Tuesday, August 23, 2011

Recent Downturn in Architecture Firm Billings Accelerates

The American Institute of Architects’ Architecture Billings Index declined for the fourth month in a row in July. With the fluctuating economy and the recent downgrade of the country’s debt, it remains unclear what the future will hold for the design industry. While the recession marked a steady decline in billings starting a few years ago, things looked to be on the upswing as numbers increased in the fourth quarter of 2010 and into the first quarter this year. While this month’s index may be discouraging, things could very well turn around as they have in the past.

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.

The ABI registered a score of 45.1 in July, worse than the 46.3 registered in June, and the lowest score of the four month decline starting in April. While billings remain down, inquiries for new design activity have continued to improve, indicating that new projects are still under consideration. Although the values of new design contracts have weakened, this will hopefully mean more of these inquiries will turn into work in the months to come.

Regionally, business conditions have worsened in across the country. The Midwest registered the lowest score of 44.9; they had previously reported growth for seven consecutive months late last year and into 2011. Firms in the west once again saw a downturn in billings, continuing the four year streak since they have seen an increase. Firms of all specializations saw a decrease in billings, a turnaround from earlier in the year when each sector reported growth. Firms with residential specialization saw the sharpest decline, while scores for those in the institutional sector remain steady, but still negative.

Unemployment declines slightly

The unemployment rate declined slightly in July, with 117,000 new jobs added. However, this still represents fewer jobs than what’s needed to sustain healthy economic growth. Construction employment remained relatively unchanged, but architecture services employment edged up slightly in June (the most current month available) to 153,200 - the highest point yet this year.

More firms buying more insurance

Despite the economic downturn, the majority of firms continue of carry some kind of professional liability insurance. Nearly 8 in 10 firms carry firm-wide coverage, with 14% carrying firm-wide insurance plus supplemental coverage for specific projects. While respondents report that the amount of coverage their firms carry has changed little over the last three years, nearly twice the number of firms added or increased coverage in comparison to the amount of firms that eliminated or reduced coverage. This applies for both firm-wide and project-specific liability insurance coverage, although 26% of firms added or increased project-specific coverage, compared to 19% that added or increased firm-wide coverage. Several respondents noted that government projects tend to require more coverage, and as such firms have accordingly adjusted their insurance amounts.

Firms in the South were more likely to have increased firm-wide coverage than those in other regions, but the West had the largest share of firms reporting a decrease in project-specific coverage. Small firms, with annual billings of less than $250,000, were the most likely to report a decline or the elimination of firm-wide coverage compared to larger firms.


By region, the ABI breaks down as follows from June to July: Northeast is down 46.4 from 47.5, South is down 46.9 from 47.3, West is down 46.6 from 51.7, and Midwest is up 44.9 from 44.6.

By market sector: Commercial/Industrial is down 47.9 from 50.0, Residential is down 44.7 from 49.6, Institutional is up 47.2 from 45.9, and Mixed is down 47.1 from 51.5.

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

• Still very slow. Overall project inquiries have picked up in 2011 versus 2010, but even when we are selected, the projects frequently do not move forward.
- Three-person firm in the West, commercial/industrial specialization

• We are currently busy with very strong profits for the year, with a lack of depth in future projects. Businesses seem to be paying down debt and not risking investment in new ventures.
- Five-person firm in the Midwest, residential specialization

• Industrial and manufacturing (as well as all oil-related) industries continue to improve in the Houston area.
- 24-person firm in the South, commercial/industrial specialization

• While we are so far having a quite profitable year, we feel the pressure caused by Congress’s long delay on the debt ceiling increase and the wrangling about deficit reduction. It contributes a lot to economic uncertainty.
- 10-person firm in the Northeast, institutional specialization

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