Architectural billings may be signalling a turn in the economy, but the gains are being localized is certain segments.
Noted economist Nouriel Roubini tweeted today "Cash-strapped US consumers apparently cheery & spending while cash-rich US firms cutting sharply on capex [capital expenditures] spending & cautious on hiring." I think that summarizes the current market and builders need to be aware of that sentiment.
Just before Thanksgiving, the American Institute of Architects (AIA) released their most recent Architecture Billing Index (ABI) figure. This measure is considered a leading indicator of non-residential construction by 9-12 months (and I'm assuming this means single-family home building is not included but multi-family housing is included since residential billings are a part of the measure). The October ABI score was reported as 52.8, up from 51.6 in September (measures over 50 signal increases in billings and measures under 50 signal decreases in billing). Even better, the October ABI for new projects was 59.4 versus 57.3 in September. Since design is *roughly* 10% of a building's cost, even modest increases in architectural billings can be leveraged into much larger amounts of money being allocated for building construction in the following months. If this is the case, these positive trends in ABI could reverse corporate America's reluctance to invest in capital expenditures like buildings and other facilities (as I discussed below on 11/20/2012--"Manic news for builders).
ABI values over time can be seen in this figure created for the Calculated Risk blog (http://www.calculatedriskblog.com). The trend has been upward (albeit choppy) since January 2009:
But like anything else the devil is in the details. Let's dig into the AIA's report, which can be read here but is nicely summarized in this figure produced by the AIA:
To access this figure, click here.
The gains in ABI have been concentrated in the south (which has been growing faster than most regions in the U.S. for some time, relatively speaking) and the west (which was hit harder in the previous recession, again relatively speaking, and thus likely to see a bigger rebound). Also, the gains in ABI are due mostly to billings in residential, with some gains due to institutional (in northern California, hospital, prison, and university work seems to be the overwhelming majority of building construction, so this doesn't surprise me). (As a side note, it seems to me that institutional would likely follow housing, as schools and hospitals tend to be built as housing is built, but that's a very simple hunch on my part.) Commercial/industrial is a drag on ABI and this indicates there is decreasing amounts of this work in the pipeline for contractors.
There are some other things people need to be aware of. While these positive trends in ABI for residential, combined with recent bullish news coming from single-family home builders, is good news, it's contingent upon some trends that must be mentioned. First, much of the home buying is due to policies that are driving the cost of borrowing for a home down. With the Fed keeping rates low, mortgage rates are also low (a 30-year mortgage at 3.75%? Yes, that's really good for a borrower!) and quantitative easing injecting money into the economy, right now is a great time to buy a house, assuming you can qualify for a loan. Second, the housing market is being buoyed by $25-30 billion (yes, billion with a "b") in private equity investors buying homes with the intent to rent them (Barry Ritholtz states that this buying could be 20% of the current market in this video). Barry continues to point out two very important issues that will change the housing market for the worse if they occur: 1) if the U.S. falls back into a recession, all of those PE buyers will bail out of their housing positions and flood the market, which will cause the housing prices to drop. Secondly, if policymakers at the federal level (the President and Congress) choose to eliminate or cap interest mortgage deductions, the market for housing, whether it be for single- and/or multi-family homes, will drop like a stone. This second issue is unlikely, as mortgage deductions are very popular with voters and thus messing with them would be political arsenic for elected officials, but it's being contemplated as a measure for national debt reduction.
The bottom line is that architectural billings are up, which is a good sign for the building industry, but the constructors need to be cautious. First, the gains in billings are in the housing (and, to a lesser extent, institutional) market sector, which is being driven by favorable macroeconomic factors that have a finite shelf life should the economy not see more wide-spread improvements. Secondly, businesses still seem reluctant to invest in capex such as buildings and industrial facilities. These two issues are, on some level, related (although it's way above my expertise to explain why). I'll feel a whole lot better if/when the commercial/industrial portion of the ABI measure improves.