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ABI Slips Slightly in May as More Firms Experience Softening Business Conditions

More than 60% of firms anticipate being able to collect nearly all current outstanding receivables

By Jennifer Riskus, AIA Manager of Economic Research

SUMMARY: The ABI fell slightly in May to a score of 45.8, as architecture firms continued to report declining firm billings. However, there are some areas where business conditions are beginning to rebound. This month firms in the Northeast and firms with a commercial/industrial specialization both posted scores over 50. With the improving conditions comes a decrease in outstanding time for previously invoiced receivables, currently averaging approximately 56 days. In addition, 63% of firms expect to collect at least 95% of their outstanding receivables.

The AIA’s Architecture Billings Index (ABI) declined by just over two and a half points in May, falling to 45.8, the lowest score in three months, indicating that slightly more firms experienced a decline in billings in May than did in April. While many firms report that they are beginning to see the light at the end of the tunnel, including long-delayed projects that are beginning to move forward and slowly starting to increase staff size, many firms continue to suffer through the worst business conditions they have ever experienced. In particular, difficulties with obtaining financing continue to affect many projects. And while the inquiries score remained above 50 for the tenth month in a row, this continues to be due in large part to the increased competition for projects, and has still not translated to billings growth at architecture firms.

Business conditions begin to improve in the northeast

In spite of this month’s lower score, some regions of the country have begun to experience billings growth. Firms in the Northeast reported a score above 50 for the second month in a row in May, while firms in the Midwest are nearing expansion with scores in the upper 40’s, an impressive recovery from the extremely dire business conditions they experienced in late 2008 and early 2009. However, business conditions remain tough for firms in the West, which may well be the last region to experience billings growth.

In another impressive recovery, firms with a commercial/industrial specialization posted a score of 51.3 in April, indicating growth for that sector for the first time since December 2007. However, after showing some growth in January, firms with a residential specialization have reported slower business conditions each month since. Business conditions also remain weak for firms with an institutional specialization, in part due to reduced federal and state government budgets that continue to be heavily impacted by the lingering effects of the recession.

Federal reserve sees “modest” improvement in economy

The general economy continues to be mixed as well. While 431,000 new jobs were added in May, 95% of these were temporary hires, primarily Census workers. And the construction industry shed 35,000 jobs in May, after adding workers in the previous two months. The newest issue of the Federal Reserve’s Beige Book, released June 9, reports that in general, economic activity is improving, but that it remains a “modest” improvement. The report indicates that the residential real estate market has been looking up recently, but that this may be temporary, as it has been largely caused by people rushing to meet the April 30 deadline for the homebuyer tax credit. Residential development has been restricted in the New York, Cleveland, Atlanta, and Chicago districts due to tight credit markets, a high inventory of available homes, and the impact of foreclosed properties. On the other hand, lower rents have led to increased commercial leasing in the New York, Philadelphia, Richmond, Kansas City, Dallas, and San Francisco markets, and public construction is rebounding in the Philadelphia, Cleveland, and Chicago districts.

Most firms anticipate collecting majority of outstanding receivables

As the economy has begun to improve, nearly half (40%) of our survey panelists reported that the outstanding time for previously invoiced receivables on active projects averages 30 to 60 days. Just 14% indicated that it was 90 days or more. The average number of days outstanding was approximately 60, although that time is shorter for firms in the West (53 days) and longer for firms in the Midwest (60 days). Small firms, with annual billings of less than $250,000, are also reporting shorter outstanding times for receivables while the largest firms, with annual billings of $5 million are reporting the longest times (43 and 69 days respectively).

In addition, more than one quarter of respondents (28%) anticipate that they will collect all of their current outstanding receivables, while an additional 35% expect to be able to recoup more than 95%. Fewer than 10% expect that they will never collect 25% or more of their current outstanding receivables. In the Midwest this share is higher: 15% of firms anticipate they will lose more than a quarter of their current outstanding receivables, compared to just 4% of firms in the Northeast. Firms with less than $1 million in annual billings are more likely than larger firms to report that they expect to collect all current outstanding receivables, but they are also more likely to anticipate that they may lose out on 25% or more of their current outstanding receivables.



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