The HVAC sector in the United States has been continuing to benefit from construction’s cyclical advance.
U.S. HVAC Sector
The latest data point from the Census Bureau on sales/shipments, new orders and unfilled orders is October 2015.
At $47 billion USD annualized in October 2015, U.S. HVAC sales were up 2.0% versus the same month of the previous year.
Compared with their lowest point (i.e., November 2009) in the Great Recession, HVAC sales were 35% stronger. In other words, they were ahead by more than one-third.
Relative to their previous cyclical peak in March 2008, they had advanced a further 13%.
From Graph 1, however, it can be seen that new orders have been tentative. Throughout 2015, they remained either flat or trended down slightly.
But that hasn’t stopped the unfilled orders curve in Graph 2 from surging higher, promising ongoing good activity levels for manufacturers of heating and cooling systems.
U.S. Construction Outlook
Modest and gradual increases in the Federal Reserve’s key policy-setting interest rate will not seriously deter construction’s forward momentum. New homebuilding, which lay dormant for so long after the sub-prime mortgage fiasco, will respond to pent-up demand pressure.
Also, as shown in Graph 3, a demographic influence arising from the key home-buying age cohort is turning more positive. The first-time home-buyer set is growing more numerous.
Furthermore, millennials are finding that escalating rents are causing a re-assessment of their delayed decisions to embark on home ownership.
In non-residential building markets, falling office vacancy rates and rising industrial capacity utilization rates are harbingers of more construction work.
Additionally, recent hefty gains in employment — finally geared far more towards full-time as opposed to part-time positions — point to an active American consumer who will support retail and entertainment-related construction. There seems to be no end to the stadium and arena projects being proposed across the nation.
Projections of the age structure of the overall population, captured in Graphs 4 and 5, do seem less supportive of school construction. More than compensating, though, will be facility needs (medical clinics, hospitals, etc.) for a population that is aging due to the natural progression of post-World War II baby boomers down the paths of their lifespans. The shift underway is clearly highlighted in Graph 6.
Canada’s HVAC Sector
North of the border, Statistics Canada has measured 12-month moving total HVAC sales at $3.2 billion CAD in October 2015 (Graph 7). That’s a steep climb of 13.9% versus the comparable level in October 2014.
March 2011 was the most recent low point for Canadian HVAC sales. Since then, they have improved 37.4%.
Compared with their previous peak level in August 2007, they are 11.1% better.
New orders have stayed mainly on an upward path for Canadian HVAC producers over the past couple of years and the unfilled orders backlog (Graph 8) has been accumulating nicely.
Canada’s Construction Outlook
The privately-financed construction outlook for Canada has turned more precarious than in the U.S. The housing starts level that has stayed surprisingly near the healthy 200,000-units benchmark for many years is in danger of correction, due to home prices that have ratcheted beyond what many prospective buyers can afford.
Furthermore, the shock waves from globally weak commodity prices, especially in the energy sector, are rippling throughout the economy. Resource-dependent provinces are scaling back their expectations. More-diversified Ontario, Quebec and British Columbia are in better shape to weather the economic storm.
The Bank of Canada is hoping that the sharp drop in value of the Canadian dollar (a.k.a., the ‘loonie’) relative to the greenback will promote export sales to the U.S. and elsewhere. So far, such a fortuitous result has been slow to materialize.
The new Liberal government in Ottawa, under the leadership of Justin Trudeau, is expected to deliver on its campaign promise to greatly increase infrastructure spending in the country over the coming years. While much of this work will be categorized as ‘civil’ — for rapid transit, roads, etc. — there will be spillover spending on social projects as well.
A Monster-sized Divergence
It should be quickly noted, however, that the outlook for the HVAC sector is no longer just about market volume.
Rather, a monster-sized matter of an entirely different nature has reared up and demanded first-responder action.
To their credit, HVAC firms have been both quick and innovative in donning the mantels of superheroes.
That issue, of course, relates to the ‘greening’ of the planet. The goal is the achievement of sustainability in building design.
