Confusion and nervousness are the main emotions the U.S. economy seems to generate these days.
Anyone feeling those emotions is justified.
“If you are running a business right now and every day you’re dealing with cost escalation and you’re trying to fill a truck when gas prices are what they are, it’s an enormous burden,” said Tim Fisher, Director of Market Intelligence at Heating, Air-Conditioning & Refrigeration Distributors International (HARDI). “I totally understand why anyone right now who is running a business would have real concern about the overall direction of the economy.”
Fisher is not ready, though, to scream that the sky is falling. And he wrote just that in a recent HARDI blog post titled (appropriately) The Sky Is Not Falling.
“It’s wise to be prudent,” Fisher said. “But try not to get so wrapped up in what we are seeing on Wall Street. The Stock Market is only a small snippet of the real economy.”
That being said, real-life and real-time issues affect the trades. Supply chain issues grind on. The price of gas was at or above $5 a gallon in June, increasing basic costs of simply going to a job. And in May the Bureau of Labor Statistics showed inflation was at 8.6 percent, the highest mark since 1981, meaning everything a business owner buys costs more.
That could require fuel surcharges or increased costs to customers, which squeezes the average homeowner further. The cycle is exactly why inflation can lead to recession.
It’s a challenge to be positive, Fisher said, when the media’s focus is a recession on the horizon. On July 6, CNBC, Politico and Bloomberg all wrote about recession fears. That negativity spreads and affects psyches.
Fisher does not even agree that the nation will see a recession. “But that negative outlook permeates all levels of the economy,” he said.
A fear of inflation or high gas prices might cause a family not to make a trip. When enough are paralyzed by the fear, contraction takes place, which can lead to recession. The trades experience the same issues, and fears.
“Business owners might think, ‘it’s time to tighten my belt,’” Fisher said. “What are costs that I can cut? Where are areas I can save? If they’re pondering buying or expanding, they may be a little more cautious.
“Just the perception that there might be something happening is enough to push people in a cautious direction.”
The #1 newsletter for the trades.
A better approach for the trades
Despair is not the answer, though, Fisher said. While today’s economy is painful, the negative perceptions may be smothering some parts of the reality.
Or, as Fisher said: “The biggest reason to be concerned about a recession has less to do with the actual indicators than the perception.”
Does the state of the economy bring challenges? Absolutely.
But economic challenges are not necessarily devastating to the trades because the trades provide services and work that remain essential. Fisher remembers his grandfather telling his father to work in HVAC. Why? Because there would always be a need.
His best advice, part I: “Ignore the macro noise.”
His best advice, part II: Remember the pandemic.
In 2020 shutdowns were drastic, yet many trade businesses saw increased numbers and growth.
The trades were essential yesterday. They remain essential today.
Fisher’s blog post used data to show reasons for (cautious) optimism. While Fisher concedes inventory levels are high, he adds “average annual HVAC equipment sales by distributors have kept pace with the growth in inventory values.”
Sales growing with the inventory growth is a good thing.
“Undoubtedly,” he wrote, “the current breakneck pace of demand will slow at some point, but when it does the odds of a soft landing appear greater than a steep, painful decline.”
Another good thing.
A Bloomberg Supply Lines newsletter in June of 2022 posited that three key supply-side factors that drove inflation have turned, meaning relief could arrive sooner than expected. Bloomberg also said that the efforts by the world’s central banks – including the Federal Reserve in the United States – will help slow inflation. However, there “will be a lag before the lower costs of raw materials filter through to the prices shoppers see.”
Even with the outside noise, those in the trades can be optimistic. A ServiceTitan survey at Pantheon, its annual conference for the trades, showed those in the trades remain upbeat: 92 percent said they are optimistic about their business performance, and 77 percent see positive growth the rest of 2022.
That optimism should drive businesses. Companies that see this situation as an opportunity may find themselves rewarded. Taking a forward step and acting courageously when your competitors act with fear can lead to growth.
“Courage is a decision,” the June 2022 edition of HARDI’s Data Drive newsletter said. “So choose courage. Whatever we are facing today, it can’t be any worse than the uncertainty.”
Supply chain still ‘a mess,’ but …
On the specific-issue level, Fisher concedes the supply chain remains “a mess,” but he sees reasons to believe things may improve over the next six months. He bases that on the decrease in unfilled orders. Though there are more than there have been historically, manufacturers are “now starting to make a dent in the backlog,” he said.
Those who could and did store inventory in anticipation of a supply chain challenge eased their problems.
In checking other factors related to “supply chain health,” HARDI’s newsletter found they persist, “but none of them are consistent with a slowdown or recession on the horizon.”
“Our expectation for this year is lead times will start to improve either due to elevated inventories that depress new order volume, or easing end-user demand,” HARDI’s newsletter said. “Once that is evident, distributors can cut back on orders, and this will relieve pressure on the supply chain.”
According to Fisher, the best way for a business to deal with supply chain issues is to maintain a strong relationship with its supplier. Relationships matter.
“It puts you higher in the line when it comes to needing something, to get as much for the job as you can,” he said.
He also advises keeping extra inventory on hand when possible. Not too much that you’re stuck if demand drops, but enough to protect the business.
“Little by little, there is evidence some of this is loosening,” he said.
How to look at interest rates
In theory, rising interest rates will have an impact on new housing builds and the residential market, which means fewer people moving into new homes and wanting to update their systems.
Despite that, Fisher said data shows demand remains high.
“Maybe on the individual business level we see some resistance from the consumer, but from the macro level, that’s what we are seeing,” he said.
Rising fuel costs are real and it’s almost impossible not to pass those higher costs on to the customers. Though wholesale prices of a barrel of oil dropped in early July, Fisher does not see prices falling quickly.
Companies have been forced to adjust pricing and add fuel surcharges, which means it’s important for each entity to market quality, Fisher said. The quality of its work, the quality of its brand, and the quality of its people.
“Just try to bang that drum,” he said.
Ignore the macro-level noise
Fisher gave his strongest advice when he discussed ignoring the doomsayers and the macro-level noise.
“There’s a lot of it,” he said. “But a lot of those factors do not matter a ton to our industry. If we really get down to crushing the data, one of the main reasons private equity is looking to get into HVAC is because they see business as recession-proof. People need their air conditioning when it’s 90 degrees out.
“It’s wise to be prudent. Maybe be conservative in placing future bets. There is uncertainty, but there always is. We just went through a period with a lot of pain, but we got through it. Right now, even with inflation being high, things generally are pretty good. And consumer demand is good.
“Crying that the sky is falling leads to connecting the dots to larger fear. A more balanced perspective is appropriate right now. Take a deep breath and say, ‘What do we have to do to make pragmatic decisions?’ Take a balanced approach and try to move forward that way.”