Economist Says HVAC Contractors Will Grow Their Bottom Lines in 2018
Nonresidential construction is lagging, but it will start to correct in the second half of the year
SAN ANTONIO — For years, one of the highlights of the Mechanical Contractors Association of America’s (MCAA’s) Annual Convention has been the economic forecast offered by Brian Beaulieu, CEO of ITR Economics in Manchester, New Hampshire.
This year was no different, as members packed the room to hear his prognostications, which included both good and bad news.
“The news I’m bringing you today is basically good,” he said. “We are optimistic about where this economy is going, and we think you’re going to be able to make a lot of money … for now.”
The reason for this optimism is that the U.S. continues to have the No. 1 economy in the world, as it has for 80 years. And it’s going to remain No. 1 for at least another 80 years, if not longer, said Beaulieu, based on these three realities:
- Demographics — In order to have an organically growing economy, it is necessary to have a growing population. With the exception of India, the U.S. is the only country with a growing population base;
- Natural resources — The countries that have the greatest amount of natural resources win in the long run, and the U.S. has a lot of natural resources. On the other hand, China has a paucity of natural resources, which is why they’re colonizing Africa, and Europe has used up most of its natural resources; and
- Rule of law — In order to prosper, countries must have intellectual property rights, personal property rights, and the ability to go bankrupt. Nobody but the U.S. has those three rules of law.
“For these reasons, we are very fortunate to live and work in the U.S.” he continued. “We’re No. 1 and growing. If you’re still reading articles that equate us to an empire that has gone through a demise like the Romans or the Persians, stop reading. That’s not us.”
The economy is showing many positive indicators right now, including rising incomes, readily available credit, strong manufacturing, and a rock-solid housing market, according to Beaulieu.
“We’re not like where we were in the bubble of 2006 to 2008,” he said. “That’s no longer germane to our thinking. Retail sales will do well through the third quarter of 2018, with growth at about 4.2 percent. Christmas 2018 will be a good one.”
In addition, single-family housing starts remain solid, and based on permit information, it looks like that growth will continue. Between now and 2029 or 2030, Beaulieu believes the new housing market will continue to be strong with perhaps a few periods of stalled activity but no cliffs in sight. Remodeling will also be robust because there is not a large enough inventory of existing homes to buy. Even renters are spending money on remodeling, he noted.
Right now, nonresidential construction is lagging. However, it will start to correct in the second half of the year, said Beaulieu.
“By the end of the year, nonresidential construction will be firing on more cylinders, and through the first half of 2019, it will be go time,” he said.
The same cannot be said for multifamily housing, which is in negative territory right now and will continue to stay there. Other concerns include the new tariffs on steel, which will disrupt supply chains and increase inflation; increasing mortgage and interest rates; the decreasing rate of savings; and increased automobile delinquency rates. The recent tax cut is not going to help much past 2018, said Beaulieu, as it accounts for only 0.5 percent of GDP this year — barely enough to nudge the U.S. economy.
The single biggest problem contractors will face for the foreseeable future, though, is still the lack of labor in the skilled trades.
“Labor scarcity is going to be part of our economic landscape for the next 10 years, and you need to manage it correctly,” said Beauleiu. “More and more of your profit is going to go toward keeping that labor by holding onto talented people. It’s a thorny issue.”
Finding skilled people who want to work is getting harder, and that’s not going to go away. Job openings remain high, and contractors are resorting to poaching each other’s employees because there simply aren’t enough people.
Finding people to work and figuring out how to keep them happy is a huge task, said Beaulieu, especially where millennials are concerned; they have a tendency to job hop every 20 months or so. But they will comprise about 50 percent of the workforce by 2023, so contractors need to learn how to work with them.
“Millennials are incredibly smart,” said Beauleiu. “They understand systems, processes, and flows better than any Gen Xer or baby boomer ever did. Listen to them, and you’ll be amazed at what they know. They are hardworking, but they do not necessarily work the way previous generations did. I get emails from them at 2:30 a.m., but I won’t see them in the office until 10:30 a.m. — because that’s the way they roll.”
Millennials also want to belong to an organization that is about more than just making money.
“If you have a philanthropic bent to your company, share it with them,” Beauleiu said. “That’s how you’ll recruit them. They want to know that they’re doing good for the world by working for you. They also need to know that you have a career path for them. If you can’t lay out a career path, they’re not interested in coming to you or staying with you.”
Regardless of the makeup of the workforce, the labor shortage will continue, and contractors need to be more aggressive with their pricing.
“Whenever you’re bidding a job for the next 10 years — because of the shortage of labor, because of the material escalation, because of inflation — you need to think about rapacious pricing,” said Beaulieu. “Put a price out there that you think is silly, and it will probably work. You need to get more aggressive with pricing in general.”
But that is the case only for the next 10 years or so, according to Beaulieu.
“Between 2030 and 2040, we are going to enter a nasty decline, because we are not having the right conversations about the increasing costs of Medicare, Medicaid, and pension funds,” he said. “We need to have those discussions. President Trump says there is no hope of having a balanced budget for the next 10 years, which means we’re right on track to run out of money in 2030. Our debt is going up, and there’s no plan to pay it off.”
But enjoy the next 10 years, said Beaulieu, because they should be good for the HVAC industry. However, contractors might want to consider selling their businesses and retiring by 2028 or 2029.
“And buy the biggest house you can, because your kids may be coming home to live with you again,” he added.
In addition to the economic outlook, the 2018 MCAA Annual Convention featured numerous educational and networking opportunities as well as many well-known speakers, including NFL legend Terry Bradshaw, NBA champion David Robinson, bestselling author Malcolm Gladwell, and former first lady Laura Bush. Grammy winner Keith Urban took the stage to close out the packed, multiday event.
Current MCAA president, Greg Fuller, kicked off this year’s “All In” convention by noting that the association and its members are making the industry stronger.
“What we’re doing matters, and we are doing it really, really well,” he said. “We are representing your interests in Washington day in and day out. We have more education programs than ever, and they’re packed. Our technology initiative is expanding, and as a result, new technologies are in our companies, in our fab shops, in our operations, and we’re being more productive than ever. We’re younger, we’re smarter, we’re more diverse, and we’re changing with the times. We are all in for the future.”
Publication date: 4/30/2018