Stronger economy brightens HVACR outlook

An accelerating U.S. economy, buoyed by strong productivity growth and historically low interest rates, promises in 2004 to reduce unemployment. That is good news for the heating, ventilation, air-conditioning, and refrigeration (HVAC/R) industry, which has been waiting for manufacturing and office construction to catch up to the sizzling home building market.

The slower-than-expected recovery from the recession during 2003 – prolonged by layoffs of manufacturing workers and high office vacancy rates – dampened commercial market construction, although a perceptible upward trend at year-end provided encouragement for 2004.

As in recent past years, it was the housing industry, with strong new construction and home remodeling projects thanks to low lending rates, that helped drive shipments of central air conditioners and heat pumps slightly above the 6.7 million record set in 2002.

Thanks to tax cuts and a generous Federal Reserve Board, which seems in no rush to raise short-term interest rates, mortgage rates are expected to rise only moderately in 2004. After bottoming out at 5.31 percent last June, 30-year fixed rate mortgages were still a bargain at slightly more than 6 percent at the end of 2003.

Higher rates reduce the size of a loan for which a borrower can qualify and may slow new construction. They may also curtail refinancing, which provided lots of cash last year for remodeling projects and replacement of obsolete heating and cooling units.

But less robust new housing market could be counterbalanced by increasing numbers of replacements, which continue to drive the air-conditioning market, thanks to at least 65 million units now in service that will need replacing over time.

Meanwhile, double-digit growth in health-care construction provided a welcome boost last year to non-residential construction, especially given the slowdown in spending on primary and secondary school construction as a result of budget cutbacks and the tepid industrial construction market.

Industry observers expect an improving economy to brighten the outlook for non-residential large unitary air-conditioners and heat pumps (BTU output of 65,000 and larger). Avoiding a decline in shipments for the first time in 2 years, manufacturers reported that shipments matched those of 2002.

Water source heat pumps and packaged terminal air-conditioners both rose about 2 percent, while packaged terminal heat pumps were down 8 percent, and room fan coils dropped 7 percent. The economy’s weakness was also seen in an 11-percent decline in heating and cooling coil shipments and a 10-percent drop in central station air handlers.

Reciprocating chillers dropped 2 percent from the 2002 level of 14,368 units. Large tonnage liquid chiller shipments dropped about 3 percent from the 2002 total of 5,793 units.

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Phase out of chlorofluorocarbon (CFC) chillers still remains a long-term task, assuring steady shipments by manufacturers of non-CFC replacement units. Of the approximately 80,000 CFC chillers in the early 1990s, approximately 36,000 are still in use, despite significant efficiency gains provided by replacement non-CFC chillers.

According to a brochure from the U.S. Environmental Protection Agency at, “Building owners with obsolete CFC equipment compete for dwindling supplies of reclaimed refrigerant and parts – paying higher prices and risking refrigerant shortages. Savings from electricity costs alone pay back the investment at high rates of return – even at low energy prices.”

Refrigerants are reclaimed to meet ARI Standard 700 for purity and are available throughout the U.S., although some such as R-502 appear to be in short supply, and the cost of CFCs has increased dramatically compared to 10 years ago.

The outlook for shipments of new large tonnage liquid chillers is brighter now than in past years, thanks to better prospects for the economy and their installation in offices, malls, hospitals, airports, factories, sports complexes, government buildings, and institutions.

It’s been a difficult few years for the HVAC/R industry, despite the welcome new records in shipments of central air-conditioners and heat pumps. The loss of millions of jobs, especially the cutbacks in manufacturing employment, took its toll as indicated by the slowdown in shipments in many sectors of the industry.

With strong fiscal and monetary incentives now working their way into the economy, the rebuilding process is well underway with jobs expansion and the need for new buildings slowly becoming a reality. The U.S. population is expected to increase by about 30 million by 2010, and this industry is well positioned to help improve the quality of life at home and abroad through the production of high-quality equipment.

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