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Following
an unexpected dip in design activity in April, the AIA’s Architecture Billings
Index (ABI) moved back into growth territory in May, with a reading of 52.9. Since any score above 50 signifies an
increase in design billings nationally, architecture firms have reported
growth in nine of the past 10 months. Inquiries for new design projects
also pointed to a modest acceleration for the month, suggesting that future workloads will continue to expand.
Even with the resumption of growth in the
overall index, there were some worrisome signs in the May figures. The first is that firms in the Midwest did not participate in the
upturn, as the ABI reading for firms in this region fell to 47.5, its second
straight monthly decline. Until recently, firms in all four major census
regions had been reporting growth. Secondly, billings at firms concentrating
in the commercial/industrial sector reported an unexpected decline in
activity, with a reading of 47.5. Generally, any sustained upturn in
nonresidential building activity is led by improvement in private sector
commercial and industrial facilities.
However,
the concern over private sector activity is tempered by the acceleration in
billings activity by firms concentrating in the institutional sector.
Institutional firms have reported 10 straight months of billings growth, but
until recently this growth has been extremely weak. However, the May ABI
reading for institutional firms was more than 52, the strongest growth in
billings activity in this sector since mid-2008, just as the recession began
to impact institutional firms.
Uneven
economic growth continues
Even
though stock market indices have recently surpassed record levels, this
strength has not been matched by the broader economy. The economy grew by 2.4
percent in the first quarter of the year (when annualized, seasonally
adjusted, and adjusted for inflation), barely up from the 2.2 percent pace of
growth in 2012, or 1.8 percent in 2011. Employment growth has been equally
unimpressive, as 175,000 payroll positions were added in May, somewhat below
the 193,000 average monthly gain during the first four months of the year,
and just under the 183,000 added per month on average in 2012.
Construction
employment also has suffered. Just 7,000 payroll positions were added in May,
down from the 22,000 added per month on average through the first four months
of the year, and even below the 8,000 added per month on average in 2012. In
spite of this disappointing growth, the unemployment rate for construction
workers continued to improve, and stood at 10.8 percent in May. While well
above the national average of 7.6 percent across all industries, the rate for
construction workers has fallen by almost 10 percentage points since 2010.
Since the unemployment rate has fallen so much faster than payroll levels
have increased, the implication is that the construction labor force has
shrunk, with many undoubtedly moving on to other industries. The concern is
that the labor force may not come back to the construction industry as
activity levels begin to pick up.
Another
concern is rising interest rates. The Federal Reserve Board has aggressively
worked to keep both short- and long-terms rates low. As talk mounts that they
may begin to ease off of these initiatives, interest rates have begun to
drift up. Higher rates would slow the home building recovery, and impact
nonresidential construction activity, since higher financing costs could
adversely affect the feasibility of some projects.
At
mid-year, architecture firms on track with predictions
When
asked at the end of 2012, architecture firms were expecting the coming year
to be good – but not great – from a business perspective. Nearing the halfway mark, firms generally
feel that this year is meeting these expectations. Almost 40 percent of firms
feel that business conditions at their firm are above expectations at this
point, while almost as many – 34 percent — feel that they are below
expectations. The remaining share responded that 2013 is basically
shaping up according to their predictions.
It’s
hardly been the breakout year many had hoped for, and firms offer many
reasons for why project workloads are increasing only modestly. The principal
reason that design activity hasn’t increased more quickly is that the
generally weak U.S. economy is creating less need for new facilities,
according to almost 43 percent of respondents. Other reasons selected by
firms for the subpar growth are: difficulties in obtaining construction
financing for projects (16 percent); federal government budget uncertainties
and cutbacks, such as sequestration and the debt ceiling debate (15 percent);
and the fiscal condition of state and local governments (14 percent). Other
reasons mentioned less frequently were construction labor shortages, the
rising prices of building materials, land constraints or restrictions, weak
business and consumer confidence, and uncertainties surrounding the
implementation of the Affordable Health Care Act.
This month, Work-on-the-Boards participants
are saying:
•
There is greater upside, but the
uncertainty still remains. In two weeks, we could either be doubling our
staff or thinking about lay-offs.
—10-person
firm in the West, mixed specialization
• Activity has increased, but margins are still tight. Activity in
Illinois is depressed due to the state’s poor financial condition.
—95-person firm in the Midwest, institutional
specialization
• Additions and renovations are at pre-recession levels. New
construction is still almost nonexistent.
—
1-person firm in the South, residential specialization
• Lots of proposals. Lots of activity. [It] still takes a long time to
get anything off the ground by clients once proposals are in hand. Clients
expect pricing structures to remain intact once they are ready to move.
—1-person firm in the Northeast,
commercial/industrial specialization
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Reprographics 101 