ABI September 2019: Firm billings remain sluggish
More than half of firms have seen significant project delays, changes, or cancellations this year.
Business conditions remained generally flat at architecture firms in September. But while the Architecture Billings Index (ABI) score remained below the 50 threshold at 49.7 (a score over 50 indicates billings growth, a score below 50 indicates a decline), that score is 2.5 points higher than the August score, indicating that fewer firms saw declining billings in September. In addition, the design contracts index rebounded strongly to 54.4 this month (from 47.9 in August), as firms saw an increasing number of clients signing contracts for new projects. Firm backlogs also remained above six months in September (6.2 months on average), although they shrank modestly from a high of 6.5 months in June. More than half of firms (55%) indicated that backlogs have not changed from the second quarter, while 25% indicated that they’ve decreased by 5% or more, and 20% indicated that they’ve increased by 5% or more.
Billings remained weak at firms located in the Northeast and Midwest in September, softening further in both of those regions from August. However, growth continued at firms located in the South for the second consecutive month and for the fifth consecutive month at firms located in the West. Business conditions weakened further at firms with commercial/industrial and institutional specializations but improved at firms with a residential specialization, after a soft late spring and early summer period.
Looking at the broader economy
The newest edition of the Federal Reserve’s Beige Book report, released on October 16, indicates that the US economy continued to expand in September and into early October, albeit at a slow to moderate pace of growth. Similar to what was seen in ABI data, the report indicated that conditions were generally stronger in the southern and western US, and weaker in the Midwest and Great Plains regions. Worker shortages remain a concern, as smaller companies reported that they are having trouble matching pay offers from larger companies. Nonresidential construction activity remained generally strong across much of the country, although commercial construction weakened in the St. Louis district. Residential construction softened in the Cleveland and Kansas City districts, and multifamily housing starts weakened in the New York City area.
The latest employment report from the Bureau of Labor statistics showed that nonfarm payroll employment grew by 136,000 positions in September, slightly below the average monthly gains of 161,000 for the year so far, and well below the average monthly gains of 223,000 in 2018. However, architecture services employment continues to grow at a steady pace, adding 500 new jobs in August (the most recent data available) to reach a total of 201,300 positions nationwide. Average monthly gains have reached nearly 600 so far in 2019, versus 500 in 2018, for the largest average monthly increase since 2015.
Project changes and delays increase
During the Great Recession, stalled and cancelled projects were a serious issue for many architecture firms. With the recent softening in firm billings, we wanted to see if firms were experiencing any of those issues again. Overall, 52% of responding firms this month indicated that since the beginning of the year they have seen at least one of the following impacts on projects at their firm: 42% have projects that have been significantly delayed or put on hold, 33% have projects that have been significantly redesigned or scaled back, and 15% have projects that have been cancelled. However, 46% of firms indicated that they have not seen any significant project changes, delays, or cancellations (the remaining 2% of firms indicated that they have seen some other impact). Firms located in the Northeast were more likely to report having affected projects (62%), while firms with a commercial/industrial specialization were less likely to have had affected projects (43%).
At those firms that have seen significant project changes, delays, and/or cancellations since the beginning of the year, they reported that an average of 15% of their project workload has been affected, with 20% reporting that a quarter or more of their projects have been affected, 35% reporting that 10–24% of their projects have been affected, and 45% reporting that less than 10% of their projects have been affected. By far, the most commonly cited reason behind these significant project changes, delays, and/or cancellations is that the construction budget is insufficient for the project as currently conceived (76% of firms). Nearly half of firms (47%) cited client nervousness about proceeding, 29% selected financing problems, and 19% selected tariff or trade concerns as the reasons.
This month, Work-on-the-Boards participants are saying:
- “Despite intense demand for housing, getting projects financed and started is increasingly difficult.” —155-person firm in the West, commercial/industrial specialization
- “Conditions remain strong overall, but we are seeing slightly less optimism than we did at this time last year. We are being particularly careful about hiring additional people at this time.” —48-person firm in the South, institutional specialization
- “It is taking unreasonably long to get materials ordered and fabricated. Contractors are generally available, but these delays in acquisition and fabrication are slowing the process.” —1-person firm in the Northeast, residential specialization
- “Still many opportunities, just smaller in size. Not because they have been scaled back, but because they are just not coming out as large as they were previously.” — 300-person firm in the Midwest, institutional specialization