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.
The American Institute of Architects (AIA) released the July Architecture Billings Index (ABI) today and the value for August came in at 55.6, above July's 54.6. After two months of declines, an uptick is welcome news. The market for design services remains robust, particularly in contracts to a historic (since 2012) average of 50.8 and in stark contract to a bottoming out o 29.5 in April 2020. 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.
Here's where things get tricky: while the overall ABI is up, there were declines in three of four geographic regions. All are still relatively strong markets, but the overall gains seem to be the handiwork of the West Coast:
Similar to geographic area, three of the four project categories were also down, leaving Mixed Practice as the only gainer.
Project inquiries were down slightly, from 65.0 in July to 64.7 in August and still strongly above the average of 58.5 (also since 2012).
So, overall ABI is up but six of the eight subcategories are down. This isn't the first time this has happened nor is it anything to be overly concerned about. None of the subcategories seem to be hurtling negatively towards the 50 level. Not too shabby.
There are a few casual observations I have made that i will keep an eye on. First, if you didn't click the link above, I checked out the tower cranes in San Francisco last week and I could not help but notice that there are significantly fewer cranes up. There were 24 up a year ago and I saw five last weekend. Of those five, three are located in areas outside of the core business and housing districts, meaning that development is heading to the frontiers, as it does at the tail end of bull building markets. Combine this with the robust Sacramento market, which always coincides with the Bay Area getting overheated and people look for less expensive places to build, and my gut tells me northern California is about to slow down. Now I know there are a million holes you can shoot in my logic (chiefly, the boom in Sac is California government buildings which are not directly related to private development in San Francisco), but it's a hunch I will track.
Secondly, the Midwest has been fairly hot as of late, yet if STL is any indicator, the tower crane activity there is outside the downtown area. Granted, there is plenty of activity near the Washington University Medical Center, but the rest of the action was in the 15,000-person suburb of Clayton and Milwaukee was really quiet. Again, my non-scientific gut feels like the froth in the market may be subsiding. I hope I'm wrong.
The American Institute of Architects (AIA) released the July Architecture Billings Index (ABI) last week while I was on vacation. Why is the ABI important? Well, 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 numbers continue to be robust with the overall ABI measure clocking in at 58.5. If you are a pessimist, you might be thinking "the ABI was a record 58.5 for May 2021 and has decreased for two straight months" and you would be correct. However, since January 2012, the average ABI has been 50.7, so 54.6 is still pretty impressive. Scratch that, it is really impressive and it shows that the rebound in construction is still ongoing given that we have had six straight months above 53.
How are things playing out regionally? Pretty darn well overall. Three of four regions saw decreases but they just went from boiling lava hot to merely scorching:
The story is similar for the industry sector breakdown except all sectors declined:
Project inquiries also declined from 71.8 in June to 65 in July, but inquiries are still way above the historic average of 58.8.
Finally, in a gratuitous attempt to combine the two things I geek out on, below are a few pix of the four tower cranes up in Boise, ID. There were three when we visited in February; the first pic is the newest crane, a mixed-use development with multi-family unites on podium parking and and adjacent parking structure. Boise is a booming (to the excitement or chagrin to locals...housing prices are astronomical and I say that as someone living in California). Anyway, tower cranes and good economic data are two of my favorite things.
It was bound to happen. Since bottoming out in May 2020 with a score of 32, the Architecture Billings Index (ABI) published by the American Institute of Architects has been on a meteoric rebound, peaking last month at 58.5 (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 construction activity). That kind of growth was unlikely to last forever and it didn't. The June ABI was reported today at 57.1 which is a decrease but is still the third highest reading since at least 2012. Long story short: architects are still busy which means builders should remain relatively busy for the foreseeable future.
Three out of four regional ABI figures were down, but again, they are still very robust:
The record for industry sectors was 50-50 with two small increases and two decreases:
A particular bright spot is project inquiries which reached a new record with a 71.8. The cost of timber and lack of labor have apparently not stopped owners from reaching out to architects.
All in all, the good news keeps on coming. Stay safe out there...fatigue is real.
The American Institute of Architects (AIA) made us wait a few days longer than normal, but it was worth it. The May installment of the Architecture Billing Index (ABI) dropped this morning and they have reached another record high of 58.5, exceeding the previous record of 57.9 set last month. 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 construction activity. Spoiler alert: the construction industry is poised to get even busier of the next year.
Regionally, the South has been the hottest market for some time, but this month's data reveals an interesting plot twist:
As far as market sectors are concerned, May was a month of increases across the board:
If there is one source of concern (and I am digging deep here), it would be project inquiries, which slipped from a record of 70.8 in April to 69.2 in May. This is still a great result but my proclivity for pessimism needs to show itself somewhere. Great, now I'll shove it back into the recesses of my soul so we can enjoy the overwise great news.
Let's keep this party going!
The slides from my presentation to the Upstate South Carolina chapter of the American Society of Civil Engineers-Institute of Transportation Engineers (ASCE-ITE) on June 23, 2021. Questions and comments are certainly welcome. Thanks to Grant Hollis for the invitation to speak.
(For my California friends: upstate South Carolina includes the cities of Anderson, Greenville and Spartanburg and is the home of the Clemson Tigers. Now you know.)
It has been a while since I've posted about contractor backlogs. I'm the guest speaker for an ASCE-ITE chapter in the southeast next week and we will be discussing (shocker) construction economics. Construction input costs are up (another shocker: it's predominantly due to material costs), but costs are also a function of contractor backlogs. When backlogs get deep, contractors raise fees, leading to higher project costs and when they slide, contractors decrease their fees in order to be more competitive. Simple supply and demand. So, how are backlogs? Luckily, our friends at the Associated Builders and Contractors (ABC) publish this data. Generally speaking, they have been increasing in the aggregate since November 2020 with a few dips along the way. The November 2020 backlog data point of 7.2 months was the lowest result since Q4 2010 (the data used to be released quarterly and now it is monthly. Please note that I have aggregated the monthly data into quarterly data in the graphs below. The aggregate backlog data is shown below:
So the general trend is positive, yet let look at the details, starting with the industry sector breakdown for May:
Moving on to geographic area, the results are more mixed:
Lastly, the backlog data by contractor size:
So, mixed bag with the general trend moving upwards. This is far from a bold prediction, yet my gut tells me that increasing backlogs will be another tailwind (if you are a contractor and like higher fees) or a head wind (if you, like me, are on the owner's side of the contract).