If you think the above title sounds like I am hedging, trust your instincts. Since I tend to be pessimistic, I am going to throw a curve ball and lead with the good news: the Architectural Billings Index (ABI), as compiled by the American Institute of Architects (AIA), registered as 53.2 in June 2022. Measures above 50 mean billings are increasing, while those below 50 connotate a decline in billings. The ABI is a nine-to-twelve-month leading indicator of commercial building construction activity. The negative flip side to the news is that the ABI declined from May, which is the fourth straight month of declines. Furthermore, all of the subset data except one have declined month-over-month and all declined year-over-year. Enough negativity...let's tack back to the positive. While declines are rarely good news, particularly with terms like "recession" being bandied about, a little perspective can be applied in terms of the AEC industry being incredibly busy for almost a year and a half. Given the multiple woes of labor availability, supply chain issues, COVID, interest rate hikes etc., etc., a little slowing will allow designers and builders an opportunity to find some firm footing to complete projects. The details of the most recent data is below, there are a few things I want to point out:
S&P 500 is down 5% over the past month. Bitcoin is down 33% month-over-month. And in spite of my slightly misleading title, the American Institute of Architects (AIA) Architecture Billings Index (ABI) declined 5% from last month, BUT there is a huge caveat: the ABI is still positive which means billings continue to increase. The ABI is a nine-to-12 month leading indicator of commercial construction activity, with values greater than 50 signifying increasing design billings and values less than 50 signifying a decrease. So while the ABI declined from 56.5 in April to 53.5 in May, 53.5 is <checks notes> greater than 50, so billings are increasing. Architects continue to be busy which means builders should remain proportionately as busy for the next year. Here are my hot takes with the full details following:
The American Institute of Architects (AIA) Architecture Billings Index (ABI) clocked in at 56.5 in April, which is down from 58 in March. I report that with two huge caveats. First, 56.5 is historically pretty good, way above the 10+ year average of 51. Secondly, and more importantly (yet statistically confusing), all of the individual ABI measures were up from last month. I am not sure how that can happen (statistical anomaly? Voodoo?), but the net takeaway is that the design sector for buildings is pretty strong. This is good news for builders as the ABI is a nine-to-12 month leading indicator of commercial construction activity, with values greater than 50 signifying increasing design billings and values less than 50 signifying a decrease. The details are below but I have a few observations:
I could not tell heads from tales this morning as I scrolled through my e-mail. In today's installment of the Construction Dive daily brief, there were two articles that seemed to be talking in circles:
So what is going on? In reductive terms, there is a lot of pent up demand for structures, particularly housing, and contractors are very busy. However labor and materials are both hard to get and expensive when found. This tension showed itself in the past four months' worth of Architectural Billings Data published by the American Institute of Architects (AIA). The Architecture Billings Index (ABI), a nine-to-12 month leading indicator of commercial construction activity, bounced along the low 50's from November to February (51/52/51/51.3 for those of you keeping score at home). Recall that values greater than 50 signifying increasing design billings and values less than 50 signifying decreasing billings. So four straight months of low 50's indicates modest and measured growth.
So after reading today's (and the last month's) news, imagine my surprise when the March ABI, which was published today, came in at a very robust 58. This is the highest the ABI has been since May of last year and is way up from February's aforementioned 51.3. The summary and graphs are shown below, but the good news was spread far and wide and was particularly good for those of us in the West, which saw a jump of 12.7% from last month. The only month-over-month declines were a very modest decline in commercial billings and billings in the South (please note that the South has been on such a tear that this decline is the equivalent of someone taking a few seconds to catch their breath after a 100-yard wind sprint. In other words, totally ordinary).
