(But), "Progress is tempered by disappointing
housing starts and a broader economy that is still underperforming"
A week or two after the AIA released the August ABI Index
score (which the AIA did on September 18th), Kermit Baker, the Chief
Economist of the AIA, weighed in with his commentary. That’s what this blog-post brings you, his
commentary.
August showed further improvement in billings at U.S.
architecture firms. The Architecture Billings Index (ABI) score of 53.8 for the
month reflected the strongest growth in activity in six months, and marked the
twelfth time in the past 13 months that design activity has increased
nationally. The strength in recent readings in the ABI, coupled with the
extended period that architecture firms have been reporting generally favorable
conditions, points to an impending healthy upturn in nonresidential activity.
This view is shared by the recently released results from the AIA’s Consensus Construction
Forecast Survey, which points to nonresidential construction
spending picking up in the coming quarter and accelerating through 2014.
Regional design activity remained healthy in August, with
preliminary ABI scores ranging from 51.9 at firms in the South to 54.8 in the
West. The trend is particularly heartening for firms in the Midwest, which
reported their second straight monthly increase after three consecutive months
of decline. By sector, firms specializing in commercial/industrial facilities
reported the strongest ABI scores for the second straight month, as residential
firms have been reporting slower growth in design activity. Institutional firms
have reported 13 straight months of billings gains, although the growth remains
extremely modest.
The Fed holds steady
However, the broader economy continues to underperform compared
to expectations. The GDP is averaging less than 2 percent growth on an annual
basis through the first half of the year and is not expected to do
significantly better for the year as a whole. National payroll gains totaled
169,000 on net in August, averaging a meager 180,000 net new payroll positions
per month for the first eight months of 2013. As a result, overall payrolls are
still almost two million below their level at the end of 2007, when the Great
Recession began.
This may be the principal reason why the Federal Reserve Board
decided not to cut back on its high-profile bond buying program. With economic
growth below expectations, and inflation not yet an issue, they apparently felt
that continued monetary stimulus at current levels was still warranted. Among
other things, this action should slow some of the upward momentum in fixed-rate
mortgages, which had climbed more than a full percentage point since the
beginning of the year.
Whether due to rising mortgage rates or other factors, the
national housing recovery seems to have stalled in recent months. After
increasing 28 percent last year, and continuing to rise in the first quarter of
this year, housing starts have flattened out in recent months. The number of
starts in August (891,000) was 7 percent below the average starts level for the
first quarter, and only 3 percent above the disappointing second-quarter
levels. The slowdown has affected multifamily construction more than
single-family homes. However, even though construction levels have stalled in
recent months, average prices for new homes continue to trend up, suggesting
that consumer demand remains at healthy levels.
Buildings designed, but not built
During the past economic downturn, architecture firms reported
an increase in project delays and cancellations after design work had begun.
Frequently, this was the result of difficulties in obtaining financing for a
project, but often it just reflected general uncertainty with the economic
viability of a project—uncertainty that was changing very rapidly as conditions
were shifting.
Overall, architectural firms reported that almost 12 percent of
their billings over the past few years were from projects that were cancelled
after design activity began. For almost a quarter of all firms, billings from
unbuilt projects totaled 15 percent or more of their design billings.
Smaller firms were more likely to have a higher share of
billings from projects that were abandoned or are unlikely to ever be built.
Almost 42 percent of firms with annual revenue under $250,000 reported that at least
15 percent of their billings have come from these projects. That share drops to
under 15 percent for firms with annual billings in excess of $5 million.
Residential firms reported high shares of billings from unbuilt projects, while
institutional firms reported lower-than-average shares. Firms in the West
reported higher shares, while firms in the Midwest reported relatively low
shares.
Overall, almost half of firms indicated that the share of
billings from unbuilt projects increased compared to pre-recession levels,
while only 12 percent estimated that they had decreased. The rest reported that
this share had reminded relatively constant.
This month, Work-On-The-Boards participants are saying:
• The
correctional market is strong in California. Judicial projects will come back
in 2014, with some projects possibly becoming active in the last quarter of
2013.
—180-person firm in the West, institutional specialization
• We are
seeing more projects from not-for-profit groups. The stronger business climate
is helping with fundraising for these needed cultural and humanitarian
projects, which have not been built over the past four years.
—Nine-person firm
in the Midwest, commercial/industrial specialization
• Healthcare
projects—the only really healthy market in our region—have slowed dramatically
over the last couple of months. Other markets are flush with minor studies, but
not a lot of real design or construction.
—16-person firm in the Northeast,
institutional specialization
• We are really busy
designing projects in the proposal phase. Clients have come to expect so much
more free work in proposals than before the recession. - 95-person firm in the
South, mixed specialization
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