“The annual sales growth of HARDI distributors is clearly slowing,” he said. “This is a function of the unsustainable rate of price increases rolling over, the burden of higher interest rates on the overall economy, and being compared to the elevated level of activity last year at this time.”

Manufacturers are still hoping for another strong year, but inflation, rising interest rates, and a possible recession all have the potential to dampen growth in 2023.

The Economy

Despite concerns of recession, the economy remains in a growth cycle, said Vikas Anand, vice president of climate solutions at Danfoss North America. Inflation is expected to peak soon, thanks to the interest rate increases last year, he said. That may have some effect on the HVACR industry; however, he believes the industry is in a strong position to weather the expected economic impact.

“We were very pleased with our sales results in 2022, especially as we saw economic growth slowed somewhat,” said Anand. “The slow economic cycle in the second half could potentially impact 2023 sales, but we expect continued growth this year. Overall macroeconomic indicators remain in place for a long-term growth cycle in the HVACR industry.”

For Fujitsu General America Inc., 2022 was also a strong year, with robust new orders as well as fulfillment of significant open orders related to supply chain challenges, said Dennis Stinson, vice president of sales at Fujitsu General America Inc. Fujitsu’s expectations for 2023 are for continued growth as well, with enhanced incentives anticipated to strengthen heat pump demand. However, he added that inflation, unemployment rates, and consumer confidence have the potential to dampen growth in 2023.

MARKET GAINS: For Fujitsu General America Inc., 2022 was a strong year, with robust new orders as well as fulfillment of significant open orders related to supply chain challenges. (Courtesy of Fujitsu)

“Indicators suggest the residential market will continue with strong demand for the first half of 2023, but weakness is possible as remodeling competes with travel and leisure for consumer discretionary income,” said Stinson. “Another concern is the current level of inventory in the channel. Safety stock, buying against increases, and M1 [DOE test procedure in new efficiency standard] stock positioning has increased manufacturing, distribution, and contractor inventories. A recent voice-of-contractor survey highlighted 26% more contractor inventory year-over-year.”

Last year’s sales were strong at LG, especially as the industry’s supply chain improved greatly in the second half of the year, said Doug Bougher, director of applied sales at LG Electronics USA.

“For 2023, I predict further growth, but the level of growth will depend upon industry trends, such as electrification, as well as expectations of a slowing economy,” said Bougher. “The economy is still strong, and any weakness in the market will likely be tied to vertical sales impacted by the risk of inflation and its impact on financing. A majority of the next year or two will be determined by how the government manages inflation, while also funding HVAC-related policies through measures such as the Inflation Reduction Act (IRA).”

Mitsubishi Electric Trane HVAC US (METUS) also anticipates continued growth in 2023, after the company saw unprecedented demand for its products in 2022, said Mark Kuntz, CEO of METUS. But he added that macroeconomic factors such as inflation, interest rates, and rising costs will likely play an important role in customer decision-making.

“In the U.S. right now, there are record levels of home equity available,” said Kuntz. “According to Black Rock, there is $11 trillion in tappable home equity available, and the average tappable equity available to Americans with mortgages increased to a record $207,000 as of April 2022. This makes it easier for homeowners to access funds to improve their homes.”

Opportunities

That vast amount of home equity available may be particularly helpful in the wake of the passage of the IRA. Indeed, Kuntz predicts that the consumer and commercial construction incentives in the IRA will create historic demand for heat pumps, as well as other products that improve a building’s efficiency, sustainability, and comfort.

“We expect our residential growth to be strongest due to IRA tax incentives and rebates for our qualified heat pumps,” he added.

The real impact of the IRA will be seen as individual states begin to roll out programs to take advantage of the IRA funds, said Jason Bingham, president of residential HVAC and supply at Trane Technologies. He also expects those programs to have a large impact on driving heat pump adoption, starting this year.

“The most significant step forward with the IRA is that it not only provides funding for equipment cost, but it also includes provisions to help customers offset some of the other costs associated with converting to a heat pump,” said Bingham. “This includes the cost to run 240V wiring to the indoor unit, or needing to upgrade the breaker panel size if needed, or upgrading the ductwork in the home. These hidden costs have long been a barrier for some homeowners to adopt heat pumps if they have a gas furnace today.”

