The U.S. economy shrank at a record-breaking annual rate of 32.9 percent in the April-June quarter, which works out to a decrease of 9.5 percent in the second quarter — the worst quarterly plunge in history, the Bureau of Economic Analysis reported Thursday. That’s nearly four times the worst quarter of the Great Recession, and more than three times as steep as the previous record — 10 percent — in 1958. However, despite the economic shock, HVAC contracting in the U.S. is showing a clear recovery since this spring’s shutdown slump. Revenue growth, consumer demand, and employment are all back to pre-pandemic levels or higher for contracting professionals, according to a home service economic report published by Jobber in July.

A sample of HVAC contractors from across the country, surveyed by The ACHR NEWS the week the quarterly economic stats were posted, backs up this assessment, with contractors reporting a boom in sales of high-end air conditioning systems and a corresponding increase in new employees to take advantage of all the new business.

New Work Scheduled

Trades like construction, electrical, plumbing, and HVAC were designated as essential during the pandemic, allowing many contractors to fare better than other industries during the shutdowns.

Still, Jobber reports a steep decline in new work scheduled when stay-at-home orders went into effect — especially in April, which saw a 23 percent decline year-over-year.

“This impacted revenues in both April and May, where growth fell to minus 15 percent year-over-year, which was roughly 25 percent below where they were expected to be,” the study stated. “New work being scheduled quickly turned around in May, and spiked up in June to 14 percent year-over-year growth, which was a record high in 2020. This has led to a great recovery in revenue growth in June, with 10 percent growth year-over-year. … It’s impressive to see the segment return to pre-COVID levels within two months. As new work scheduled continues to improve, this segment is poised well entering Q3.”

Amy O'Grady is general manager, Charlie’s Tropic Heat and Air, Atlantic Beach, Florida. At the beginning of COVID-19, new business was trending down 25 percent, she said. In July, business has picked back up.

“We didn't see substantial growth. We really just hit our goals over the previous year this month,” she said. “The weather, I think, still really drives the demand.”

Doug Jackson, operations manager at Jackson Comfort Systems, Northfield, Ohio, said business was down 15 percent in May, “but that's just because we didn't have the workforce to get the work done. Ever since that, we've been breaking records.”

JM Salazar is president of George Cunningham Co. in Harlingen, Texas.

“In the very beginning, we did see a pretty drastic decline in new services coming in — down about 25 to 30 percent — probably early March through mid-March. But then early April, we got a good swing. And of course, we're in south Texas, so it's a little bit harder for us to stay not busy. After the first three or four weeks of a steady decrease, we had a steady increase, going up about another 25 percent in business. So we've actually seen a positive influx of residential service.”

The company did invest in Google advertising at the same time and has seen “great growth” with it.

“Going off the data that I have, it looks like [new business] is growing,” he continued. “People are getting the assistance that they need, and the banks are able to finance some of these projects for us a little bit better; they're getting a little less stringent on their approvals. And we're doing really well as far as the residential replacement market. Not really new construction, but the replacement/repair market, indoor air quality — it's booming.”

Data from the June Heating, Air-conditioning & Refrigeration Distributors International (HARDI) TRENDS report correlates this rise, shows that the average sales performance by HARDI distributors was an increase of 24.3 percent during June 2020. The average annual sales growth for the 12 months through June 2020 is 3.4 percent.

“The strong report this month was as expected and a welcome relief after two very challenging months,” said Brian Loftus, HARDI market research and benchmarking analyst. “The report looks like a solid start for cooling season.”

Employment

While the U.S. unemployment rate has generally seen a positive trend for the past five years, this changed quickly as the pandemic hit and states across the country started to implement stay-at-home orders, with overall unemployment hitting 14.7 percent in April as a result of COVID-19 related layoffs. That rate improved to 13.3 percent in May and 11.1 percent in June.

For contractors including plumbing and HVAC, the employment rate was up 1.8 percent year-over-year in January, holding steady at 1.6 percent through the end of March. It took a dive, down to minus 13 percent year-over-year in April, but is up to minus 5 percent year-over-year as of June 20.

