ABI August 2019: A significant setback in business conditions
As architecture firms report a rare decline in both billings on current projects and new work coming in, many beginning to consider international opportunities.
Business conditions at U.S. architecture firms so far this year have been disappointing. Reports from firms regarding their August performance clearly point to another setback. The national ABI score for the month was just 47.2 (any score below 50 signifies a decline in aggregate design activity). Additionally, the national score for new design contracts, which measures new design work coming into architecture firms, was just 47.9 (again, any score below 50 signifies a decline in aggregate new design contract activity). So, architecture firms reported a rare double decline in both new work coming into their firms and design work that was being completed.
Regionally, firms in the Midwest bore the brunt of this recent slowdown. Firms in this region reported a reasonably steep decline in August on top of a comparable setback in July. Firms in the Northeast reported another modest setback in billings for the month, extending the string of monthly declines to seven. Firms in the West were the only ones reporting growth on average.
Firms specializing in commercial and industrial facilities likewise reported a drop in design activity in August, coming on the heels of a fairly significant downturn in July. Firms concentrating in either the multifamily residential or institutional sector reported some modest gains in August. Firms in both sectors had seen several months of declining billings prior to August.
Economy continues to expand, but pace of growth is slowing
Having just passed the ten year mark, and thereby setting a new record for duration in the post-World War II era, the current economic expansion continues. Nonetheless, signs of age are finally beginning to show. Overall GDP grew by 2.9% last year, which accelerated to a 3.1% pace in the first quarter of this year. However, economic expansion slowed to 2.0% in the second quarter, and this quarter is shaping up to produce comparable results. Payroll gains also are slowing. Almost 2.7 million net new payroll positions were added in 2018, but this year through August we are on a pace to add just 1.9 million positions. Manufacturing activity increased about 4% last year, and in doing so added 264,000 new manufacturing positions. This year, manufacturing activity has been modestly declining, a reflection of the slowing demand for U.S. goods internationally as the economies of many of our key trading partners have begun to soften. Weaker export markets, coupled with ongoing concerns over tariffs on imported goods, both already imposed or threatened, has helped to push down business confidence scores to levels last seen as the economy was emerging from the Great Recession.
Still, there are other indicators suggesting that this period of economic growth has some momentum left. In spite of slower job growth, the national unemployment rate stands at 3.7%, near a low point for the past several decades. Consumer inflation is running well below 2% at present, down from around 2.5% last year. Overall producer inflation is running around 1%, being held in check by lower food and energy costs. Low inflation is helping to keep interest rates unusually low this far into an economic expansion. Favorable unemployment and inflation rates, coupled with rising wages are keeping consumer confidence levels near their highest level in decades.
As prospects for a domestic slowdown increase, a majority of architecture firms considering offshore prospects
As architecture firms grow more concerned about a slowdown in design activity, they tend to look to diversify their practice, either by considering expansion into new geographic areas, exploring additional construction sectors, or partnering with other firms that have a different focus. Also, a majority of architecture firms are casting a wider net, at least considering international projects. Of the more than $10 trillion spent annually on international construction activity, the U.S. has only about a 12% market share. And much of the growth in construction activity will come not from developed areas like Western Europe and Japan, but rather from China, India, Central and South America, and the Middle East and Africa.
At present, only about 10% of U.S. architecture firms are currently working on international projects, while an additional 13% don’t have current projects, but have worked internationally within the past five years. Another 13% of firms have plans to pursue at least some type of international work in the near future.
That leaves almost two-thirds of firms that are not actively pursuing international work. Over half of these firms indicate that they would a least consider getting involved in an international project. The main reason that these firms would consider working on an international project is that it would help to diversify their practice, a motivation mentioned by over half of these respondents. Other common incentives were that these projects would help build the firm’s reputation, or that the staff and firm leadership would enjoy working on these projects.
Of those firms that would not consider working on international projects, the main reason stated for avoiding them was that they didn’t want to deal with the potential headaches of these projects. Other popular reasons were their firm currently has plenty of domestic projects, that their firm doesn’t have the qualifications for international work, or that their firm doesn’t know how to pursue these projects.
This month, Work-on-the-Boards participants are saying:
- "Cash flow has significantly tightened over the summer. Clients are holding on to money and not releasing it. Our accounts receivable is already over 120 days and growing." —5-person firm in the Northeast, commercial/industrial specialization
- "Tariffs affect agricultural business, which affects the regional economy, which affects public sentiment, which places public bonds and public projects at risk." —26-person firm in the Midwest, institutional specialization
- "With construction costs so high, we are hearing rumblings of a slowdown. It hasn’t hit yet, but there are signs." —25-person firm in the South, mixed specialization
- "There is plenty of work, although there does seem to be more projects with delayed starts." —36-person firm in the West, commercial/industrial specialization