HVAC producers, working jointly with design professionals, are in the forefront of the war on climate change. Opening skirmishes have focused mainly on energy conservation. No other industry has held a larger stake nor played a bigger role.
Last fall’s Paris Agreement, signed by nearly 200 nations, assures that full-on efforts to achieve sustainability in new construction will increasingly transition into the mainstream.
HVAC producers have led the way in working with building product manufacturers in such areas as glazing, roofing, lighting and plumbing to ensure new built environments that are energy efficient.
Water conservation has been moving up the ranking of priorities, as well, on account of the difficulties being experienced by some drought-stricken areas (e.g., California). Closed loop water cooling and recycling systems can be an important part of some HVAC set-ups.
Increasingly gaining attention are ‘wellness’ issues. For employees, a healthy worker is a happy and more productive worker. For society at large, there are advantages for the health care system, never mind the positive contribution made towards better family dynamics.
A good starting point for improved ergonomics in the workplace is air quality. HVAC producers are specializing in filtration systems that remove pollens and other pollutants, while also permitting the entry and circulation of more outside air.
An additional offshoot of this effort is the increasing push for transparency concerning the materials being used in the manufacturing process. With respect to compliance, HVAC firms must continue their willingness to jump on board.
More Environmental Trends
Some other thoughts on environmental trends impacting the HVAC sector?
For many individuals, given how hectic and noisy modern-day life has become, a quieter acoustical environment is enormously welcome. HVAC enterprises can seize on and run with this worthy objective.
Improvements in monitoring and control systems for heating and cooling in public-space buildings must also be adapted to serve the residential and assisted-living requirements of an aging population.
And finally, climate change appears to be having some drastic impacts on weather patterns. There is a great deal more media coverage of hurricanes, tornadoes, forest fires, floods and mudslides.
HVAC contributors will be increasingly called on to do whatever they can to minimize damage from natural and other, possibly terrorist-induced, disasters.
A consideration of costs for HVAC companies begins with an understanding that the sector has a foot in two doors, manufacturing and construction.
Whereas total employment growth in the U.S. is currently +1.9% year over year, in construction it is a more rapid +4.2%. Manufacturing, meanwhile, is underperforming, at only +0.2%.
The low unemployment rate nation-wide, at 5.0%, has not yet had much of an impact on compensation levels, but that may soon change. For the U.S. as a whole, average hourly earnings have most recently (December 2015) been +2.5%, with average weekly earnings +2.2%.
HVAC is a sub-sector of durable goods manufacturing. For the latter, both average hourly and average weekly earnings are also quite restrained, at +2.0% and +1.3% respectively.
Construction, though, is pointing to a more aggressive wage-rate future. Its most recent compensation levels have been +2.9% hourly and +4.2% weekly.
Exchange rate movements are always double-sided. Since the dramatic decline in the world price of oil in the summer of 2014, the value of the U.S. dollar has become supercharged. This presents two dilemmas for manufacturers with plants mainly in the U.S., but with hopes for significant foreign sales. The price of their products becomes more expensive in those locations beyond America’s borders. At the same time, competing imports at home are cheaper.
Alternatively, Canadian HVAC producers are riding a wave of low-valued loonie benefits. On account of the loonie’s sharp decline, Canadian HVAC producers can sell their goods cheaper in markets outside the country. The flip side of the same calculation is that import competition is running into an exchange rate wall.
The share prices of some of the biggest U.S.-headquartered HVAC firms have been battered by reduced foreign sales expectations.
Based on what occurred in other sectors in 2015, however, it would be wise to consider that a much bigger equities story may lie ahead.
Grounded principally in energy, communications, pharmaceuticals, beverages and high-tech, 2015 featured the greatest merger and acquisition (M&A) activity on record.
In many instances, private equity and hedge funds determined what was bought and sold, and when.
It would be willful blindness not to consider that a major HVAC player or two might come under M&A scrutiny in 2016.