Wednesday, October 22, 2008

The bottom drops out of the ABI

Gas prices may have fallen in the past few weeks, and the stock market may be showing signs of a turnaround, but those indicators are not reflected in the American Institute of Architects' Architecture Billings Index (ABI).

The ABI fell sharply in September, dropping more than six points.

As a leading economic indicator of construction activity, the ABI shows an approximate 9- to 12-month lag time between architecture billings and construction spending.

The AIA reported the September ABI rating was 41.4, down sharply from the 47.6 mark in August (any score above 50 indicates an increase in billings). The inquiries for new projects score was 51.0. This is also the first time in 2008 that the institutional sector has fallen below the 50 mark.

"With all of the anxiety and uncertainty in the credit market, the conditions are likely to get worse before they get better," said AIA Chief Economist Kermit Baker. "Many architects are reporting that clients are delaying or canceling projects as a result of problems with project financing."

That last statement from Baker is worse than the numbers themselves would indicate. When clients delay or cancel projects, that leaves architecture firms who have allocated resources to a project in the unenviable position of having to find something for their architects and project teams to do. Then it's down to the lesser of two evils: either let them go or risk having them sit around the office with nothing to do. Letting employees go is painful, but necessary to maintain a good balance sheet. Keeping them to look like the "good guy" only sets you up for a bigger fall later if things don't turn around.

The August ABI rating was 47.6, July was 46.8, and June was 46.1, so after three straight months of slight improvements, September's number represents a drastic dip.

The September ABI breaks down by sector as follows: Mixed practice (45.9, up from 44.8 in August); institutional (45.6, down from 52.2 in August and 53.6 in July), commercial/industrial (42.1, down from 47.5 in August and 48.8 in July), and multi-family residential (40.3, down from 44.8 in August and 45.6 in July).


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