Sunday, June 30, 2013

AIA Chief Economist's follow-up commentary on AIA ABI Index for May 2013

On June 19, 2013, the AIA issued a Press Release to reveal the AIA ABI Index reading for May 2013.  As is normally the case, the AIA subsequently released a more in-depth commentary on the most recent ABI Index reading.  Here’s that follow-up commentary, authored by Kermit Baker, the AIA’s Chief Economist…..

May Registers a Quick Rebound in Design Activity
A return from last month’s billings setback is clouded by a few concerning signs
By Kermit Baker, Hon. AIA, AIA Chief Economist (published in late June 2013)

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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