Friday, July 27, 2012

Broader Economy Pulls Monthly ABI Down

After a slight decrease in April, the American Institute Architects’ Architecture Billings Index fell sharply in May. It marked the biggest drop seen in the architecture industry in almost a year. This pattern in ABI readings mimics 2011, when billings increased in the first quarter and then reversed in the second before recovering later in the year. While a decrease in business activity is never a welcome sign, hopefully this trend proves true and billings will increase again by the year’s end.

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 45.8 in May, a significant drop from the 48.4 recorded in April. The drop pushed firms in all regions of the country into declining billings. The downturn is particularly notable at firms in the Northeast and Midwest, which had been posting generally positive readings for the past several months. Firms with an institutional building specialization remained weak, while residential firms turned slightly negative after several months of positive business conditions. Firms specializing in commercial and industrial facilities were the one major category that continued to show growth in the face of the national downturn.

Economy Entering a Soft Spot

Trends in business conditions at architecture firms are reflecting a slowdown in the broader economy. On the employment front, growth in business payrolls slowed to an average of just over 70,000 in April and May, after averaging monthly gains in excess of 225,000 in the first quarter, and 130,000 in the fourth quarter of 2011. For the first time since late 2010, weak growth in payrolls in May pushed up the national unemployment rate, which now stands at 8.2%.

As seen over the past several quarters, a slowdown in overall employment growth has meant a decline in construction employment. Construction payrolls declined by an average of 15,000 per month over the past two months, after recording small gains for the prior three quarters. The unemployment rate in the construction industry is currently 14.2%, above the national average but well below its high-water mark of more than 27% in early 2010.

Even with weak job growth, there are signs that the housing market has begun to turn around. Annualized housing starts for the first four months of the year have totaled 100,000 more than they did in 2011. Multifamily construction activity has accounted for almost half of this gain, as this market has improved dramatically as an increasing share of households are choosing renting over homeownership until the housing market stabilizes. Sales of existing homes have also improved, but at a somewhat slower rate.


By region, the ABI breaks down as follows from April to May: Midwest is down 46.8 from 50.1, South is down 46.1 from 49.0, Northeast is down 48.6 from 51.0, and West is down 47.6 from 48.0.

By market sector: Residential is down 48.9 from 50.5, Institutional is down 45.6 from 46.6 and Commercial/Industrial is down 50.7 from 53.8.

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

  • Activity has slowed over the last 60 days. There was some momentum in March and April, but that has diminished. —55-person firm in the Midwest, institutional specialization 
  •   We have had a flurry of contracts signed, but most are for work that had been previously delayed. [It’s] nice to have more cash flow, but still not very promising long term. —Five-person firm in the Northeast, mixed specialization
  • Lots of inquiries and requests for proposals, but the hit rate is less than 35 to 40%. Still lots of bottom-feeders in our segments.—Six-person firm in the South, commercial/industrial specialization
  • This is the second consecutive year that we’ve undertaken a re-budgeting exercise. We are readjusting income and labor projections for the rest of the year based on performance through the first four months. We see this as becoming an annual process. —140-person firm in the West, institutional specialization

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