How's the RV Industry Doing . . .

. . . and is it going to be a rocky 2022?

A substantial share of the 600,200 Recreational Vehicles produced in the United States are made in Elkhart, Indiana. This sector represents more than half the growth in manufacturing Gross Domestic Product in Indiana over the past decade.

Recreational Vehicle sales are highly sensitive to the business cycle, so feature predominantly in the news and in presidential campaigns. It is also convenient that the Recreational Vehicle Industry Association provides such superb data.

I even made the not too bold of a claim on the Smerconish that RV sales do a better job of predicting recessions than do economists. This graph depicts that, though of course, the RV industry didn’t anticipate a global pandemic and a significant government response.

This graphic depicts annual RV sales and nominal household and institutional savings. This is interesting to note the large spike in 2020-2021 in both. I’ll return to this later, in my analysis of the industry in 2022.

RV sales suffered in 2019 because of dual pressures. The cost of making RV’s was heavily affected by the Trump Administration’s trade war with China. At the same time the Demand for RV’s was affected by the increase in borrowing rates for potential buyers.

This graphic depicts both the 2019 decline, which began weeks after the start of the Tariffs on Chinese imports. It also depicts the pandemic, and pandemic response effect on RV sales.

I have a fancy variance decomposition to illustrate this with. This variance decomposition really shows what variables mattered most in changes in shipments. These were price of the RV’s themselves (I believe this is substitution between types of RV’s) and gasoline prices. This variance decomposition comes from a statistical model (a Bayesian Error Correction Model).

An example of the change in sales is apparent comparing the Jan 2020 sales with the Jan 2022 sales. The big spike was in Type B campers (in the industry lingo).

For the rest of us, this is what they look like . . . kinda neat to own.

So, enough contemporary RV history, let’s consider what will happen over 2022. A way to simulate this is to first estimate the responsive to historical sales, which gives both a direction and magnitude of the effects. Here I focus on the demand side of sales, not supply side issues which seem not have have hampered RV sales in 2021.

The four ‘biggies’ for which we might anticipate changes this year, are automobile loan rates (loosely tied to the Federal Reserve Open Market Operations), consumer sentiment (the Univ. of Michigan survey), Gasoline prices and household savings.

The impulse here is in a one unit change; or, basis point, one percentage point of survey, one penny for a gallon of gas and one billion dollars in household and institutional savings, respectively. All of these data are available from the Federal Reserve Economic Data site (FRED).

So, to simulate what this year likely holds in store for the RV sector, I use this impulse response to simulate four events. First, I increase the auto loan rate by 75 basis points in two tranches (month 3 and month 6). Second, I reduce consumer sentiment by 10 percentage points and hold that constant through 2022. Third, I increase gasoline prices by $2.25 over 6 months. Finally, I exhaust household savings at a rate of $100 billion per month, which returns us back above 2019 levels by year’s end.

I don’t think these are particularly unreasonable assessments. I am least certain about consumer sentiment, which hardly matters. I don’t know if we’ll exhaust this level of household savings in 2022, but it seems likely. This spending of savings appears to have less allocated to the RV sector in recent months, but that might just be a seasonal matter.

The interest rate increases seem close to what the effect of currently signaled Federal Reserve rate hikes in the next few months. And, I am not sure gas will rise by $2.50 in the coming months, but including the increases that have yet to show up in the data I am using, that is not far off.

This simulation offers a decline of more than 60,000 RV shipments spread out over 2022. That means despite the difficult aspects of 2022, RV shipments to retailers seem to be on pace for a good year, albeit not a robust as 2021.

This simulation yields RV sales that are right at the lower bound of the industry’s own RV forecast. The RVIA team forecasted 2022 sales between 578,800 and 603,3000 units. Our reasonable simulation is in the bottom range of that. Here I compare that graphically and in a table.

The RV industry remains a bellwether measure of aggregate economic performance, with some caveats. The pandemic boosted sales for potentially many reasons. Social distancing is easier on a campground, so many families might have used savings from a destination vacation to purchase an RV. The CARES and American Recovery Act both boosted household savings during the pandemic, which families might have used to help pay for a new RV. And, historically low borrowing costs made it an attractive time to buy. These explain the current surge in sales, and hint that 2022 will be another good year.

However, this is a forecast, so will be wrong. Here’s why it may be very wrong. We don’t know if uncertainty about global conditions will induce greater permanent savings, in lieu of consumption. That would hurt RV sales. Interest rates could rise substantially higher than 75 basis points and gasoline prices could rise well more than $2.25 per gallon. These are more knowable effects.

What we don’t know is whether RV sales in 2021 cannibalized later purchases. Perhaps a large share of sales went to households who had planned to purchase an RV in 2022 or later. If so, future sales are likely to be worse than this simulation projects. Also, we don’t know how deeply price, uncertainty, gasoline prices and borrowing costs may interact to reduce sales. We will know more in the coming months.