Brightening economic prospects in 2003 could spur a second consecutive year of record shipments of central air-conditioners and heat pumps as manufacturers of heating, ventilation, air-conditioning and refrigeration (HVACR) equipment benefit from low inflation, favorable interest rates, and slowly increasing employment.
As America 's tedious recovery from recession continues - buoyed in part by a surprise, year-end, 0.5-percent cut in the federal funds rate to 1.25 percent - employment is expected to pick up.
Federal Reserve Board Vice Chairman Roger Ferguson is describing longer-term prospects for economic growth as favorable and said, "I expect the economy will pull out of this period of weakness and that the natural resilience of the economy and the stimulative effects of monetary and fiscal policy will show through more clearly in the coming year." This hopeful view comes as surveys of senior loan officers at banks report weak demand for commercial and industrial loans. Lower vacancy rates in commercial buildings would stimulate more construction and orders for large unitary, centrifugal chillers and ventilation equipment which lagged in 2002.
Unitary shipments increased 7 percent last year to more than 6.7 million central air-conditioners and heat pumps. However, they were heavily weighted toward residential and light commercial equipment of 5 tons and less, with the combined total eclipsing the previous record of 6,685,481 units set in 2000.
A new record approaching 6.8 million units in 2003 appears within reach because of the strong new housing market and continuing high demand for replacements. With 60-70 million central air-conditioning systems in the service in the U.S. , replacements will account for well over 60 percent of shipments.
Many industries report lean inventories and the HVACR industry is no exception. Field inventories of central air systems have been running 200,000 units below 2001, which raises prospects for a fast start in 2003 for manufacturers.
One indication of the strength of housing construction could be seen in the estimated 1.5 million heat pump shipments in 2002 - a new record and a 4-percent increase over the previous year. Also, continuing low interest rates will help with more refinancings, remodeling projects, and the high level of existing home sales.
An early, warm spring coupled with sustained heat waves in the summer would help drive up demand, assuring that 2003 becomes a record year for shipments of unitary equipment. Also, 2003 would become the fifth straight year that shipments exceed 6 million units compared to average annual shipments of about 3.7 million units 10 years ago.
Prospects for non-residential large unitary air-conditioners and heat pumps (BTU output of 65,000 and larger) depends on how fast the economy recovers from the recession of 2001 that saw the loss of millions of jobs, dampening office and industrial construction.
Clearly, 2002 was the start of a multi-year rebuilding period for many sectors in the HVACR industry following the torrid building boom years during the longest economic expansion in U.S. history.
Large unitary shipments dropped about 14 percent in 2002 compared to a 1-percent drop in 2001. Water source heat pumps achieved a 2-percent increase while packaged terminal air-conditioners were unchanged. Packaged terminal heat pumps dropped 6 percent, while room fan coils were down 8 percent.
Other areas showing the effects of the downturn in the economy included heating and cooling coils with a shipment decline of 6 percent, and central station air handlers were down about 3 percent.
Reciprocating chillers dropped 7 percent from the 2001 level of 15,307 units. Shipments of large tonnage liquid chillers - used for comfort cooling in buildings ranging from skyscrapers to malls - declined following the boom years of the late 1990s to 7,171 units in 2001 and dropped approximately 20 percent in 2002.
The pace is still almost double that of 15 years ago in 1987 when shipments totaled 3,744 units - before the ban on production of chlorofluorocarbon (CFC) refrigerants, which were used widely in chillers. The need to replace or convert CFC chillers provides a continuing opportunity to manufacturers.
There are an estimated 38,000 CFC chillers still in service. Non-CFC chillers use alternative refrigerants accepted for use by the U.S. Environmental Protection Agency (EPA) such as HFC-134a, HCFC-123, HCFC-22, HFC-410A, and HFC-407C.
The more efficient new chillers reduce operating costs and save billions of kilowatt hours of electricity annually, according to the EPA, which says in a brochure that "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."
As companies and homeowners look for reduced operating costs as a way to cope with the realities of today's economy, the HVACR industry is well positioned to offer the energy-saving products needed to serve the commercial, residential, and industrial markets.
Despite the disappointing slowness of the economic recovery, 2002 lived up to expectations as a "turn-around" year. The rebuilding process will continue in 2003 with record or near record residential/light commercial unitary shipments and improving prospects for commercial/industrial construction as the underlying structure of the U.S. economy builds strength.