ABI June 2019: Architecture firms report another setback in billings
In the past year, nearly four in ten firms have seen a direct impact on their projects from tariff-related concerns.
Business conditions at architecture firms softened in June, following two months where growth was essentially flat. The ABI score of 49.1 for the month indicates that more firms reported that billings declined than increased from the previous month. Architecture firm billings have either declined or been flat since February, the longest period of such softness since 2012. In addition, while inquiries into new work and the value of new design contracts remained positive in June, the pace of that growth continued to slow, with inquiries in particular falling to its lowest score in a decade. However, firms are still reporting strong backlogs of work in the pipeline, six and a half months on average, which continues to be the most robust that backlogs have been since we began collecting this data on a quarterly basis in 2010.
Billings decline across the country
Billings also declined at firms in all regions of the country in June, with the exception of firms located in the South, who reported modest growth. Billings remained softest at firms located in the Northeast, as has been the case since February. Business conditions also weakened at firms with multifamily residential and institutional specializations this month, with both reporting declines for the fourth consecutive month. On the other hand, billings have strengthened at firms with a commercial/industrial specialization over the last two months, following a brief downturn in March and April.
Despite ongoing concerns about a looming economic downturn, employment showed more encouraging signs in June, on the heels of an unexpectedly soft May. Nonfarm payroll employment increased by 224,000 for the month, with construction employment adding 21,000 new positions. And architectural services employment added 700 new positions in May, the most recent data available, climbing to a total of 200,700 in the sector. Monthly employment gains in the industry are averaging 820 so far this year, an increase from average monthly gains of 517 in 2018. In addition, it looks all but certain that the Federal Reserve will lower interest rates by the end of July, which should provide a fresh infusion into the economy as well.
Tariff-related concerns on the rise
This month’s special practice questions asked responding architecture firms for an update on the potential impact of tariffs, threatened tariffs, and possible trade-related retaliation on the economy, their business, and their clients. On a scale of 1 to 5, with 1 being not at all concerned, 3 being somewhat concerned, and 5 being very concerned, 35 percent of responding firms rated their degree of concern about tariffs on the economy and their business in the coming quarters as a 4 or 5, with an additional 37 percent rating it as a 3. Firms located in the West, as well as those with an institutional specialization, reported a higher level of concern, with 44 percent of each group rating it as a 4 or 5. This is in contrast to firms with a commercial/industrial specialization, that were much less likely to report a high level of concern, with just 27 percent rating it as a 4 or 5. In addition, 33 percent of firms rated the level of concern that their major clients have about the potential impact of tariffs as a 4 or 5, and an additional 33 percent rated it as a 3.
Overall, 39 percent of responding architecture firms reported that they had seen direct, negative impacts on projects at their firms from tariff-related concerns or issues in the past year. While this is just a modest increase from 37 percent of firms that indicated the same in a survey last August, the share of firms located in the West, as well as those with a multifamily residential specialization, that reported seeing a direct impact from the tariffs was much higher, 45 percent and 50 percent of those firms, respectively. The most commonly cited impact seen was rising construction costs for projects (99 percent of firms that have seen an impact in the last year have seen this specific impact), pressure from contractors to modify materials selected, or design approaches (58 percent of firms), and clients requesting modified project designs to accommodate changing costs/availability of materials (43 percent of firms).
This month, Work-on-the-Boards participants are saying:
“Business is clearly slowing. Projects moving forward last year have gone on hold while owners grapple with rising construction costs, increased estimates, etc.” —21-person firm in the Northeast, institutional specialization
“It still seems as if projects are taking a long time for clients to decide to move forward, and getting approvals from permitting authorities is also taking a long time.” —19-person firm in the West, commercial/industrial specialization
“We are still dealing with a shortage of available construction trade workers, as well as the tariffs.” — 21-person firm in the South, residential specialization
“Remain strong, but new activity seems to be leveling out rather than getting stronger.” — 92-person firm in the Midwest, institutional specialization