Sales of all-terrain vehicles aren’t one of the classic leading economic indicators that point to how the broader economy will do just down the road, but a slowdown in sales for Polaris Industries sure got my attention.
Polaris, based in Medina, enjoys a fine reputation for good management, so if sales decline, it’s not likely because of some blunder the company made. It has to be because the people who are most likely to buy one of its ATVs or side-by-side vehicles have decided to put off buying one for now.
When people put off big purchases, maybe because their own job security looks a little shaky, that in turn causes other companies and consumers to think about putting off purchases. That’s how recessions happen.
The country’s economy grew at a less than 1 percent annual rate in the fourth quarter, but it was enough to sustain an economic expansion that has been going on now since the summer of 2009.
Economic prognosticators are still looking for more growth in 2016 and beyond, but there have been more than a few disquieting little tidbits that suggest that the economic expansion might be nearing the end of its life.
An easy indicator to spot, since it generates headlines, is orders for durable goods. These are long-lasting things such as a new refrigerator or equipment used in a business, and the appetite for Americans to buy these big-ticket things tells us a lot about the underlying strength of the economy
Orders for durable goods declined about 3.5 percent last year. That might not seem like a lot, but it’s been about two-dozen years since there’s been a drop this big that wasn’t coincident with an economic downturn.
Less-obvious numbers tracked by economists are also pointing to caution, including the recent volume data for the railroad industry.
It’s not that the railroad business is such a significant employer or driver of economic growth. What’s important is that a decline of carloads over the rails suggests that fewer things are getting shipped to consumers and fewer loads of materials are being shipped to manufacturers to be turned into products.
The Bank of America research department recently voiced alarm over falling freight volumes, seeing it as a warning for the broader economy. The Association of American Railroads reported that traffic declined 10.5 percent for its most recent weekly report, and was down 7.6 percent for the first three weeks of the year.
As Bank of America pointed out, a sustained drop in rail freight traffic like this usually precedes a recession or overlaps one.
Part of the explanation for slowing rail traffic is the breathtaking fall in the price of oil and its impact on oil exploration and production. Rail shipments of petroleum products slid pretty much all of last year.
The vicious downturn in the oil and gas industry turned out to be a big part of Polaris’ explanation for its fourth quarter, too, as overall company sales slipped about 13 percent from the year-earlier period. The problem wasn’t in the company’s motorcycle business, as sales jumped again in the fourth quarter, but with snowmobiles and off-road vehicles, called ORVs.
“We probably didn’t realize how much oil and gas was going to hit us at the beginning of the year,” said Bennett Morgan, the company’s president and chief operating officer, referring to slumping consumer purchases in oil-producing regions. “The states that really matter when we are talking about that are Texas, Louisiana, Oklahoma, Alberta and western Canada. Wyoming and North Dakota are in there although their impact is less. If you look at the rest of our ORV business, the growth was better, although we did see weakening trends in the fourth quarter.”
The company was a little reluctant even to have this conversation about the relationship between the business cycle and its sales. One reason is that it has had to reassure investors that its customer base is both more diverse and less likely to consider a new ORV as a discretionary item, just another toy for a grown-up, than many investors assume.
A lot of its products, Morgan explained, are used by people in farming and ranching and other industries that may well be cyclical but don’t necessarily move in step with the broader economy.
It might also be that the company thinks that talking about economic weakness will be taken as some sort of excuse for disappointing performance. One of the refreshing things about this company is that its executives are far more likely to say it’s their fault than put the blame on the economy, competitors or anybody else.
As Morgan pointed out, the Polaris business plan is based on taking market share with innovative products, “and if we get a little industry growth, great. However, we don’t want to be dependent on it.”
In looking back at the history of the company along with the broader economy, it powered through some economic downturns without a drop in profitability. Yet in some ways the most recent quarterly announcement looks at least a little like the one that took place eight years ago, after the last quarter of 2007.
The company had reported a year of earnings per share and sales growth for 2007, but retail sales of ORVs were slipping then, too.
There are a lot of differences between what was happening in the economy then and now, of course, but December 2007 also marked the start of the Great Recession. Unit sales held up pretty well for Polaris in 2008, but the following year was certainly a dismal one, as overall company unit volume declined nearly 30 percent.
Polaris is cautious looking ahead, just telling its investors to expect that 2016 sales should be in a range from a decline of 2 percent to growth of 3 percent.
Given what else we are hearing recently about the health of the economy, 3 percent growth could turn out to be a very good year.