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Design Activity Remains Strong in June at Architecture Firms

Even with the market recovering, most firms are still well below peak employment levels

By Kermit Baker, Hon. AIA
AIA Chief Economist

Billings at U.S. architecture firms exhibited strong gains in June. The AIA’s Architecture Billings Index (ABI) reading was 53.3 for the month, coming on the heels of healthy reading of 52.6 in May. (Scores above 50 indicate billings growth, scores below 50 indicate billings decline). This upturn suggests that design activity may be entering a stronger phase after weak quarters at the end of last year and the beginning of this one. Particularly encouraging is that new design contracts at architecture firms have risen sharply in each of the past three months. The pace of growth for this indicator in June was the fastest in the almost four years that the AIA has been gathering this information.

Another positive trend is that this improvement is becoming more balanced across regions and across the major construction sectors. With the June figures, firms in three of the four major regions of the country are reporting billings gains. By sector, residential firms continue to report strong growth, while commercial/industrial firms have now seen six straight monthly gains. Institutional firms saw the first monthly increase in billings since last summer.

More stable growth over second half of 2014

Recent economic indicators point to improvement in the performance of our economy. Over 800,000 net new payroll positions were created at U.S. businesses in the second quarter, on top of 570,000 created during the relatively weak first quarter. That puts job growth on pace to create almost 2.8 million new jobs this year, which if achieved, would be the strongest year for job growth since 1999.

Even the construction industry is finally participating in the employment upturn. Through the first half of the year, construction firms have added almost 140,000 new payroll positions, the best six months for the industry since 2006. As a result, the unemployment rate for construction workers has dropped to 8.2 percent as of June, still well above the national unemployment rate for all industries of 6.1 percent, but well below the recessionary high for the industry of more than 25 percent in the first quarter of 2010.

This improved performance of the economy is showing up in the financial results of U.S. businesses. Pre-tax corporate profits averaged 11 percent annual growth in 2012 and 2013. Even in the weak first quarter of this year, profits increased almost 8 percent over Q1 2013 levels. Strong profits have pushed stock prices to record levels, even though other economic indicators suggest a weaker economy.

Recently improved job growth coupled with a buoyant stock market has improved the outlook for both consumers and businesses. Consumer confidence scores increased from 80.5 in the first quarter to 83.0 in the second quarter, according to the Conference Board’s Consumer Confidence Index, although they are not yet back to their pre-recessionary levels of over 100. Even more encouraging is that business confidence scores (on a different scale than their consumer confidence readings) averaged almost 63 in the first half of the year, according to the Conference Board’s CEO business confidence survey, well above the average score of 58 in 2013 or 50 in 2012.

Firms sizes yet to fully recover from downturn

This past downturn saw dramatic declines in the number of architecture positions nationally. While these figures have begun to improve over the past two and one-half years, most architecture firms that survived the downturn are well below the size that they were at before the recession hit. While almost 19 percent of firms indicate that they have surpassed their pre-downturn high, and an additional 30 percent are about the same size that they were at the prior peak. But more than half of these surviving firms are smaller at present. Some are still significantly below their previous levels. Almost a quarter of all firms are currently 25 percent or more below the staffing levels they were at before the downturn.

These declines leave most firms below what they consider to be their ideal size. While about a quarter of firms feel that their current size is the ideal size, most would prefer to be larger. Over half of firms (54 percent) would like to be up to 25 percent larger, while almost one in five thinks that more than 25 percent larger is the ideal size. Interestingly, smaller firms are more likely to feel that their current size is their ideal size, while larger firms are more likely to feel that they would benefit from being larger.

This month, Work-on-the-Boards Participants are saying:

    • State funding for K-12 and higher [education] projects has begun to increase, but the competition for the limited opportunities is ferocious, with hundreds of out-of–the-region and out-of-the-state competitors vying. –39-person firm in the Northeast, institutional specialization

    • Projects which have been in design are finally moving forward. We have a huge backlog of completed design work awaiting either community, municipality, or financial approvals to move forward. Market conditions are best I've seen since before the downturn. –8-person firm in the Midwest, commercial/industrial specialization

    • Business conditions have cooled somewhat from last spring. Larger firms seem to be getting more new large projects, and we are seeing some poaching of our staff as a result. –15-person firm in the West, institutional specialization

    • [We’re seeing] only renovations/interior build-outs, [which are] better than nothing, but not really economically sustainable. [There is] very little $5 to $20 million new private sector commercial work. 3-person firm in the South, mixed specialization

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Recent Related:

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Reference:

The ABI Work-on-the-Boards Survey Panel is open to any AIA member who is principal/partner of their firm. Apply to join the ABI panel by completing a brief background information form on your firm here.

 

About the AIA Architecture Billings Index:

The Architecture Billings Index (ABI), produced by the AIA Economics and Market Research Group, is a leading economic indicator that provides an approximately nine- to 12-month glimpse into the future of nonresidential construction spending activity. The diffusion indexes contained in the full report are derived from a monthly “Work-on-the-Boards” survey that is sent to a panel of AIA member–owned firms. Participants are asked whether their billings increased, decreased, or stayed the same in the month that just ended, as compared to the prior month, and the results are then compiled into the ABI. These monthly results are also seasonally adjusted to allow for comparison to prior months. The monthly ABI index scores are centered near 50, with scores above 50 indicating an aggregate increase in billings, and scores below 50 indicating a decline. The regional and sector data are formulated using a three-month moving average. More information on the ABI and the analysis of its relationship to construction activity can be found in the white paper “Architecture Billings as a Leading Indicator of Construction: Analysis of the Relationship between a Billings Index and Construction Spending” on AIA.org.

 

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