ABI May 2017: Business conditions continue to show encouraging trends
Like labor shortages, rising construction material prices developing into headwind for future growth
Billings at US architecture firms increased for the fourth straight month in May. AIA’s Architecture Billings Index (ABI) was 53.0 for the month, up from April’s reading of 50.9, and surpassing the 51.4 average score for firm billings for the first four months of the year.
New project inquiries and new design contracts also saw accelerated growth in May. Both indicators recorded their highest readings for the year. These results show that design activity is healthy at present, and that is should continue to remain so for at least the next several quarters.
In spite of very solid national readings, regional business conditions are unusually varied. Firms in the South posted the strongest growth in billings in several years. Firms in the West reported continued positive momentum in business conditions. In contrast, Midwest firms saw hardly any increase in billings in May, while Northeast firms saw a sharp decline in billings, which came on top of a small slide in April.
By construction sector specialization, in contrast, business conditions are remarkably similar. Firms concentrating in the residential sector reported a healthy uptick in billings, a trend matched by commercial/industrial as well as institutional firms. However, while commercial/industrial firms saw a modest acceleration in billings, institutional firms reported slowing growth after several months of strong results.
Second quarter looking better
After a disappointing first quarter for the US economy, concern grew over how much longer the economic recovery would continue. However, many of the key economic indicators have stabilized as we move through the second quarter of the year. There is consensus that the 1.2 percent growth (seasonally adjusted and annualized) that we saw in the first quarter will probably double in the second quarter, and that we’ll end up seeing growth in excess of 2 percent for the year.
Our economy added an average of about 165,000 net new payroll positions per month through the first quarter this year, and has more or less kept that pace through April and May. Even that modest level of gains has been enough to bring the national unemployment down to 4.3 percent in May, its lowest level in almost two decades. The manufacturing sector has also performed well, with growth each month after posting declines in 2015 and 2016.
The Federal Reserve Board has been comfortable enough with economic conditions to raise short-term interest rates again at its mid-June meeting. This was the fourth quarter-point increase in this tightening cycle that began in late 2015. At that point, short-term rates were effectively 0 percent, and had been at that level since late 2008 in the midst of the Great Recession. The Fed is expected to continue to implement two or three small interest rate hikes a year over the next couple of years.
Construction materials prices seen as emerging industry concern
While not as critical of a concern as the construction labor shortage, many construction materials prices have been on the rise of late. The US Labor Department’s Bureau of Labor Statistics recently reported that prices for construction materials like steel, copper, aluminum, and asphalt have risen at a double-digit percentage pace over the past year. Cement, lumber, and gypsum have risen at a high single-digit pace over this period.
This month’s special business question looked at how, if at all, these trends were affecting architectural practices. Seven in 10 firms report modest or significant increases in prices for construction materials in their projects. Two in 10 report mixed price trends, and fewer than 1 in 10 state that they haven’t seen a noticeable change.
Of those that have seen some price pressures, a third of firms say that it is a serious problem and 45 percent report that it is somewhat serious. The remaining 22 percent report that it hasn’t been that serious of a problem at their firm.
Architecture firms—and their clients—have resorted to a variety of measures to deal with higher material prices. A majority of firms (63 percent) that report concerns with material prices have scaled back the scope or size of one or more of their projects, while others have redesigned projects (49 percent), or put projects on hold or dropped them entirely (27 percent).
Over half of these firms have had to work with their clients to increase construction budgets (58 percent), or substitute less costly materials (54 percent). Only 12 percent of firms that report rising construction materials costs believe that current budgets are adequate to absorb higher costs for their projects.
This month, Work-on-the-Boards participants are saying:
- "We went from too slow to crazy busy in just a few months. We were not able to hire fast enough to stay in front of the workload. Excessive OT is a concern." — 31-person firm in the West, mixed specialization
- "We are seeing the shortage of qualified construction trades labor locally resulting in a drop in quality of construction." — 16-person firm in the South, institutional specialization
- "May was status quo for our client base, however, our biggest clients were indicating a renewed push in capital projects going forward." — 6-person firm in the Northeast, commercial/industrial specialization
- "Business conditions remain robust. Good staff are in very short supply and it is costing us more to grow and retain. The real question will be can we offset the obvious increase in overhead." — 29-person firm in the Midwest, commercial/industrial specialization