August Architectural Billings Index Posted -- Analysis by AIA

August Billings Stabilize After Four Straight Declines

Financing is still identified as a chief obstacle to completing projects

By Kermit Baker, Hon. AIA
AIA Chief Economist
After a four-month skid, billings at U.S. architecture firms edged up very modestly in August. The Architectural Billings Index (ABI) in August was 50.2, indicating minor growth in design billings. Inquiries for new project activity also improved, showing its strongest gain since the first quarter of the year.
In spite of an ABI indicating little change (the previous month’s score was 48.7), there has been a significant shift in the geographic composition of design activity in recent months. 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.
Also, firms 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. Commercial/industrial firms reported their fourth straight monthly decline, coming on the heels of eight straight monthly increases.
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 percent in July to 8.1 percent 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 percent 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.
Stalled projects
With continuing concerns over the condition of the economy, many architecture firms report that they are seeing more delays on projects as clients work through this uncertainty. In August, respondents were asked to rate which of the many client concerns was the most serious in terms of delaying projects. Two-thirds of respondents reported that the ability to secure financing is a very serious problem in terms of clients’ decisions to move forward. More than half put a weak economy and high unemployment in the very serious category.
A quarter of respondents rated concern over the outcome of the upcoming presidential and congressional elections as a serious problem, a share matched by those citing uncertainly over construction or energy costs. Concern over the need for the facility once it is completed was listed as a serious concern by only one in five respondents.
When asked to select what, in their view, is the single most serious issue influencing clients’ decisions to not proceed on projects, 45 percent indicated that it was financing, 30 percent said it was a weak economy, 10 percent mentioned the upcoming elections, 8 percent referenced the need for the facility once it is completed, with the remaining 7 percent spread among other reasons.
By architecture firm specialization, commercial/industrial firms were the most likely to list financing as the most serious issue, with 50 percent selecting this concern. Institutional firms (34 percent) were more likely than other firms to select the weak economy. Though rarely mentioned by other specialties, 12 percent of residential firms selected construction and energy costs as the most serious problem inhibiting clients from moving forward on building projects.
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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