The American Institute of Architects issued a press release today titled "Substantial Decline in Architecture Billings" which shows that the AIA's Architecture Billing Index (ABI) fell from 50.1 in July to 47.2 in August. This is the largest drop since it fell from 55.9 in December 2016 to 49.4 in January 2017. Project inquiries dipped slightly from 54.9 last month to 54.5 yet the Design Contract Index fell from 49 in August to 47.9. Ouch...Per my usual spiel, any value greater than 50 means that architecture billings are increasing; conversely, any value less than 50 means billings are decreasing. The ABI is a leading indicator of commercial building construction by approximately nine to 12 months. Last month I wrote "The economy is slowing, but it's not slow." It appears to be slowing faster than I expected. Again, no need for a full-blown panic, awareness of a slowdown is warranted.
Here's is the regional breakdown for August 2019:
Sector Averages for August 2019:
The graphic below is cobbled together from two indicators I like to follow and an article published today in Business Insider. On the left is the JLL office clock. It shows New York as entering the "falling phase" in terms of rents. The middle graphic is from the Business Insider article stating that NYC luxury real estate had its slowest month in six years. On the right are the AIA Architectural Billing Index results from last month (click here for my explainer).
These pieces of evidence are not entirely related. The JLL clock is for commercial properties. The BI article is for multi-family properties and the Northeast ABI and Multi-family Residential ABI numbers include data that extends beyond NYC. However, if you combine them and include the recent data that reveals that New York City had a decline of commercial construction starts (which includes both commercial and multi-family projects) of 8% over the fist half of 2019 and the signs point to an almost unmistakable slowdown in NYC construction activity.
Wow...it has been a while since I've posted. Over a year ago, I posted about eight months in a row of growing architectural billings. Since then...meh. Let's look at the July 2019 numbers (posted on August 21, 2019). The Architectural Billing Index reported by the American Institute of Architects clocked in at 50.1, up from 49.1 in June. Project Inquiries came in at 54.9, up from 50.3 in June, however the Design Contracts Index decreased from June's 50.3 to 49 in July. As a reminder, any value greater than 50 means that architecture billings are increasing; conversely, any value less than 50 means billings are decreasing. The ABI is a leading indicator of commercial building construction by approximately nine to 12 months. So we have been essentially flat lining for a few months (50.3 in February, 47.8 in May, 50.5 in April, 50.2 in May and 49.1 and 50.1 in June and July respectively). This span has provided the first values less than 50 since September 2017. Time to panic? Short answer: no. The design and construction industry has been very hot, like the rest of the general economy, for a while. The economy is slowing, but it's not slow.
Here's is the regional breakdown for July 2019:
Sector Averages for July 2019:
So yes, things are slowing from an ABI perspective. Given these trends over the past 5-ish months and ABI's status as a 9-12 month leading indicator, I would construction starts to begin slowing in the next half-year or so. More on that soon...
As someone who participates in the design and construction of public facilities, I am biased towards increased funding in infrastructure. As such, there are two current trends that I find heartening. First, while total construction spending increased 0.1% last month, public construction increased 0.7% from June to $304.5 billion. As he artfully does, Bill McBride at Calculated Risk blog has figures that illuminate this increase. The first figure shows construction spending since 1993 and there's no surprise to anyone working in the construction industry that the residential and non-residential commercial building markets have been continuously heating up since rebounding from the Great Recession.
Spending Public construction peaked in 2009 with the "Shovel Ready" projects funded by U.S. D.O.T. Transportation Investment Generating Economic Recovery (TIGER) grants (now known as Better Utilizing Investment to Leverage Development, or BUILD, transportation discretionary grant program) and then moved sideways...until 2017. Since 017, there has been an uptick in on public projects.
Again, from my biased point of view, this is good news. Politicians from across the political spectrum have been in agreement that the U.S. needs greater investment in infrastructure (albeit with methods of funding causing many bones of contention) and that seems to be happening. While it has been turned into a running joke, there is widespread excitement every time the term "Infrastructure Week" is mentioned. This leads me to my second heartening trend. Private investment funds are raising large financing rounds for dedicated infrastructure investments. Here are two Bloomberg articles worth reading:
Investors Keep Flocking to U.S. Infrastructure, Even Without a Trump Plan
I Squared Raises $7 Billion for Infrastructure Investments
A quote from the first article is particularly positive:
"As we wait for formal U.S. federal financing to materialize, the private sector is taking action to raise funding, partner with all levels of government and build and improve infrastructure across the U.S., an initiative that benefits all stakeholders,” Randall said in an email. There’s “significant demand” from institutional investors for private credit strategies that provide diversification and yield, he added.