With the industry’s focus on electrification and decarbonization, as well as the availability of funds from the IRA, heat pumps are solidly positioned to provide a tremendous opportunity for contractors, said David Budzinski, president of global residential and light commercial products at Johnson Controls.

“Innovation in heat pump technology is unfolding rapidly,” said Budzinski. “The space is incredibly dynamic, and as a result, heat pumps are able to address an increasing share of heating loads. However, it's important to note that most air-source heat pump systems need to include some form of backup or supplemental heat that is utilized when the building heating demands exceed capacity. Using gas for supplemental heating will often result in lower operating costs and source emissions compared to electric resistance for space heating, but results will vary on a building-by-building basis.”

Emerson expects strong sales in the HVAC commercial sector, as well, based on the demand for HVAC equipment that started in the second half of 2021 and remained throughout 2022.

“Our assessment of key 10-12 month leading indicators for commercial, such as non-residential gross fixed index (GFI) and the AIA billings index, continue to indicate strong growth through 2023,” said Mark Bills, vice president and general manager of commercial HVAC at Emerson. “This ongoing end market demand, coupled with the order backlogs being carried into the start of 2023, will provide a foundation for strength in the commercial HVAC segment, provided we can regain stability in the supply chain as we go through the year.”

Challenges

Speaking of the supply chain, the disruptions of the past few years appear to have become the “new normal” for all industries, not just within HVAC, said Kuntz. He believes some challenges may ease in 2023, but new issues will inevitably arise.

“Companies will strive to decrease friction in the supply chain while adding efficiency and speed,” said Kuntz. “At METUS, we’ve made significant investments in systems and facilities to deliver on the unprecedented demand for our products. Our focus in 2023 and beyond is ensuring we can adapt quickly to issues should they arise and provide transparency to our customers.”

The supply chain has improved, though, as production has stabilized with more efficient manufacturing and component sourcing, said Stinson. The result is increased manufacturing capability matching current demand.

“Ocean freight costs are in decline with much to recover to 2019 levels,” said Stinson. “Increased inventories have reduced less-than-truckload (LTL) shipments, easing domestic shipments. The supply chain is currently predictable and manageable and will benefit from additional efficiencies.”

As product demand continues to grow, supply chain disruptions, along with regulatory changes and a waning workforce, will be a source of ongoing pressure within the industry, noted Budzinski.

“From a manufacturing standpoint, this means planning for these factors is critical to minimizing disruptions,” said Budzinski. “At Johnson Controls, we have made significant investments in our plants and are working closely with our suppliers and supporting their efforts in everything from staffing to sourcing in order to overcome these challenges. We have also invested heavily in new tools, technology, and automation in equipment in conjunction with expanding our workforce.”

Another challenge is the labor market, which will continue to be tight, said Anand. Even though there was some easing during the latter half of 2022, staffing challenges are expected to persist in 2023. He added that contractors, in particular, are facing a shortage of experienced professionals, as well as higher costs and the need for training on new technologies.

“At the same time, there is tremendous opportunity for growth by leveraging energy-efficient technologies to prepare for decarbonization and climate goals that are being set at the state and local level,” said Anand. “Digitalization and remote diagnostics provide opportunities for contractors to be more efficient. Contractors who can scale their business and fleets and have access to the right brands will also win in this market.”

In addition to these challenges, the industry is right in the middle of an unprecedented wave of regulatory change, given the 2023 Department of Energy efficiency increases; the 2024 low-GWP refrigerant transition in applied systems; and the 2025 low-GWP refrigerant transition in residential and commercial unitary, said Bills.

“Resources at all manufacturers and across the industry are being stretched like never before to ensure they have products designed, developed, and released to support the equipment transitions associated with these regulatory advancements,” said Bills. “This creates challenges for leadership across the industry, but also provides a great opportunity to drive future growth by successfully prioritizing and focusing their teams in 2023.”

Even though 2023 is sure to have its headwinds, Stinson is optimistic about the next 12 months, noting there is momentum for the HVAC product channel and a continued increase in demand for heat pumps.

“Our contractor partners have a lot of work on the books, there is growing awareness of high-efficiency heat pump technology, and federal incentives offer additional promise,” said Stinson. “We are confident that the professional installation channel will continue to thrive.”