For the AEC industry, 2022 ended on a dour note, yet there is hope for 2023. The American Institute of Architects (AIA) released its Architecture Billings Index reading for December last week. The bad news is that the measure, clocking in at 47.5, indicated that billings are declining. The good news is that December was up from November's 46.6. Let's hope that this isn't a dead cat bounce. The ABI is a nine-to-twelve-month leading indicator of commercial building construction activity, with measures above 50 demonstrating that billings are increasing and those below 50 signaling a decrease. 

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The last three monthly ABI results have come in under 50. This is not surprising given that the economy is still trying to digest information. Inflation is getting better but is still high by (recent) historical standards and economists are business prognosticators are still debating whether or not there will be a recession and, if yes, whether it will be soft or hard. The design and construction industry is feeling the whiplash of the manic economic data and while the ABI has turned down, there is still plenty of work for builders with the hope of more with funds from infrastructure bills shaking loose. Overall, the news is not great but it is note reason for panic either.

If you want to panic, here's your justification: a) save for the northeast, every regional and sectoral measure is down over the past year, and b) the most recent month's detailed data shows that regional and market segment data are all below the 132-month (11-year) averages except mixed practice. If you want a silver lining, focus on the fact that we are way up from when the design market cratered while we falling into the jaws of COVID-19 pandemic in the spring of 2020. You can see the market gyrations in the graphs below. 

I tend to be a "glass-half-empty" type of pessimist. As such, the American Institute of Architects' (AIA) Architectural Billings Index (ABI) for October landing with a 47.7 handle would typically have me concerned about the wheels coming off the AEC industry wagon, but I am fairly sanguine about the measure. Before I explain why, let me restate that an ABI measures above 50 mean billings are increasing, while those below 50 signal a decrease. The ABI is a nine-to-twelve-month leading indicator of commercial building construction activity.

​Having said that, how can a measure of 47.7, particularly after falling from 51.7 the previous month, not leave me worried? Well, this decrease was totally predictable. If not this month, then sooner than later. Why? well, there are plenty of predictors that we are heading for a likely recession. My favorite indicator is the spread between 10-year and 2-year treasuries (AKA the 10/2 yield curve). While a lot of people will argue the validity of the 10/2 yield curve, it is a pretty good reductive predictor of recessions. Essentially, when the yields on short-tern treasuries (2-year) exceed the yields of longer-tern treasuries (10-year), the “smart money investors” are predicting tough economic conditions in the short term (hence the demand for a higher yield). Right now, the yield curve is bending strongly towards a recession. Notice how when 2-year yields exceed 10-year yields (a negative yield curve, or when the graph below goes below zero), a recession seems to follow (select "max" for time period; the grey bands in the figure signify recessionary periods). If you want to geek out over the validity/invalidity of the 10/2 yield curve, shoot me an email or DM.
A more tangible measure in the increasing Fed funds rate. The Federal Reserve Bank has been increasing their funds rate in a stated purpose of cooling the economy (specifically reducing inflation). While the Fed funds effective rate does not seem that high from a historical perspective, when it is at zero for several years, any increase seems painful. Notice also that recessions (grey bands) tend to follow periods of increasing rates. Taking these economic indicators together over the past several months has braced us for an economic slowing, and hence a decrease in ABI.
Having said all that, here are the details.

Similar to last month, the pain is localized. In fact, the only regional ABI that was below 50 was in the West, and that 49.6 measure is not that bad. In terms of market sectors, Multi-family Residential has decreased for two months straight (and rather sharply to boot). Again, this is predictable as this sector is particularly susceptible to increasing interest rates. Institutional, in spite of a monthly decline, has remained relatively strong over the past year and this may be due to planned government spending on infrastructure (which includes auxiliary building construction). Design contracts and inquiries are both down sharply but inquiries are still above 50. In spite of my relative positivity, one stat that concerns me is that, with the exception of the Northeast and Institutional projects, the sub-category ABI measures for October are all below their 130-month averages.

So the big question now is how long will this decline last? That is a tough question. While there are all these economic headwinds, some ginned up intentionally, there remains so much pent up demand for new buildings, especially housing. So if you are not buying my seemingly lack of panic, let me leave you with the news that construction starts accelerated 8% in October. The economy is behaving schizophrenically so be prepared for some wild gyrations over the next few months. 

I read an interesting article in the McKinsey Quarterly this weekend regarding construction employment. Almost everyone in the Architecture-Engineering-Construction (AEC) industry knows there is a labor shortage, acutely for skilled trade positions. What I found particularly interesting is that the demands for such labor will increase markedly over the next few years as projects funded by H.R.3684 - Infrastructure Investment and Jobs Act (IIJA) commence. As of September 2022, there were approximately 7.7 million people working in the construction industry.

