Wednesday, October 3, 2012

August Billings Stabilize After Four Straight Declines

Billings at U.S. architecture firms improved slightly in August, after four consecutive months of decline. The Architectural Billings Index registered a score of 50.2 for August, indicating a minor increase in design billings. Inquiries for new project activity also improved, showing its strongest gain since the first quarter of the year. 
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.

Although improvement has been minor, there have been significant changes in design firm activity based on region. With a score of 51.2, firms in the West reported their first monthly increase in billings in five years, offering the possibility that firms in this region may finally be working their way out of the downturn. Conversely, firms in the Northeast and Midwest reported weak conditions in August, after reporting generally positive conditions over the past year. 

Billings based on company specialization were again mixed in August. Those specializing in the institutional sector reported only their third monthly increase in the past 18 months. Residential firms saw healthy gains, providing further evidence that the residential construction sector is in recovery, however, commercial/industrial firms reported their fourth straight monthly decline. This was a surprise after eight straight months of improvement. 

Economy still sputtering

Softness in design activity at architecture firms is reflecting the slow pace of the national economic expansion. Job growth in August was disappointing, with only 96,000 net payroll positions added nationally, well below the 225,000 added on average each month during the first quarter of the year. Construction employment hardly changed at all in July and August, and manufacturing employment saw a rare decline in August. Given this backdrop, it was surprising that the national unemployment rate dropped from 8.3% in July to 8.1% in August. The reason was due to a surprisingly large drop in the labor force: a net loss of 370,000 persons nationally in August on top of 150,000 in July, as more people either stopped looking for work, retired, or left the labor force for other reasons.

The weak economy has generally kept inflation under control. Consumer prices have been growing at about a 2% annual rate for most of the year, with wholesale prices rising a bit more. The recent upturn in gasoline prices is likely to push up inflation in the coming months. 

Weak employment growth, a high national unemployment rate, and volatile gasoline prices have affected consumer confidence scores, which were lower in August than in January. However, the University of Michigan reported an uptick in consumer sentiment in its preliminary September release, which could point to an increase in consumer spending in the months ahead. 


By region, the ABI breaks down as follows from July to August: Midwest is down 45.3 from 46.7, South is down 52.2 from 52.7, Northeast is up 45.5 from 44.3, and West is up 51.2 from 45.3.

By market sector: Residential is up 53.0 from 51.4, Institutional is up 50.2 from 48.4 and Commercial/Industrial is up 47.9 from 46.6.

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

        There are a lot of tire-kickers, especially among small to midsize private sector players. The large REITS and developers are moving forward on projects without regard to bank involvement.
— 11-person firm in the Northeast, commercial/industrial specialization

        I have projects waiting to start after the first of the year—not a practical thing to do as we are seeing great increases in material pricing, especially lumber. Also [there are] long delays in getting materials. Nothing is being stocked.
—One-person firm in the Midwest, residential specialization

        There is worry over reduced federal funding for capital expenditures. We are competing for studies and planning projects that aren’t assured of proceeding to design and construction phases.
—Eight-person firm in the West, mixed specialization

        The residential sector seems to be picking up with the inventory decreasing. Homes under 2,500 square feet [are] the direction many potential clients are moving toward at this time.
Six-person firm in the Northeast, residential specialization

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