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Aug. 9, 2010 – Foretelling the good and the bad

August 6, 2010
Filed under Features

The double-digit declines faced by the motorcycle industry during the most recent recession were severe, but historically speaking, they shouldn’t have come as a total shock. That’s because history shows that when the larger economy takes a downturn, the motorcycle industry faces a drop-off that’s many times worse.
The good news? History also shows that following an economic rebound, the motorcycle industry experiences growth many times greater than that of the overall economy.
To provide some perspective on the 2007-2009 recession, Powersports Business spoke to Esmael Adibi, director of the A. Gary Anderson Center for Economic Research at Chapman University in Orange, Calif., about how the previous two economic downturns compare to today’s situation.
The first (from 1990-1991) followed the Black Monday stock collapse of 1987, the Savings and Loan crisis of the late ’80s, and beginning of the Gulf War and the resulting 1990 spike in oil prices. After a decade of economic expansion, the second (in 2001) followed the dot-com bust and was worsened by the Sept. 11 terrorist attacks.
Though each recession is unique, there are certain constants. For example, there’s a correlation between unemployment rates and motorcycle sales. Whenever unemployment rates run high, there’s a decline in motorcycle sales.
Additionally, as in all recessions, the three examples being looking at are defined in terms of declines in real gross domestic product. Real GDP declined and then went negative in 1990-1991 as well as in 2007-2009. And in 2001, the number remained positive for the year, but there were negative quarters within that period.
During a recession, consumers respond by reducing spending. In ’90-’91, growth in consumer spending came close to zero, and in 2001 growth slowed significantly. That was bad news for the motorcycle business because consumer spending is closely related to how the industry performs.
“Clearly, consumer spending is what really drives motorcycle sales,” Adibi said.
That is borne out by sales declines in 1990 and 1991, but 2001 appears to buck the trend. However, Adibi says that year, where motorcycle sales were strong despite the recession, is an anomaly that can be explained.
“The stock market was doing so well in 1999 and 2000, and then the housing market started performing very well, and that was really what supported motorcycle purchases,” Adibi said. “People were benefiting from high stock valuation and making money in 1999 and 2000, and you can see those double-digit increases.”
He says in 2001, motorcycle sales were still up 20 percent because we didn’t see the effect of the recession until 2002-’03, with the housing market making up for some of the losses in the stock market.
In the most recent recession, there was no such buffer. In addition, unlike in the previous two recessions, in 2008-’09 spending growth actually became negative, and that resulted in extremely steep declines in motorcycle sales.
Looking at the data, Adibi says motorcycle purchases behave the same way in a recession as other luxury purchases.
“Whenever we go into a recession, people cut back in a certain consumption pattern,” Adibi said. “They don’t cut back on food as much. They don’t cut back on pharmaceutical products because those are all necessary. But there are some luxury items — your discretionary spending — and people really cut back on those. Taking trips, going to eat in restaurants, buying fancy cars or boats or motorcycles.”
That’s why during recessionary cycles, the decline in motorcycles sales is significantly more than the decline in consumer spending. In 2009, GDP went down 2.5 percent, consumer spending went down 0.6 percent, but motorcycle sales dropped off almost 41 percent.
However, when the country comes out of a recession, as the economy gains momentum, the motorcycle industry performs better than the overall economy, Adibi says. That’s because the people who typically buy items such as motorcycles are usually in a position to benefit more from economic growth than the average person.
“Discretionary spending responds much more both ways — on the down side and on the upside,” Adibi said.
Adibi says that phenomenon is also behind the huge increases in sales in 1999 and 2000.
“If you look at 1999-2000, the stock market was rallying,” Adibi said. “So people with higher than average income are more involved in the stock market, and consequently as their income goes up, their discretionary spending goes up.”

Looking ahead

To see those kinds of sales in the industry again, Adibi says we need to see sustained, strong economic growth driven by increases in real GDP. He points to 1997-2000, when real GDP increased by more than 4 percent each year, as an example of what he means. Spurred by the economic expansion, motorcycle sales skyrocketed.
“When we see this kind of economic growth, we will see double digit increases [in motorcycle sales] or more,” Adibi said.
Unfortunately, Adibi isn’t predicting that kind of growth this year. He doesn’t think there will be a double dip recession, as some economists do, but he thinks growth will continue at an anemic rate — 2.5 percent to 3 percent per year.
And in years with 2.5-3 percent growth, he says you can go back and see that those weren’t the years with large increases in sales. PSB

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