There are more declines in the year-over-year data, but those of you who have not been actively trying to forget the past year or so, you may recall that a year ago the market was muy en fuego after rising like a phoenix from the depths on the COVID-induced ABI chasm of two years ago. My simplistic view of the construction economy goes like this: COVID caused a tailspin in ABI, but once vaccines and a semblance of heard immunity was realized, the industry remembered we still need housing and other structures so the market roared back. Labor and supply chain constraints have cooled the temperature and forced modest growth over the past quarter or so, with March being a seemingly randomly strong month. I actually like this tension between strong demand and labor and material constraints because it keeps us questioning our assumptions. Every owner keeps ensuring their projects still pencil and contractors keep watching construction budgets like hawks. This tension did not exist in 2007 and high demand, easy capital, no constraints, champaign and cocaine (metaphorically speaking) all merged together and ended in a housing bust that was felt around the world. By themselves, I am not a fan of rapidly escalating labor and material prices, but I feel like they are pumping the brakes and keeping us from running off the road. Anyway, enough musing. The data is below:
Ok, that title is a bit misleading. This month, there was incremental growth in the American Institute of Architects (AIA) Architecture Billings Index (ABI), with February clocking in at 51.3, up from 51 in January. Under the surface, the regional and sector numbers show a lot of volatility with some big swings up and down. But first, a reminder that the ABI is a nine-to-12 month leading indicator of commercial construction activity, with values greater than 50 signifying increasing design billings and values less than 50 signifying a contraction. Based on the general economy, it should be no surprise that the granular ABI figures are volatile.
Last month, I mentioned headwinds facing the AEC industry like material price escalation and a general lack of labor. February looked over at January and said "hold my beer" and introduced a war in the Ukraine that is leading to skyrocketing fuel prices (over $6/gallon in California!). So the fact that we saw any increase in the overall ABI is astounding, not to mention a 5% increase in multi-family (the housing crisis seems to be the only constant) and a nice 3.3% jump in the Midwest. However, the B-side to those gains are sharp drops in Mixed Practice (-9.3%), Northeast (-5.3%) and the South (-4.2%...but don't cry for them or their still lofty regional ABI figure of 58.6). The details are below, but overall, the design and construction industry is still chugging along.
Hello 2022! This is the first construction economics post of the new(ish) year because I put my energies last month into my 2022 Construction Financial Management Association (CFMA) economic forecast presentation (which can be found here). We are off to a good start in 2022, with the Architectural Billings Index clocking in at 51. The American Institute of Architects (AIA) publishes the Architecture Billings Index (ABI) and values greater than 50 constitutes that architecture billings are increasing, while a value less than 50 means billings are decreasing. The ABI is a nine-to-12 month leading indicator of commercial construction activity. Since 51 is (checks notes) greater than 50, billings grew in January. Yay...sort of. January was down from a measure of 52 in December. Per the press release issued by AIA:
“Architecture billings, while remaining at very healthy levels in recent months, have slowed considerably from the middle of last year,” said AIA Chief Economist, Kermit Baker, Hon. AIA, PhD. “This no doubt reflects delays in the construction sector caused by supply challenges for both labor and materials, as well as ongoing staffing constraints at architecture firms.”
So many of the know headwinds in the industry, such as material cost escalation and a lack of labor, are starting to take root and have negative consequences. The big outstanding question is whether or not this downward trend will continue such that we see a contraction in ABI which would predict a slowing in construction starts. In the meantime, let us just enjoy that the market is healthy and that the ABI is a tick above its average dating back to 2012 (50.9). In particular, take a look at where we were one year ago; in every category except Project Inquiries, the granular ABI figures are up by over double digits. The breakdowns are below in a new table format (with the historical graphs in tow). I hope you like this new format.
This will likely be the last post of the year and the news is good-ish. The good lies in that architectural billings increased in November, as the American Institute of Architects (AIA) Architecture Billings Index (ABI) for November came in at 51. A value greater than 50 means that architecture billings are increasing, while a value less than 50 means billings are decreasing. We care about this because the ABI is a nine-to-12 month leading indicator of commercial construction activity. Spoiler alert: construction will remain largely busy for the next year. The caveat lies in that the ABI has declined two months in a row and has been on a downward trend since July. This is no reason to panic. In fact, a *moderate* slowdown may be a welcome change from the frenetic pace the AEC industry has been on for most of 2021. Also, this may be the industry adjusting from some serious economic headwinds, chiefly a represented by abnormally high inflation in materials and wages and a woeful supply of skilled labor. Usually that cocktail would lead to a dramatic slowdown, yet we are persevering. The questions is for how long?
