ABI August 2018: End of summer sees healthy billings rebound
Technology, project complexity, and staff training seen as keys to productivity levels at firms
Billings at US architecture firms saw a healthy jump in August, a positive sign as firms enter what is traditionally a seasonal slowdown. The August ABI score of 54.2 (any score above 50 signifies growth) was the second highest so far for 2018, more than two points above the average of the first seven months of the year. While project inquiries were also healthy, new design contracts coming into architecture firms saw a rare—although very modest—decline. This was the first monthly decline in new work coming into firms in almost two years.
Regional ABI scores for August continued to reflect a divergence in business conditions. Scores for firms in the South remained on their torrid pace; the ABI score at firms in this region was 57.0 for the month, and have averaged above 55 for the first eight months of the year. In contrast, the ABI score of 46.9 for firms in the Northeast reflected the steepest drop in billings so far this year. ABI scores in the Northeast have declined in six of the eight months of 2018. Firms in the Midwest and West regions reported healthy business conditions. Firms specializing in each of the major construction sectors also were uniformly reporting healthy conditions; the preliminary ABI score for residential firms was 55.6, 53.6 for those in the commercial/industrial sector, and 52.3 for institutional firms.
Strong growth continues, but warning signs emerging
The 4.2 percent increase in GDP in the second quarter, when seasonally adjusted and annualized, shows that the US economy is very healthy. Quarterly growth has not been that strong since the third quarter of 2014. Economic growth has been propelled by investment by businesses, which grew by 8.5 percent in the second quarter (again, seasonally adjusted and annualized) on top of 11.5 percent in the first quarter. The tax reform bill likely is a key factor in this strong pace of investment, as after-tax corporate profits grew by 38 percent in the first quarter and an additional 15 percent in the second.
Healthy levels of business investment have kept the labor market strong. Payrolls increased by 201,000 positions on net in August, so the economy has produced almost 1.5 million net new payroll positions through the first eight months of the year and therefore is on a pace to create 2.2 million for the year. As a result, the national unemployment rate is 3.9 percent and has been near that rate for most of the year. The construction sector has followed suit with the broader economy, creating 23,000 net new payroll jobs in August. It is on pace to create 280,000 for the year, compared to 250,000 in 2017 and 190,000 in 2016. Such strong growth has brought the national unemployment rate for construction workers down to 3.4 percent in August, compared to 4.7 percent in August of 2017. Architecture firms have also seen strong employment gains, with national payrolls in excess of 202,000 in July, up from a low of 151,000 in early 2011 but still below the high of 220,000 in mid-2008.
In spite of these strong economic numbers, the length of this current business expansion has many worried about its resiliency. Leading economic indicators—interest rates, building permits, and new orders for capital goods—have been less favorable recently. A highly respected leading index from the Economic Cycle Research Institute peaked this past February and has declined about 2 percent over the past six months. While there are no broad signs of an overheated economy or other conditions that would lead to a recession, there also are few sectors of the economy that are likely to generate significantly stronger growth in the near term.
Increasing productivity a challenge for architecture firms
Architecture firms have seen mixed results in terms of their productivity, which is defined as output per hour of labor. Still, when asked how they feel their firm compares with their peers by this metric, most are feeling quite positive. Half of firms feel that that their firm is somewhat more productive or much more productive than their peers. A third feel that they are about as productive, while only one in six feel that they are somewhat less or much less productive than their peers.
There are a long list of factors that can affect firm productivity, and technology is often a central, although mixed, focus. At the top of the list, over 80 percent of firms agree with the statement that there is a steeper learning curve with new technologies that can reduce staff productivity in the short run. However, almost an equal share agree that new technologies have made their staff more productive. Further down the list, almost half (46 percent) of firms agree with the statement that since new technologies may reduce the costs of redesigning project elements, they may encourage firms to “overdesign” projects, thereby reducing productivity.
Project complexity, including more complicated building and zoning provisions are also a factor reducing productivity according to 60 percent of firms, while growing numbers of smaller projects and renovations as well as more demanding clients are factors influencing productivity according to about half of firms. Finally, staff experience is a common issue regarding productivity. Many firms agree the statement that younger staff don’t have the same commitment to workplace productivity as previous generations, while others indicate that they have added a lot of younger staff recently, which has lowered productivity. Only a third of firms agree that architecture schools have done a good job of training graduates for work at an architecture firm.
This month, Work-on-the-Boards participants are saying:
- "Many municipalities are adding inclusionary zoning for affordable housing, which may inflate demand short term." -20-person firm in the Midwest, residential specialization
- "Construction pace has eased a bit in the last 60 days, which has led to increased inquiries for work from contractors and a corresponding slight softening in bids." -11-person firm in the West, institutional specialization
- "Economy is strong, but building is polarized between super large projects and very small renovations and single-family housing. There is no middle market." -3-person firm in the South, mixed practice
- "Economic and trade issues on steel and lumber have definitely raised our bidding results on projects, and due to the steep increases, have put them on hold." -12-person firm in the Midwest, institutional specialization