ABI November 2016: Another modest increase for billings
Firm profitability tops the list of concerns for 2017
Growth in billings at US architecture firms remained soft in November, with the national index score of 50.6 just about matching the October figure of 50.8. New design contracts also showed a very modest gain of 50.2, coming off a rare decline in October. Overall, the third quarter was disappointing for many architecture firms, and the fourth quarter is not looking a lot stronger.
Slow growth generally sums up design activity nationally, and also sums up the recent trends at firms in most regions across the country and in most construction sectors. Firms in the Northeast, Midwest, and South reported modest growth on average in November, while firms in the West reported a slight decline. Residential as well as commercial/industrial firms reported a slight increase in billings, while institutional firms reported revenue to be down a tick for the month. From an architecture firm perspective, therefore, the outlook for construction activity over the coming nine to 12 months would seem to be generally moving forward, but with very little momentum.
Economic outlook dependent on policy details
General economic indicators for the U.S. are basically quite healthy. The economy grew at a 3.2 percent pace (when annualized) during the third quarter, payroll gains have been reasonably strong in recent months, as the country is on a pace to add over two millions jobs to the economy this year, and the national unemployment has fallen to 4.6 percent.
However, the future path of the economy has an unusual amount of uncertainty. Stock values have responded favorably to incoming Trump Administration proposals of lower tax rates and a reduced regulatory environment. However, rising interest rates and a strengthening dollar are clear headwinds to future economic growth. As expected, the Federal Reserve Board raised short-term interest rates at their December meeting, and indicated that they will be active in continuing to raise rates over the coming years as warranted by the strength of the economy, employment growth, and inflation levels.
Of particular interest to the construction industry is the proposed national infrastructure stimulus program. Growing needs to maintain and improve our infrastructure, coupled with a narrowing window of favorable interest rates suggests to some that this is an optimal time to launch such a program. However, shortages of construction labor, emerging concerns over inflation in a growing list of construction materials prices, and mounting apprehension over rising federal deficits have many others questioning the timing of a late-cycle stimulus program.
Top concerns for the coming year
Architecture firms are generally seeing reasonable business conditions moving forward. In fact, looking ahead to the coming year, several of their deeper concerns are related to a strong and occasionally overheated construction sector. Fully a quarter of architecture firms mentioned that finding qualified staff is one of their top three issues for the coming year. Almost 12 percent of firms list managing project schedules/backlogs as one of their top three concerns, while almost 10 percent of firms list finding contractors among their top worries.
However, in spite of a healthy construction sector overall, an intensely competitive design profession is keeping pressure on firm finances. At the very top of the worry list for firms for the coming year is increasing firm profitability, followed closely by negotiating appropriate project fees, with each mentioned by a quarter of firms as one of their top three concerns. Finding qualified staff, managing the rising costs of running a firm (rents, healthcare, etc.) and coping with an unpredictable economy round out the top five issues at firms for 2017.
This month, Work-on-the-Boards participants are saying:
- "We have heard that there will be no new apartment buildings started in Chicago in 2017." —60-person firm in the Midwest, residential specialization
- "We have a bigger backlog than in the past, but are waiting for the coming year for our clients to kick into gear on their projects." —4-person firm in the South, mixed specialization
- "There is a surplus of work coming up, but we may have to pass on projects we would otherwise pursue due to the competitive labor market." —68-person firm in the West, institutional specialization
- "Uncertainty around economic climate post-election. Some projects are on hold and we can’t tell if it is a slowdown, financial difficulty, or a wait and see attitude." —12-person firm in the Northeast, residential specialization
ABI November 2016