ABI October 2016: Business conditions improve modestly
Gross revenue at firms expected to increase by 2 percent in 2017
After two consecutive months of softening business conditions, architecture firms saw a modest rebound in their firm billings in October. The Architecture Billings Index (ABI) score for the month was 50.8, indicating that a modestly larger share of firms reported an increase in their firm billings for the month than reported a decrease. However, fewer firms reported an increase in inquiries into new projects this month, and firms also reported a decline in the value of new design contracts that were signed in October. This marks the second month of the year with a decline in the design contracts index, which has been relatively strong and steady for the last three years. While none of these indicators signals immediate alarm, it will be important to continue to keep a close eye on business conditions over the coming months.
While business conditions at firms located in the South region of the country remained strong in October, firms located in all other regions saw a decline in their firm billings for the month. Firms located in the West reported a very modest decline, but firms located in the Northeast and Midwest saw a more significant softening of their billings. Firms with commercial/industrial and institutional specializations also saw modest slowdowns in October, with only firms with a residential specialization reporting improving business conditions.
In the general economy, nonfarm payroll employment increased by 161,000 positions in October. That increase remains below both the average monthly increase for 2016 thus far and the average monthly increase in 2015. However, while construction employment has remained relatively flat in recent months, architecture services employment continues its upward trajectory. Employment in that sector increased to 184,100 in September (the most recent data available) and has increased by nearly 4 percent in the last year.
The latest edition of the Federal Reserve’s Beige Book report, released in mid-October, also shows that the national economy generally expanded in the prior six weeks, particularly in the St. Louis, Kansas City, and Dallas districts. Growth in single-family residential construction continued across the country, but that increase was generally low, with strong growth reported in the San Francisco district but a decline seen in the Richmond district. Multifamily construction increased in the Boston and Atlanta districts, while slowing in the New York district. And while commercial construction also continued to increase, with lengthening backlogs reported in the Cleveland and Atlanta districts, labor shortages were reported in the San Francisco and Cleveland districts.
Gross revenue and 2017 projections
This month’s special practice questions asked survey panelists about revenue changes at their firm this year, projections for 2017, and their hiring plans for the coming year. Overall, more than half of responding firms (51 percent) indicated that gross revenue at their firm increased in 2016 compared to 2015. Most of those firms saw a relatively modest increase in revenue from 2015 to 2016, 4 percent on average, but 9 percent of responding firms reported an increase of 25 percent or more. However, 27 percent of firms indicated that their revenue declined in 2016, and the remaining 22 percent saw essentially no change in their revenue from 2015 to 2016.
The share of firms indicating that their expectations for 2016 gross revenue were lower than expectations and higher than expectations were essentially the same—34 percent and 33 percent of firms, respectively—but while just 8 percent of firms indicated that their estimated revenue for the year was significantly in excess of their expectations, 13 percent reported that their estimates were significantly less than their expectations. When asked to project revenue changes from 2016 to 2017, fewer firms reported that they expect revenue to decline (25 percent), one third expects no change in revenue, and 42 percent anticipate an increase, with just 2 percent projecting a major increase of 25 percent or more. But on average, firms anticipate a smaller increase in their firm revenue next year than this year, just 2 percent on average.
When asked about hiring plans for 2017, most firms (57 percent) indicated that they expect to keep staff around current levels, while 37 percent expect to increase staff, and just 6 percent anticipate reducing staff. Three quarters of firms that anticipate adding staff in 2017 expect to add staff architectural positions with 3-10 years’ experience, while firms that expect to reduce staff anticipate reducing less experienced positions: students/emerging professionals on the path to licensure and architectural positions with 3-10 years’ experience.
This month, Work-on-the-Boards participants are saying:
- "Very busy through spring 2017, then expect some drop off." —53-person firm in the West, institutional specialization
- "We are cautiously optimistic. There are many inquiries for new work recently, but they have not yet resulted in agreements." —4-person firm in the Northeast, commercial/industrial specialization
- "Universities and state hospitals have both been releasing smaller projects that were held up until the very large projects were completed." —6-person firm in the Midwest, mixed specialization
- "Business conditions remain incredibly strong, and the biggest challenge is finding capable candidates to fill the positions that we have available." —38-person firm in the South, institutional specialization
ABI October 2016