Cheers to a new year!

December has always been my favorite month of the year. And it’s not just because it’s my birthday month! It’s also not because of the holidays — though I do enjoy spending time celebrating with family and friends. I like December because it’s the very end of the year — a time to reflect on everything that’s happened the past 12 months — the goals you’ve achieved and the lessons learned — as well as look ahead to the beginning of a whole new year. A blank slate to start fresh all over again.

This time of year is especially important for contracting business owners. Now’s the time to reflect on your company’s performance in 2021 and plan your strategy for 2022. So don’t miss out on our 2022 plumbing industry forecast cover story where we talk with several industry leaders about growth opportunities, product trends and more. News flash, don’t expect the challenges from 2021 (supply chain issues and increasing material costs) to magically disappear overnight. Many experts believe these issues will continue into next year.

“The post-pandemic consumer demand has made supply chain problems much more apparent, of course, resulting from material shortages, staffing shortages, factory closures and a crippled freight system, putting a strain on the global economic recovery,” notes Dave Viola, CEO of IAPMO. “Some of these problems will be addressed in 2022, but it’s likely that some problems will persist throughout the year.”

To learn more about what to expect next year, click here.

Economic outlook

I was lucky enough to travel to a couple of in-person events in October — my first since the pandemic lockdowns began in March 2020. One of them, you’ll hear more about in our next issue, so stay tuned. The other was PHCC — National Association’s annual PHCCCONNECT conference. This is one of my favorite events of the year as PHCC does an excellent job of lining up relevant educational sessions as well as engaging keynotes, not to mention the Product & Technology Showcase and watching the plumbing and HVAC Apprentice Contests. This year, back by popular demand, Connor Lokar of ITR Economics gave a keynote presentation exploring all the changes that have occurred in the economy and what they mean for the future. During the presentation, he warned audience members that the economy would be slowing down some next year.

“Things are going to slow down in the economy of 2022,” he said. “It’s not a disaster. It’s not a pothole. It’s not a cliff, but we are going to decelerate. We’re going to see some things coming back down to Earth, statistically normalizing. Now, normally, that would be mostly bad. Of course, we want to be accelerating, we want to be feeling good. But let’s be honest, this year hasn’t felt all that good. This time in the business cycle when things are accelerating, it’s generally a lot more fun. It’s not hallmarked by the supply chain thing, the lead time extension and the labor shortages. So while yes, things are going to slow down next year, my silver lining, at least the one I’m going to try to put on it, is the silver lining that says, ‘We see some things getting better,’ as far as some of those supply chain constraints, those long lead times, the product unavailability and the inflation pressure. We see those pain points that have been so exceptionally challenging for you folks resolving as that economic cycle shifts next year.”

Lokar cautioned that both housing starts and permits were decreasing.

“This 4.7% is not a forecast, it’s the quarterly rate of change for housing starts in the third quarter. Starts were up a very thin 4.7%. Housing is running into a lot of hurdles right now in terms of exhausting some of that unique post-COVID buyer pool. Home prices have gone up so frighteningly high this year from a developer and builder standpoint. Land acquisition is becoming a big challenge, and the bidding environment is quite robust, so there’s a lot of headwinds hitting housing right now. So it is going to slow down next year. You see the current annualized growth rate, 22.6%. Again, that’s still extremely robust. There is no inflation here, this is the number of units, number of starts, up 20-plus percent. At ITR, we’re forecasting 4.3% for next year, annualized growth in the housing market. So it’s not negative, but plus 4% versus a year-end 2021 up more than 20%, and a plus multi-digit growth rate for 2020 — that feels and looks a little bit different. So the fundamentals that we’ve been riding in residential construction are — I don’t want to say eroding beneath us because that sounds a little bit more doomsday-ish than I think I’m going for here — but they’re just weakening. We’re seeing a transition here towards slowing growth.”

Housing sales are also decreasing, which will impact plumbing and heating contractor businesses, Lokar explained.

“The fact that NAHB’s Housing Market Index is steeply moving downward says things are going to slow down next year,” Lokar said. “That’s going to affect us on the remodel and retrofit side from an equipment installation standpoint because when we see home sales decelerate, that’s generally not a good sign for remodeling activity. Generally, what we see in studies has shown that a bulk of remodeling spend occurs either right after you purchase a house or right before you sell the house. When we see this deceleration, not just from a start standpoint, but also from a home sales standpoint, we see that existing home sales are up just 6.7%. You can see that they’re decelerating. Those rates of change are coming down at 6.2 million units.

“We see that new home sales are decelerating,” he continued. “So this is going to affect our service business, our aftermarket and the system replacement and installs because we’re seeing less of that changeover. That does not mean your business evaporates overnight. I’m sure that you’re probably taking calls and booking folks up probably maybe even into 2022, at this point, with how labor-strapped that you are at this point. So it’s not that things will fall apart, it’s that things slow down, and that you actually might be able to get your head above water in 2022 and actually keep up with the calls and work that’s coming in,as opposed to playing from behind, which is where you’ve lived so far this year.”

Lokar had this piece of advice for contractors: “One of the biggest traps for businesses at this point in the business cycle, particularly when a late in an accelerating growth phase coincides with the end of a calendar year, is folks are in that strap planning, budgeting session. The most dangerous thing you can do right now is basically straight line your forecast through next year: ‘I’m going to grow 20% this year.’ Let’s call it 20% for 2022, and build and plan based on that. And then get really out of position to where you’re actually going to be 12 months from now. That’s one of my biggest takeaways for today is making sure that we’re not too far off over our skis and seducing ourselves with all the work that’s out there presently, particularly that we can’t get to, and just assume that it exists statically like this over the next four or five quarters. We have to understand that next year’s going to look different, that demand pressure’s going to be fading. It’s not going to be the same unimaginable volume of work out there that we’re chasing and can’t keep up with here in 2021.”

Lokar also advises contractors to “just keep hiring.” Sing it in your head to the tune of “Just keep swimming,” from the movie “Finding Nemo.” Lokar notes most companies think to take their foot off the gas for hiring as the economy slows down. However, if experienced or talented people become available, grab them up from the competition so you don’t kick yourself later, he advises.

“I would just keep over hiring on what you think you need because of that turnover in labor market piece,” he says. “Yes, the economy’s going to slow down next year in 2023, but it’s really not going to feel like it from an HR and hiring standpoint. So I would continue to stay up on that if you can.”

While Lokar is predicting a slower economy, he’s not running around shouting, “The sky is falling!” There are some great opportunities for plumbing and heating contractors in 2022. You just have to be prepared to capitalize on them. And don’t forget to take some time away from the business to spend the holidays with friends and family. I wish you all a safe and Happy New Year! See you in 2022!