Similar the the overall ABI number, the regional ABI readings all declined. But since this is the holiday season, let's stay positive: three of the four regional values clocked in above 50.
The story is similar for industry sectors in that all ABI values declined from the previous month, yet all are still above 50. This means the billings are growing across the board, albeit at a slower rate than the previous month. All in all, this is good news.
Project inquiries and design contracts also fell from October, but both are well above 50 and their 199-month averages, so we will finish on that positive note. I hope everyone has happy and safe holidays!
The American Institute of Architects (AIA) released the October Architecture Billings Index (ABI) last week and the value for last month came in at 54.3. This is lower than September's 56.6 and represents the first decline in the rate of billing increases since July 2021, yet to be clear, billings are still increasing. A value greater than 50 means that architecture billings are increasing; conversely, any value less than 50 means billings are decreasing. The ABI is a nine-to-12 month leading indicator of commercial construction activity.
The database I have constructed contains ABI data going back to January 2012 (118 months). The 118-month average ABI is 50.9, so October's 54.3 is a historically healthy measure.
In terms of ABI subset data, there was one sub-50 category last month versus seven 50+ measures. The geographical breakdown is as follows:
For the sector breakdown, all were above 50, with Mixed Practice leading the way.
Project inquiries were up in October, increasing to 62.9 over September's 61.8, showing strong interest in design services.
Overall, the ABI numbers are slightly lower on balance than last month with a few localized exceptions. That said, the numbers are pretty robust and demonstrate demand for design services which should translate to continued demand for construction services.
There are a few things I have been trying to wrap my mind around and it started with a conversation I had with a colleague recently. At the beginning of the pandemic, the institution for which I am employed went into full damage control. We put projects on hold, froze hiring and ultimately offered fairly generous (for a state bureaucratic agency) early retirement packages. We expected construction project funding to dry up on campus as state financial resources were likely to be reallocated towards fighting the COVID-19 pandemic. Much to our surprise, we are busier than we have ever been. While our construction projects were temporarily put on hold, they resumed just as soon as we and our contractors could put COVID prevention/containment protocols in place. Couple that with federal funds for COVID relief and pandemic preventative measures (aka the Coronavirus Aid, Relief, and Economic Security Act, a $2.2 trillion program, of which $14 billion was earmarked for higher education via the Higher Education Emergency Relief Fund) and we are absolutely slammed with work on our campus while we are dealing with a reduced workforce. Many of the contractors working on our campus have lamented the lack of skilled labor as an impediment to completing their current projects, let alone taking on more work in a busy market. While a lot of press attention is dedicated to the skyrocketing cost of materials due, in major part, to COVID-related supply chain issues, I am curious about the role of wage increases (due to labor supply and demand imbalances) on the overall discussion regarding inflation. This led me to this question: is the current construction workforce doing more work that it has over previous periods of time?
In investigating this question, I did a quick-and-dirty analysis that I will present below. However, I want to start with some caveats. First, my analysis discounts the adoption of technology in the construction industry. Construction is very likely seeing the productivity gains most other industries enjoyed with the adoption of widespread technology upgrades. The construction industry largely missed this trend in the early decades until hardware became portable and inexpensive enough to be utilized on a construction project site. Similarly, I did not dig into the use of robotics as a source of productivity enhancement, nor did I analyze the impacts of the adoption of lean production techniques on construction projects, both of which improve labor productivity. Rather, I focused very high level and wanted to determine if people working in construction are performing more work than they had in the past, and if so, how much more.
