Wednesday, January 16, 2013

Latest ABI Reflects Strongest Growth in Nearly Five Years

November saw the fourth straight monthly increase in the AIA’s Architecture Billings Index, with the pace of growth accelerating each month. At 53.2, the ABI is reflecting the strongest growth in billings at architecture firms since the end of 2007, just before the recession in design revenue began. 

The Architecture Billings Index (ABI) serves as the leading economic indicator of construction activity, and reflects the approximate 9-12 month lag time between architecture billings, and actual construction spending. The monthly ABI scores are centered around 50, with scores above 50 indicating an aggregate increase in billings, and scores below 50 indicating a decline.

Improvement has also been seen in various regions and sectors. Firms in the Northeast and Midwest are reporting a reasonably sharp upturn in business conditions. Firms in the South are reporting a modest increase, and firms in the West a very modest decline. However, regional revenue trends at architecture firms have been quite variable in recent months, and are likely to continue to vary in the months ahead. Firms specializing in residential construction have seen another substantial month of growth, with an index level of 55.9 for November – the fourth straight month with a value above 55. This represents a level of growth that hasn’t been seen since the end of the housing boom in late 2005. The commercial/industrial index moved back into growth territory, and the institutional index remained barely in growth territory, with an index reading just above the 50 threshold. Both of these sectors are currently fragile enough that they are more vulnerable to the fluctuations of the broader economy, particularly the federal budget and debt negotiations. 

Housing strong, but rest of economy teetering 

In a long-awaited turnaround, the housing market has turned into one of the strongest sectors in the economy. Housing starts in the second and third quarters have been more than 25% above the same period in 2011. However, the rest of the economy has been relatively disappointing. Payrolls increased by a modest 146,000 in November, similar to the gains in September and October. Though the national unemployment rate declined from 8.3% in July to 7.7%, much of this resulted from a decline in the labor force rather than an increase in employment.

Concern over the federal fiscal situation continues to make consumers and businesses nervous. The Consumer Sentiment index declined eight points (approximately 10%) with the preliminary December numbers from the University of Michigan, while their Consumer Expectations index declined thirteen points. Small-business optimism declined even more sharply in November. The National Federation of Independent Business Small Business Optimism Index saw its largest one-month drop in the 25 years it has been conducting this survey. 

One relatively positive development of a sluggish economy is low rates of inflation. Consumer prices have been increasing at a pace below 2% per year in recent months, with producer (wholesale) prices growing less than 1.5%. Some of this is the result of falling energy prices, and recent developments point to more stable energy costs for years to come. Domestic production levels of both natural gas and oil are slated to dramatically increase in the United States over the next several years due to increased production from fracking (hydraulic fracturing). A recent report by the International Energy Agency predicts that by 2020 the United States will be the largest international oil producer, surpassing Saudi Arabia. While this is welcome news for consumers and businesses—and should boost growth in the domestic economy—it has serious consequences for strategies to deal with climate change issues.


By region, the ABI breaks down as follows from July to August: Midwest is up 54.4 from 50.8, South is down 51.1 from 52.8, West is down 49.6 from 51.8, and the Northeast is up 56.3 from 52.6.

By market sector: Residential is down 55.9 from 59.6, Institutional is down 50.5 from 51.4 and Commercial/Industrial is up 52.0 from 48.0.

This month, Work-On-the-Boards participants are saying: 

        People believe that the corner has been turned, and that 2013 will be a growth/recovery year.
—2-person firm in the Northeast, institutional specialization

        Businesses and individuals are reluctant to commit to significant spending due to the uncertainty surrounding the fiscal cliff.
—15-person firm in the West, residential specialization

        There has been a dramatic slowdown in healthcare this year, waiting for the election. We received several new potential projects once the election was over. We feel that 2013 will be a good year.
—5-person firm in the South, institutional specialization

        Conditions are about the same despite many new apartment high-rise starts that were shelved from previous years. No new market rate for-sale product coming online at the moment.
—16-person firm in the Midwest, mixed specialization

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