HVAC Industry Forecasters Predict Growth
Changing HVAC Landscape to Bring New Challenges
New fuel has been added to the minimum wage debate as the Congressional Budget Office (CBO) declares that raising it could have negative consequences on jobs.
“Increasing the minimum wage would have two principal effects on low-wage workers. Most of them would receive higher pay that would increase their family’s income, and some of those families would see their income rise above the federal poverty threshold,” said a release from the CBO. “But some jobs for low-wage workers would probably be eliminated, the income of most workers who became jobless would fall substantially, and the share of low-wage workers who were employed would probably fall slightly.”
Later in the release, the government department translated with charts, graphs, and multiple scenario outcomes of different minimum wage increases. Loosely translated, the $10.10 minimum wage option could cost the American economy as many as 500,000 jobs.
It’s not just wages that will have an effect on 2014. There are multiple factors to consider when gaging what events may come and how to respond to them this year. The good news is that several industry economists have a strong opinion of 2014 and its outcomes. The bad news? None of them have a crystal ball guarantee.
WHAT TO EXPECT IN 2014
According to Alan Beaulieu, HARDI’s chief economist and principle at ITR, it looks like it is time to start investing. During his keynote presentation at the HARDI Annual Conference, he encouraged distributors to invest in business, hiring, and technological advances for the company. Beaulieu noted that it is time to stop considering the economy to be in a stage of recovery, rather it is in a stage of growth. Leading indicators are pointing up, according to Beaulieu, and the rates of change are improving. He did caution that the second half of 2014 could have a dip or possible soft spot, but that it wasn’t guaranteed.
Other indicators brought an optimism from Beaulieu. He explained that household net worth is ascending and that delinquency rates are at a 23-year record low.
“Banks are lending again,” he said. “It is beginning to slow down a little because of Dodd Frank and the fear of future inflationary measures, but they
are lending.”
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The inflationary issues Beaulieu spoke of are not expected to begin taking hold until 2015 according to his presentation. Once they do, the inflation will likely continue upwards from 2016-2019.
“My suggestion is to borrow money now to grow your business and make improvements,” said Beaulieu. “Then pay the sum back in the next few years with inflationary dollars.”
HOW IS HOUSING?
Steve Tusa, CFA, analyst at J.P. Morgan, explained that housing is a big factor and that the industry had experienced a year of hyper growth in 2013. His comments came from the presentation he made at the HARDI Annual Conference as well.
“Last spring’s mortgage rate shot up,” he said. “They have since settled some having a cooling effect on the market, but they are still up.”
Tusa noted that new construction was tracking weaker than expected overall, but he also pointed out that replacement demand was tracking about in line as to what had been expected. Private growth is considered to be at a good rate, while public growth is still not looking as healthy as economists would like.
“Trends are pointing to a continued normalization,” he said. “Third-party forecasters like Dodge and Global Insight, have been consistently optimistic on the speed of the recovery.”
Looking at other factors in the economy and the HVAC industry, Tusa explained that the industry is on pace to post a high single-digit growth rate for replacements.
“Unlike 2011, this is not driven by R-22 dry shipped units,” he said. “R-22 is not the force it once was.”
INDUSTRY LANDSCAPE
Looking at some significant events on the manufacturing side of the HVAC industry, observers have noted the change in the HVAC landscape from new partnerships, alliances, and acquisitions. These newly-forged relationships are expected to affect the industry, but how they will affect it remains to be seen.
In Aug. 2012, Daikin acquired Goodman for $3.7 billion. In Dec. 2013, Johnson Controls announced a new joint venture with Hitachi. In Jan. 2014, Google acquired Nest Labs for $3.2 billion.
Another change in the landscape is an increased introduction of non-traditional competition. This has already been experienced to some extent with utilities, cable companies, online retailers, security companies, etc., but with a push for home-automation and remote management on the horizon, industry members are expecting to see more of this competition arise.
2014 RISK FACTORS
Although 2014 is expected to look much like 2013, stable and more normal, there are topics of concern that economists and industry watchdogs have their eyes on. One of those factors is geopolitical unrest. Places like Europe and China are experiencing governmental and economic changes. The clashes in the Ukraine are a European example and markets are expecting China’s economy is signaling a coming slowdown.
The U.S. government and regulatory changes are risk factors to watch as well. Extensions and changes in national health care implementation are changing and as mentioned earlier in this article, minimum wage changes are an issue. Distributors and HARDI’s advocacy groups are paying particular attention to tax reform and a push to repeal the last in first out (LIFO) accounting method.
Another set of concerns stems from the U.S. economy, according to Beualieu. He noted that the nation could see food, fuel, and rent experiencing inflation this year, ahead of the 2015 expectations.
Despite the risks, Tusa, Beaulieu, and others, are suggesting that 2014 should be a year to invest and grow. Tusa’s bottom line was 9 percent. That is the growth rate he is predicting for 2014.
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