To answer this question, I utilized two sets of data, Total Construction Spending in the United States and All Construction Employees in the United States. Next, I combined the data into a single metric, Construction Spending per Employee, which is plotted below:
Clearly, we are completing more work per employee today than we were in the past. For example, in January of 1993, there was one member of the construction industry for every $100,000 of construction spending ($98,216 to be exact). In September 2021, there was $211,109 of construction spending per employee. This represents approximately 0.22% compounded monthly increase over that period of time. But look at how the curve is particularly steep from December 2018 to present. Over that period of time, the compounded monthly growth rate is 0.60%. While these percentages may appear small, the increases over the past three years are quite profound.
So what happened in 2018 to cause this dramatic increase in construction spend per employee? Looking at the increase through the most simplistic lenses, it could be due to a decrease in construction employment and/or an increase in construction spending. The change in construction industry employment is shown below. While our current national construction industry employment of 7.5 million is down from peak employment in April 2006 (7.73 million people working in construction), we are way off the lows of 5.48 million in March 2011. Since December 2018, employment has increased 1.1%.
Construction spending, on the other hand, has skyrocketed since December 2018, from $1.28 trillion to $1.57 trillion. This constitutes an increase of 22.7%. So, with marginal increase in employment and a large increase in construction spending, the steep increase in the ratio of construction spending per employee since 2018 is due to increased spending (neglecting all outside factors).
So we are doing more work with essentially the same number of employees we had in 2018. This is not necessarily a bad turn of events. It could be that we are capable of doing more work per employee due to the adoption of productivity-enhancing technologies, lean production techniques, training and skill enhancement, etc. I do believe that productivity increases are real and due in no small part to technology and lean implementation. That said, given the chorus of warnings from contractors regarding the quantity of skilled labor as an impediment to getting the current increasing backlog of work completed, I an inclined to believe the increase in work is outstripping the bandwidth of the current construction workforce. Without increased technology adoption AND a strong inflow of construction personnel, we run the risk of overworking our current workforce and leaving a lot of projects at the starting gate.
Economic Mixed Bag: Design Billings Up Two months in a Row; Contractor Backlog Down Two Months in a Row
This post is a construction economics two-for-one. The short take is that architectural billings are still very robust and have increased for the second month in a row, while contractor backlogs have dropped over the same period of time. Let's dig into the good news first.
The American Institute of Architects (AIA) released the September Architecture Billings Index (ABI) this past week and the value came in at 56.6, above August's 55.6 and July's 54.6. While the ABI is down since peaking at 58.5 in May, all of the data from 2021 are way above the average ABI, which is 50.8 since 2012. As a reminder, the ABI is a nine-to-12 month leading indicator of construction activity. A value greater than 50 means that architecture billings are increasing; conversely, any value less than 50 means billings are decreasing.
The regional ABI data is a mixed bag with two increases and two decreases:
For industry sectors, gainers beat decliners three to one:
While the news is positive on the balance, one thing to keep an eye on are the four straight months of declines in project inquiries, with September clocking in at 61.8.
monLet's pivot to contractor backlogs, which are reported by Associated Builders and Contractors (ABC) as the Construction Backlog Indicator (CBI). Speaking very generally, when backlogs increase, it is a indicator that contractors are getting busy and, hence, the construction industry is healthier. As the spoiler alert title of this post indicates, the overall CBI has declined the past two month, coming in at 7.6 months for September, declining from 7.7 months in August and 8.5 months in July. Sounds a bit ominous, but keep in mind that the ABI also declined from May to June and June to July before rebounding. CBI may be going through the same gyrations. The figure below shows quarterly CBI data, which mutes the affects of monthly increases and declines, yet the recent downward trend is evident.
Just because the overall CBI is down doesn't mean there are not some rays of sunshine in the data. The industry sector breakdown for September :
Moving on to geographic area, the results are more mixed:
The last CBI breakdown data is by contractor size, which as three increases to one decrease:
The data presents a mixed bag with ABI up and CBI down and that permeates into the specific indices. This is likely to continue while the overall economy stays strong but commodity prices staying high and labor supplies remaining low. For every tailwind comes a headwind. 2021 continues to be interesting.