Billings will turn into buildings
Economist Anirban Basu pointed to the Architecture Billings Index as a favorite indicator of nonresidential construction activity when he spoke March 19 at the Mechanical Contractors Association of America convention in Orlando. Based on their billings, architects have been busy for five of the last six months. This design activity will translate into actual construction in nine to 12 months.
The ABI was moving into positive territory a year earlier until last summer’s federal deficit ceiling debate in Congress made building owners worry about a double-dip recession, Basu said. Once the country made it through that troubling period, the ABI began to climb again.
The American Institute of Architects releases the ABI each month based on its On-The-Boards Survey of principals and partners at architectural firms. An ABI higher than 50 indicates that architects’ billings are increasing.
In February, the ABI had reached 51, which followed a score of 50.9 in January. Since Basu’s speech, the ABI ticked up again in March to 50.4. Although the scores don’t exactly blow by the 50-point threshold, AIA shares Basu’s optimism.
“We are starting to hear more about improving conditions in the marketplace, with a greater sense of optimism that there will be greater demand for design services,” AIA Chief Economist Kermit Baker said in mid-April. “But that is not across the board and there are still a number of architecture firms struggling, so progress is likely to be measured in inches rather than miles for the next few months.”
A month earlier, Baker had identified two factors that are preventing a more accelerated recovery: persistent caution from building owners to move ahead with new projects and continued difficulty in getting financing for projects that developers had decided to pursue.
The fact that financing still is an issue is worrisome, Basu said, because no industry is more susceptible to a credit crunch than construction. The recession began in earnest for many construction contractors in 2008 when both demand and financing disappeared, he noted.
The ABI also gives scores on a regional basis. The Midwest had the highest ABI score in February at 56, followed by the South at 51.3 and Northeast at 51. Only the West struggled below 50 with an ABI of 45.6. The regional ABI numbers for March show a similar pattern with the Midwest (54.1), Northeast (53.9) and South (50.1) still in plus territory and the West (46.6) lagging the other areas.
By construction sector, commercial/industrial led the way in February with 55.1, followed by multifamily residential at 53.3 and institutional at 50.3. In March, the ABI for commercial/industrial (56) and multifamily residential (51.9) remained positive while institutional (47.7) slipped below the 50-point mark.
AIA also releases a new projects inquiry index, which reached 63.4 in February. That was up from 61.2 in January and reached its highest level since July 2007. While it remained in the plus column in March, the new projects index dipped to 56.6.
Quoting other industry figures, Basu told MCAA members that nonresidential construction put-in-place was down 21.2% from $719 billion in October 2008 to $566.4 billion in January 2012. Even so, he noted, construction spending in several sectors showed growth this past January from January 2011.
Spending in manufacturing led the way with a 38.3% increase, followed by power (24.4%), health care (9.7%), commercial (7.8%) and educational (5.8%). Showing marginal gains were office buildings (0.6%) and sewage and waste disposal (0.1%). On the negative side of the ledger, spending on religious buildings was down 23.1% from a year ago, as well as water supply (-5.0%) and lodging (-2.4%).
The construction industry even shared - albeit in a small way - the economy’s growth in jobs over the past year. The nation gained 2.02 million jobs between February 2011 and February 2012. Construction gained 65,000 jobs during this period.
Noting that construction tends to lag the economy, Basu said that broad economic growth will bring positive activity to construction as well. While he predicts just 2.3% growth in the nation’s gross domestic product this year, he sees better times ahead.
“Later this decade, there will be some huge years in the U.S. economy,” Basu said. “A lot of money is still on the sidelines. Low mortgage rates will lead to construction.”
Several factors still could derail a strong recovery, he cautioned. In fact, the biggest threats are political, not economic. Just remember the deficit ceiling debate.
With this being an election year, we all will have an opportunity to make an impact on the political scene. Let’s make sure we take advantage of it.