​This amount is just slightly less than the peak construction employment achieved in April 2006 (7.719 versus 7.726 million to be more precise). However, the gains in employment since the market cratered in the housing bust that catalyzed the great recession of 2007-2008 are not enough. There are currently over 440,000 openings in the construction industry.

​If those open positions are to be filled, we need to increase construction employment by over 10%.  But that’s not all. The McKinsey article estimates that we will need over 200,500 additional positions between 2027 and 2028 to accommodate the projects that will be funded by the IIJA. Most of these jobs will be in areas that most people associate with traditional infrastructure, such as:

• Transportation (roads, bridges, etc.): 8,100 engineering positions and 34,000 trades workers
• Water infrastructure: 5,500 engineering positions and 23,000 trades workers
• Passenger and freight rail: 4,200 engineering positions and 17,000 trades workers
• Resilience and other infrastructure: 3,700 engineering positions and 15,000 trades workers
• Airports, ports, and waterways: 3,300 engineering positions and 14,000 trades workers

 
Yet, the biggest increase in employment will be necessary to build broadband infrastructure (9,100 engineering positions and 35,000 trades workers). These totals do not include people in the industries tied to delivering construction materials, which is in even greater need. The McKinsey article offers some recommendations for increasing construction employment (upskilling/reskilling existing workers, hire from nontraditional segments e.g. military, enticing people into the workforce with subsidized housing and other benefits e.g. childcare, and of course apprenticeships. Another key point to entice people into the construction industry is the pay. Strong demand for people for the foreseeable future and steadily increasing compensation are great selling points. However the case is made, it needs to be made strongly, because the construction industry is understaffed just as we are finally making serious investments in our built environment.

 The American Institute of Architects' (AIA) Architectural Billings Index (ABI) measure for September slipped to 51.7, down from 53.3 the month prior. While this is a relatively steep drop, the losses were localized to two key areas that will be discussed below. And while the ABI slipped, it is still above 50 and is actually higher that it was in July. ABI measures above 50 mean billings are increasing, while those below 50 signal a decrease. The ABI is a nine-to-twelve-month leading indicator of commercial building construction activity. The amount of up-and-down activity in ABI is not surprising giving the gyrations in the overall economy. 

When digging into the details, what jumps out to me are the September result for the South and Multi-family residential, the two sectors that have been in their own secular bull market for quite some time.

• Check out the Northeast. It ripped north last month by 9.6%. Keep in mind that over the 10+ years of data I have, the average ABI for the Northeast is 48.5, meaning it has been declining in billings for an extended period of time. The gains in the Northeast are not a recent phenomenon given that the year-on-year gain is 6% while all other regions are down.
• Multi-family had a really bad terrible month. Over the past 10+ years, it has the second highest ABI subsector performance (right behind the South), but it has the greatest month-over-month and year-over-year losses. Raising interest rates are likely the kerosene on this dumpster fire.
• Almost as surprising as the big jump in the Northeast is the rip up in Institutional ABI. The September reading of 53.9 is well north of the 10+ year average of 50.3. I will be watching to see if this is the result of the recently-passed large infrastructure bills.
• Aside from Institutional, the three other sectors were down, yet their losses were mild compared to Multi-family. The steep month drop in Commercial/Industrial, along with it's yearly loss, are a source of concern that are worthy of future scrutiny.

The graphical data is below, yet the big story of today is the steep slide in the South and Multi-family. That said, while ABI is a leading indicator, the more leading of the leading indicators are the Project Inquiry and Design Contract indices, and both are down on a month-over-month and year-over-year basis. Even worse, they are well below their 10+ year averages. The next few month could see even greater paring unless there is a bump from the infrastructure bills.

It has been two months since I have posted regarding the American Institute of Architects' (AIA) Architectural Billings Index (ABI). In that two months, the Dow and S&P 500 are down over 9% and the NASDAQ is down over 6%, with the bulk of these drops in the form of market convulsions based on the Fed raising interest rates. Layer this on top of 40-year high inflation and the sundry labor and supply chain issues and you have a cocktail for malaise. However, over that same period of time, the ABI is actually up, albeit by less than 1%. The August ABI registered at 53.3, versus 51 in July and 53.2 in June. But up is up, so keep that in mind before the other shoe drops. Recall that 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.