O’Grady reported that her company did not have to lay anyone off; a lot of people simply didn’t show up for work, and one older employee with underlying medical conditions decided to retire. Salazar’s company saw layoffs in early March and early April, but by late April and early May, they were back to their pre-pandemic staff count — and are now looking to hire two more. Jackson’s company hired four new employees and opened a plumbing division.

Revenue

U.S. Census Bureau data shows that revenue growth for home services, which had started 2020 at 11 percent year-over-year growth, remained pretty stable throughout Q1 and was less impacted by the pandemic compared to other categories — like restaurants and clothing stores — in Q2. After being down 18 percent in April and 15 percent in May, revenue returned to positive year-over-year growth in June, ending at 10 percent.

Charlie’s Tropic Heating and Air is hitting its revenue goals again. Jackson Comfort Systems, after a 5 percent decline, was up 10 percent year-over-year in April and 20 percent in June — and will be up close to 30 percent over 2019 for July. Jackson attributes part of that to strong marketing pieces about UV lights, which the company bought ahead so they’d have enough in stock for those jobs.

“I would just attribute it to people being at home and being hot,” he said. “I know a lot of people who haven't left their house in months, and it gets stuffy in there. So they want air conditioning.”

The company had so much backlog that they went ahead and purchased 30 additional window air conditioning units to temporarily cool their customers’ homes while they waited for service.

Salazar reported “record” growth in mid- to late June and into July, mostly through IAQ products and replacement systems.

“In replacement margins, the replacement market has gone up about 25 percent from last year to this year at this same time,” he said.

Consumer Spending

Jobber stated that while consumer spending in the category “furnishings, household equipment, and routine household maintenance” did see a slowdown in March and a sharper decline in April, it recovered quickly in May, back towards positive year-over-year growth. That fall and rise directly correlates with how the home service category performed in that same period, underscoring the non-discretionary nature of the work these businesses provide.

In addition to essential HVAC work, all three contractors reported that customers are also buying more high-end systems, both residential and commercial.

Salazar said that after the initial boost in sales of duct cleaning and IAQ measures, customers have been willing to spend a lot more for health and efficiency. He thinks part of that is due to the current low interest rates.

“We've been bundling some pricing together, selling home indoor air quality projects along with a new high-efficiency air conditioner,” he said. “Where we used to see maybe $5,000 or $6,000 projects, we're seeing $30,000 projects being bundled in.”

“I think the reason for that is people have more disposable income than they did before because they’ve had to cancel all their vacations, they’re putting off going to restaurants, so they’ve got all kinds of disposable income that they want to spend somewhere,” Jackson said. “They're fixing up their houses; they're putting on decks. Pools around us — they're sold out for like four months, right now. Air conditioners — they're sold out forever.”

With everything flying off the shelves, stock availability is becoming more the challenge, O’Grady said. Her company has sold a lot of IAQ systems to commercial customers like the Massage Envy franchise.

“They are willing to now spend in the indoor air quality arena,” she said. “Where before it was almost like an add-on, now it's kind of the focus.

“The only thing we're really worried about is making sure we're collecting, in case there becomes a huge financial issue for people,” she added.

According to HARDI, the Days Sales Outstanding (DSO), a measure of how quickly customers pay their bills, is now at 42 days.

“The DSO had increased by a couple days this spring, which would be consistent with an economic slowdown,” said Loftus. “The DSO is now at or below where it was during June 2018 and June 2019. Maybe the increase this spring had more to do with COVID-19 operational disruptions than economic weakness or fatigue.”

Future Outlook

While there has definitely been an economic rebound for home services at the end of Q2, COVID-19 cases are still rising.

“If states across the country start to re-enact stay-at-home orders or other economic restrictions, this could make for an uncertain Q3 across all categories,” the study concludes.

For Jackson, the future is still rosy.

“I don't know what it is about COVID, but it makes people spend money,” he said. “I’m in an ACCA MIX group and Service Nation, and everybody that I talked to, out of about 25 contractors — everybody's busy. There's not one person that is slower than last year. Everybody's busier, everybody's selling more, everybody seems to be hiring more. I would definitely say everybody made a bounce back. We've just been doing really good.”