Recession fears are rising. Here’s the status of economic bellwether Elkhart, Indiana.
Elkhart County, Indiana, proudly calls itself “the RV Capital of the World.” But there’s a belief that where Elkhart County goes, Indiana — and the rest of the nation — is sure to follow.
Economists like to use the RV industry, which dominates the manufacturing city on the very northern edge of Indiana, as a barometer for the health of the U.S. economy. And the news coming out of Elkhart is giving some plenty of reason to be worried.
Total wholesale shipments of recreation vehicles are down 20.3 percent, year to date, across the industry, signaling to some Indiana economists that a recession is on the way. Companies such as Elkhart-based Thor Industries Inc. have slashed production and cut back the work week to slow the pace of production.
Economists reading the tea leaves for signs of a recession have typically held declining RV shipments as a strong warning of a contracting U.S. economy.
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And that’s not the only warning sign flashing in Indiana, said Ball State economist Michael Hicks, who tracks the RV sector.
He listed the state’s peaking manufacturing employment, the nation’s declining auto sales numbers and disruptions in international trade as other indicators of an economic downturn.
“I think Indiana’s economy is far more susceptible to this downturn than most states,” Hicks said. “I think there’s evidence that Indiana is well ahead of the U.S. economy in moving towards recession.”
In Elkhart, RV production is a barometer
More than 80 percent of recreation vehicles sold in the U.S. are produced in Indiana, and roughly 65 percent of that production takes place in Elkhart County, population 206,000, according to the RV Industry Association.
But, consumers usually stop buying expensive, big-ticket discretionary items like RVs when money starts to tighten. As such, economists watch for declines in the RV sector— in addition to a slowdown in auto sales — for signs of a downward-turning economy.
“Those are really strong signals of where the Indiana economy is going,” Hicks said. Total U.S. auto sales fell 1.8 percent year-over-year in July, according to JD Power and LMC Automotive, industry consultants.
Hicks, along with business professor Kyle Anderson at Indiana University’s Kelley School of Business, said the looming recession results from disruptions in international trade by President Donald Trump’s trade wars and tariffs imposed on key U.S. foreign trading partners like China, Mexico and Canada.
“The big problem for Indiana is that we make a lot of things,” Hicks said. “A big chunk of what we make is exported overseas — about 10½ percent of our economy.”
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And in manufacturing-intense Indiana, tariffs on imported goods used in production means higher costs that companies can pass along to consumers.
While there haven’t been widespread layoffs in Indiana’s RV sector, Hicks says there are worrying signs in Elkhart’s labor pool, where manufacturers like Thor Industries, Patrick Industries, Renegade RV and Berkshire Hathaway’s Forest River Inc., among others, employ tens of thousands of workers.
The county’s unemployment rate climbed to 3 percent in June, up from 2.8 percent in the same month last year. The average number of hours worked in the county decreased by four, Hicks said.
While the unemployment rate in Elkhart remains below both the state and national average, it has increased while the state a whole has declined, according to the U.S. Bureau of Labor Statistics.
Chris Stager, president and CEO of the Economic Development Corporation of Elkhart County, said he’s heard anecdotal stories about RV manufacturers implementing longer periods of “relaxed scheduling.”
Thor Industries, in its second quarter 2019 financial report, said it cut production at some facilities of its North American facilities and shifted to a four-day work week at others.
The RV industry has $32.4 billion annual economic impact in Indiana. It supported 126,140 jobs and $7.8 billion in wages, according to the RV Industry Association. The industry pays $3.1 billion in taxes to Indiana.
A softening sector or an industry ‘adjustment’
Not everyone is convinced that declining RV shipments are a harbinger of an upcoming recession.
The RVIA and the Economic Development Corporation of Elkhart County both cautiously say an inventory adjustment is taking place after a period of overproduction.
RVIA spokesman Kevin Broom said dealers placed excess supply orders in anticipation of long-term consumer demand that didn’t pan out. Suddenly, the dealers found themselves with a lot of inventory on their lots, and it’s taking some time to sell through that, he said.
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Production and inventory levels are starting to normalize, he added, with the association projecting that shipments for the year will be down about 14% — instead of about 20%— at the end of 2019.
“There is the wild card of the tariffs and the trade dispute being thrown in the mix and it’s difficult to tease out how much of an impact those are having right now,” he said.
RV shipments have dropped in five periods since 1981, but only three of those periods were followed by recessions, Broom added.
Stager, of the Economic Development Corporation, also said he’s remaining cautiously optimistic.
“We’re very pro-RV,” he said. “We’re very positive about the fact that the supply base that sells into the RV sector is very diverse and continuing to diversify.”
China tariffs and trade impact the industry
Both Broom and Stager say the sector has been impacted by tariffs the Trump administration has imposed on key foreign trade partners like China.
The federal government on Tuesday altered its list of imported goods that would be subject to an additional 10 percent tariff. Some of the items were removed because of health safety and national security concerns.
Tariffs on other items, such as laptops and cellphones will be delayed until Dec. 15 to ease fears about increased pricing during the holiday shopping season.
The RVIA said as many as 167 products that could be used by the RV industry would be more expensive, based on the original list of $300 billion in imported goods subject to the new tariff.
The products include doors, raw hides, and knobs, among others. The RVIA is analyzing the revised list for potential impacts on the industry.
Broom said the economy may be due for a dip, but he said pegging it to what’s happening in the RV industry may be not be wise given the ongoing foreign trade issues and inventory rebalancing.
“The American economy has grown every year since the Great Recession,” he said, referring to the prolonged economic downturn that began in December 2007 and lasted until June 2009. “That’s an unusual period of sustained economic growth, so it is possible that there is an economic downturn coming.”
So far, no RV companies in Elkhart County have filed Worker Adjustment and Retraining Notification Act, or WARN, notices with the state.
Stager said he is hopeful that the warning signs don’t foretell a recession.
“I think Michael Hick’s assessments are correct,” he said. “(RV shipments) have, in many cases, historically been an indicator of some trends in the national economy. But, I prefer to stay positive about the national situation and how that could play out here.”
Hicks does not share Stager’s optimism. He said the double digit decline in shipments during the first half of this year is well into a recessionary level for the RV industry.
“They can’t recover over the rest of the year. That’s a permanent decline,” he said.
Other recessionary indicators
The RV industry’s shipment decline isn’t the only worrying sign.
Other flash points include bad economies in Germany and Hong Kong, the high New York Federal Reserve’s recession probability indicator, and the inverted Treasury yield curves that sparked a flurry of recession chatter in the U.S. this week.
If there’s no progress in the trade war and the Trump administration imposes the next round of tariffs in December, Hicks said there’s a good possibility the nation will be in recession in the first half of 2020.
Still, it’s hard to predict the severity of a recession and when it will occur.
Despite the chatter, small businesses, in general, remain optimistic about the economy, said Barbara Quandt, the Indiana state director for the National Federation of Independent Business.
The NFIB’s July optimism index rose 1.4 points to 104.7. Many businesses indicated they plan to create new jobs and make capital outlay investments. Unemployment also remain low in Indiana and nationally.
But Hicks said unemployment is a lagging economic indicator, and it’s not uncommon for hiring to continue as more sensitive sectors are flashing red.
“Health care mostly hired all the way through the Great Recession,” he said.
Call IndyStar reporter Alexandria Burris at 317-617-2690. Follow her on Twitter: @allyburris.
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