn in exports and a much larger decrease in equipment and software.  The most notable offset was a much larger decrease in imports. Final sales of computers subtracted 0.01% age point from the fourth-quarter change in real GDP, the same contribution as in the third quarter.  Motor vehicle output subtracted 2.04%age points from the fourth-quarter change in real GDP after adding 0.16%age point to the third-quarter change.

Real personal consumption expenditures decreased 4.3% in the fourth quarter, compared with a decrease of 3.8% in the third.  Real nonresidential fixed investment decreased 21.1%, compared with a decrease of 1.7%.  Nonresidential structures decreased 5.9%, in contrast to an increase of 9.7%.  Equipment and software decreased 28.8%, compared with a decrease of 7.5%.  Real residential fixed investment decreased 22.2%, compared with a decrease of 16.0%.

Real federal government consumption expenditures and gross investment increased 6.7% in the fourth quarter, compared with an increase of 13.8% in the third.  National defense increased 3.1%, compared with an increase of 18.0%.  Nondefense increased 15.1%, compared with an increase of 5.1%.  Real state and local government consumption expenditures and gross investment decreased 1.4%, in contrast to an increase of 1.3%.

Credit continues to remain tight as the effects of the mortgage crisis continue to ripple their way through the economy. In the meantime, consumers have started to lower their personal financial obligations as shown by the chart on the right. The financial obligations ratio adds automobile lease payments, rental payments on tenant-occupied property, homeowners' insurance, and property tax payments to the debt service ratio.

Real Estate Market Bottoms in 2009

We expected that the real estate market would stabilize by the end of 2008 in our last update but that turned out to be wishful thinking. Home sales and home prices continue to decline. The average home price was down 25% or $79,000 in 2008 from 2007 while new home sales in January were off by 48% from January 2008.

The equity Americans have in their most important asset — their homes — has dropped to its lowest level since the end of World War II. According to the Fed, homeowners' portion of equity slipped to 46.2% in the first quarter from a revised 47.5% in the previous quarter. That was the fifth quarter in a row below the 50% mark. The total dollar value of equity also fell for the fourth straight quarter to $9.12 trillion from $9.52 trillion in the fourth quarter, while Americans' total mortgage debt rose to $10.6 trillion from $10.53 trillion.

This is perhaps one of the most significant factors weighing on the industry today and we expect that to continue through 2009.

The RV Stock Index fell 37% in 2008 placing it about in the middle when compared with other Dow Jones sector indices. However, the RV Stock Index has fallen below its all time lows several times in 2009.

Source: Dow Jones Indices

Significant Erosion in RV Index Component Financial Performance

Operating performance for the RV Index companies was down across the board for 2008 and will continue to erode in 2009 as the decrease in wholesale shipments in Q4'08 and Q1'09 foreshadow.

Our forecast for 2009 is based on a simple model that takes into account historical monthly seasonality by type. Using January's wholesale shipments as our baseline, we calculated monthly shipments by type. The results are provided in the table below. We also provide a month by month comparison with 1978 and forward based on a suggestion from one of our readers. One can see that the recovery took years in the early 1980's. We've assumed that this will be the case in the forecast.

We're also projecting that retail sales will drop off 60% and will end up below $5 billion, about one third their peak.

According to the RVIA and Dr. Richard Curtin, Director of Consumer Surveys at the University of Michigan, RV shipments are expected to be lower in 2009 as well as the current recession is expected to affect all sectors of the economy. Credit restrictions are causing RV buyers to delay purchases and RV dealers to keep inventories low.  Sales in 2009 will be affected by high credit standards, falling employment, and continued declines in household wealth and home prices.  Dr. Curtin predicts 2009 shipments will total 186,800. That would make 2009 the lowest record on year since 1991. [Editor: As of this writing, the industry would have to average 16,318 units per month from February through December.]