To be sure, the private sector will target infrastructure that has a revenue component to it (think power transmission or toll roads), otherwise there would be scant opportunity to provide a rate of return to investors. However, as those infrastructure assets attract private financing, that should reduce the total number of projects seeking government funding, making it easier for government agencies to fund assets that will benefit society but do not offer returns to private investors. This would represent a great form of public-private partnership on a macro scale that would lead to improved infrastructure and increased project backlog for those in the design and construction industry.
I just posted about increased architectural building serving as a positive economic indicator for growth in the construction industry so I'll balance that news with a dose of bad news. The price of lumber is absolutely wildin. See for yourself in the figure below created by Bill McBride at the Calculated Risk blog:
Prices have been essentially climbing since the middle of 2015 and then accelerated in the fall and winter of 2017 with the devastating wildfires in northern and southern California with the market knowing that thousands of homes would need to be rebuilt. The steepest growth comes in January 2018 as lumber tariffs on Canadian lumber were imposed (if you are looking to troll, this is not a political statement; it comes from the National Association of Homebuilders).
Anecdotally, I am hearing project owners bemoaning the increased cost in lumber and steel (also subject to tariffs) to the point many are contemplating shelving projects that haven't broke ground and busted financial models for those that have. It will be interesting to see how these developments affect forward-looking economic indicators like the AIA ABI going forward.
It has been a couple of months since my last post, but there is good news to spread: The Architectural Billing Index reported by the American Institute of Architects increased last month from 52 to 52.8 which marks its eighth straight month of increases. Project Inquiries came in at 59.3, up from 56.7 in April, and the Design Contracts Index increased from 50.1 to 53.3 in May. As a reminder, any value greater than 50 means that architecture billings are increasing; conversely, any value less than 50 means billings are decreasing. The ABI is a leading indicator of commercial building construction by approximately nine to 12 months.
Here's is the regional breakdown for May 2018:
Sector Averages for May 2018:
All in all, very positive news. Not to be Debbie Downer, there are headwinds that can very easily slow the AEC industry (lack of labor, high material prices, etc.), but we can enjoy this data as a great way to start the summer.
Construction material price index continued its steady upward climb and reached a new record high of 226.2 (the index is based on June 1986 = 100 and is not seasonally adjusted). This climb that started in March 2016 after previously peaking at 221.7 in August 2014.
The overall increase in the index has been muted by the relatively steep decline in natural gas prices. Softwood lumber prices and various forms of metal have seen steep increases and will likely go higher should trade wars materialize (e.g. tariffs on Chinese imports, a repeal of NAFTA, etc.).
I was so busy last week that I almost forgot to report on my favorite forward-looking economic indicator for the construction industry: the Architectural Billing Index reported by the American Institute of Architects. While a one month dip is no need to panic, I kind of wish I had forgotten to check for an entire month. February 2018's ABI came in at 52, a sharpish drop from January's 54.7. Drops happen, even in strong construction markets (recall a drop from 53.7 in August 2017 to 49.1 in September 2017). And the number is still above 50, so that means billings are increasing, albeit slower than last month. Per my typical spiel, any value greater than 50 means that architecture billings are increasing; conversely, any value less than 50 means billings are decreasing. The ABI is a leading indicator of commercial building construction by approximately nine to 12 months.
Here's is the regional breakdown for February 2018:
Sector Averages for March 2018:
So, yes, the ABI declined in February, yet it is difficult to even insinuate that this is the canary in the coal mine for a wide market cool down. Even though the thin labor market, skyrocketing material prices and trade wars have people nervous, the bad news thus far is really localized to the Northeast and, to a lesser extent, the Mixed Practice sector. Stay tuned to next month to see if the next data points point to a negative trend.
The United State Census Bureau reported construction spending for January 2018. Overall, spending in January 2018 was basically the same as December 2017 ($1,62.8 billion in January versus $1,262.7 billion in December) and up 3.2% from January 2017 ($1,223.5 billion). Private construction dipped 0.5% from December to January due mostly to a decline in non-residential construction (residential was up slightly). Public construction was up 1.8% from December to January based on strength in the education and highway segments. The full press release can be downloaded here.
The most recent ABI data just dropped, but first an update on material prices. Materials for non-residential construction are up 4.7% year-over-year. Softwood lumber is up 14.5% which was discussed a couple of weeks ago. Crude oil was the largest gainer at 30.3% y-o-y, meaning the cost of gasoline and diesel is climbing.
OK, let's move on to my favorite leading indication: ABI. Per my usual explanation, the ABI records architectural billings on commercial building projects. Any value greater than 50 means that architecture billings are increasing; conversely, any value less than 50 means billings are decreasing. The ABI is a leading indicator of commercial building construction by approximately nine to 12 months.
For January, the ABI came in at 54.7, a sharp up-tick from the previous month's adjusted 52.8 figure.
The regional breakdown for January 2018 goes like this:
Looking at the ABI figures by building type, we have the following: