While there has been talk lately of “green shoots” and improvements in the economy, one leading economic indicator, the Architecture Billings Index dropped nearly five points in June. The ABI, which tracks architecture firms’ billings, is a good reflection of where the construction industry will be 9 to 12 months out.
The ABI, an index that can help predict future construction spending based on architecture design spending, is released by the American Institute of Architects. The score is calculated each month based on a poll of 500 architecture firms of whether their billings have gone up, down, or stayed the same. The index is based around a score of 50, meaning if every firm said their billings stayed the same, it would be a score of 50. With higher billings the score rises above 50, and if more firms say their billings are lower, the score drops below 50.
AIA chief economist Kermit Baker spoke with ThinkGlink.com on what the architecture billings number means, what he thinks is going on with the economy, and where the architecture and construction industries are heading.
With the Architecture Billings Index dropping 5 points in June, what does that mean for whats going on in right now in architecture and construction?
50 indicates that things are pretty stable. With a score below 50, more are saying that billings are down than up. Numbers have been below 50 for a year and a half. That means every single month there’s been some decline from the prior month, sometimes modest, sometimes steep.
At the end of last year and into the first two months of 2009, we saw a very steep drop in business activity.
It started to moderate in March, April, and May, with numbers in the low-to-mid 40s. It was still getting worse, but it was much more modest. Then in June it dropped down again and it began to accelerate again.
It’s a concern for us because we know we went through some tough times. The credit markets were tight, we understood that design activity was down, but it appears to moderate.
When it dipped 5 points again in June, it forced us to question, “Are things beginning to moderate or not?” The answer appears to be not. Things are appearing to get worse at a faster rate.
How does this compare to Wall Street numbers? We’re seeing some upward movement in the market, but how is that being compared or reflected in the architecture and construction industry?
When a stock price goes up, there’s some sense that earnings are going to start improving, but different pieces of the economy work through the cycle at difference times. Non-residential construction is late in the business cycle. A lot of things get better before non-residential starts to improve.
Before a builder is going to build a business or a retailer will add locations, a lot of other things will improve.
You will pay down your debt, or hire new workers. There are a lot of things you do before you build new facilities. You need to see a lot of things improve before you build new facilities. You’ll see non-residential construction improve after other parts of the economy are showing improvement. But, because of the time it takes to build buildings, they [construction and architecture sector] stay healthier longer than other parts of the economy.
Last year when other parts of the economy were declining, there were still a lot of projects taking place. You don’t stop building halfway through the project. These are big investment decisions that take a long time to implement and you have to see them through.
Are the dropping billings numbers a fallout from the commercial property crash?
We view our billings index as the reverse. It’s the leading indicator of where commercial property is headed.
It tells how much construction you’ll see 9 or 10 months out. We can estimate how much construction activity we’ll see later this year and into the first half of 2010. It’s going to be fairly weak. Some areas of the economy are seeing improvement, but commercial construction is not going to be in that category of improvement.
Are you seeing anything else that would indicate “green shoots” that other people are talking about?
There are some indications of the economy recovering and getting healthier, but we’re not seeing much of that in this sector – non-residential construction. In residential, there are some signs of that improving. Consumer spending is picking up a bit. The stimulus is helping out in improving our economy. But non-residential construction is not benefiting.
Who’s hiring architects right now?
Well, very few people are right now.
Some firms are doing better than others. The firms that are doing better generally have an institutional focus, not a commercial focus. They work on projects that have a non-profit or public ownership. Schools, public organizations, the government.
Other firms that are doing better right now are firms that are very strong in energy management and energy retrofits and upgrades. There’s a fair amount of interest in that because people think energy costs are rising.
If you’re credentialed and have done work with federal projects in the past, that’s where a lot of the stimulus money is going. General services administration projects and Department of Defense seems to be picking up.
But we have seen architecture firm payrolls declining about 15 percent in the past year.
Is anyone getting financing for non-residential construction projects?
It is a problem. We continue to hear that projects are put on hold or in some cases canceled because of financing.
It’s hard to tell how much is a result of a generally weak economy, or because financial institutions aren’t lending now.
Criteria have changed for what project makes sense in the economy.
A lot of times you’ll hear that a bank doesn’t want to lend on this project with all the job losses or that they can’t get financing because the project just doesn’t make sense right now.