As for that other shoe...there is a lot of negative numbers, both from month-over-month ABI data and year-over-year. The details are as follows, but first a few notes:

• The month-over-month increase in the overall ABI from 51 in June to 53.2 in August was exclusively the work of the Northeast (+2.9%) and Institutional buildings (+4.8%).  Every other subsector was down.
• Speaking of the Northeast, that region is very Jekyll and Hyde. Its 10+ year average subsector ABI is 48.4, the only subsector below 50. That said, it is home to three of the top 10 metro areas for construction starts (New York, Washington, D.C. and Philadelphia). I am aware there is a pretty big difference between starts for the first half of this year and 10+ years of data, but I still find it interesting that the lagging region houses some of the busiest cities.
• Between the overall ABI, the regional and building type subsectors, Project Inquiries and Design Contracts (11 total data sets), five are now below their 10+ year averages:
  • West: 50.2 in August versus a 128-month average of 50.7
  • Multi-family Residential: 52 in August versus a 128-month average of 52.3
  • Institutional: 52 in August versus a 128-month average of 50.2
  • Project Inquiries: 57.9 in August versus a 128-month average of 59.1
  • Design Contract Index: 52.3 in August versus a 128-month average of 52.4
• The overall August ABI of 53.3 is greater than the 128-month average of 51, so not all is bad.

Per usual, it will be important to watch the ABI and other metrics (e.g. construction material costs and labor rates) as the economy continues to navigate choppy waters. I suspect the measures will decline more next month given the sense of pessimism on Wall Street, but I hope I am wrong. There is a bit of distance between Wall Street and market demand. 

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:

• The Northeast was the only subset of data that slipped below the 50 threshold. So again, buildings are increasing in 10 out of 11 data subsets, but the Northeast is back into the decline column after two months of growth. Also (amazingly?), June's 48.7 is above the 126-month average of 48.4.
• The West and Midwest are above their 126-month averages (50.7 and 51.2 respectively), while the South is below its average (52.8).
• The only subsector month-over-month gainer was in Institutional buildings.
• For the sectors, all are still above their 126-month averages. Again, not all the news is dire, but...
• The two forward-looking measures, Project Inquiries and Design Contracts, are below their 126-month averages (59.1 and 52.4, respectively).

So a sort of mixed bag of news that leans negatively. Given the Federal Reserve meeting this week where the Fed Funds rate is likely to go up 100 basis points and a lot of quarterly earnings being reported, the next few months of economic data watching should be interesting.

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:

• All subcategories are above 50, so there is universal strength across the industry. Keep that in minds as you continue to read.
• All regional ABI measures were down except the West. I credit the Golden State Warriors for this positive move #godubs
• All of the market sector ABI measures also declined, no exceptions.
• Project inquiries were UP from last month. While inquiries are far from a sure bet to become actual billings, it is amazing that people are still interested in building in spite of all the economic headwinds.
• For context, all of the May 2022 ABI values are higher than their respective averages starting in January 2012. It is rare that the South is down and perhaps the folks down there are just exhausted.

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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:

• Multi-practice hit a 10-year + 5-month high (the duration I have been tracking he ABI).
• Commercial/Industrial, at 60.7, is almost at its 10+ year high (61).
• Aside from the overall ABI, the only other decliners from March to April were Project Inquiries and Design Contracts, with the latter's 8.5% retreat being the only really dour news.
• On a year-over-year basis, the overall ABI is up and the only specific sector measure that is down is Institutional billing.
• Project Inquiries and Design Contracts are down year-over-year, likely goosed by the March to April declines.

So yes, the overall ABI is down but on the balance, the design sector is healthy which is good news for builders. In spite of the rough several weeks for the stock market and poor news regarding the general economy (inflation, etc.), the AEC world looks pretty strong.

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:

• Economic headwinds threaten construction's spring recovery (TL;DR version: pent-up demand is good for the construction industry, but skyrocketing material and labor prices are bad, particularly with respect to maintaining budgets).
• U.S. single-family starts tumble; construction backlog at record high (TL;DR version: single-family housing construction is a huge part of the industry, so fewer housing starts are generally a bad economic indicator for the industry, yet contractor backlogs are at record highs which indicate contractors have a lot of work and, by extension, have the ability to increase margins ,which is good).

Writers and pundits are not trying to confuse us. There is so much data and given worldwide turbulence, not all the data is correlated towards "good" or "bad". It is easy to be confused when the stock market, while off its highs, is still roaring while the 10-year/2-year treasury yield curve inverted last week (such inversions have preceded the last six recessions for you non-nerds). In other words, it is complicated.

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.