Let’s start with architecture billing.
I smell a positive trend! The American Institute of Architects (AIA) Architecture Billing Index (ABI) is continuing to rebound, posting a 40 in June, up from 32 in May and 29.5 in April. While the trend is good, let’s not forget that 40 is still pretty lousy. As a reminder, ABI is a leading indicator of commercial building construction by approximately nine to 12 months. A value greater than 50 means that architecture billings are increasing; any value less than 50 means billings are decreasing, which is the case for the past four months. The overall ABI is as follows:
Still, up is up and it seems the AEC industry is starting to adjust to a COVID-dominated world. As for the regional breakdown:
The Sector Averages for June 2020 are as follows:
So on the one hand, we are clearly numerically up from the lows experienced in April. On the other hand, the scores are below 50 across the board, demonstrating that billings are shrinking (just not as fast).
How about contractor backlog?
If the ABI represents what may happen in about a year (the hope), then what do contractor backlogs (the promise) look like? The graphs below show a decrease in contractor backlogs, but the x-axis is in quarters. The good news is that, according to the Associated Builders and Contractors, collectors of the backlog data, backlogs increased last month and optimism is rebounding.
Backlogs are down considerably from their peaks, but what’s missing (and possibly smoothed out due to the quarterly vs. monthly data) are the huge drops we witnessed in the various ABI measures. I don’t know this for a fact, but I highly suspect that this is due to the relative ease of canceling (or not starting) design as opposed to the relative difficulty in terminating projects, particularly large projects (notice the line for $100 million + projects is consistently higher than others) once a general contractor is selected. This is particularly the case for public-sector projects, many of which take years to get approval from and once funds are allocated, they are typically locked in place (infrastructure, which is commonly publicly-financed, actually increased its backlog last quarter).
All in all, we seem to be off the bottom and it doesn’t appear to be a false bottom (fingers crossed). I speculate that the ABI figures will remain under 50 as we pass the COVID-19 economic kidney stone, but any climbing towards 50, no matter how tiny, will help the AEC industry weather this storm.
It is Friday, so let's start with some good news: the American Institute of Architects (AIA) Architecture Billing Index (ABI) rebounded from last month's beyond dismal 25.1 figure up to 32 for May 2020. The bad news: 32 is still pretty bad (OK, it sucks...). Hopefully this is a turn in the right direction, though. As a reminder, ABI is a leading indicator of commercial building construction by approximately nine to 12 months. A value greater than 50 means that architecture billings are increasing; any value less than 50 means billings are decreasing, which is the case for the past few months. The overall ABI is as follows:
Notice the sharp uptick in May. Hopefully it is not a dead cat bounce. As for the regional breakdown:
The Sector Averages for May 2020 are as follows:
It is unwise to call a trend based on the two most recent monthly data points, so I will just state that I hope that the bottom has been reached. Given the uptick in COVID-19 cases in the South, the region that has been the strongest in the construction industry for much of the past decade, I am worried that we are still far away from a V-shaped recovery in construction in spite of pent up demand.
Yup, two blog posts in one day. With the taxes I pay on the income that comes from delivering these pithy insights, the economy will be back in no time!
So I like to present the AIA ABI data as a leading indicator of where the construction industry is heading, but it is just a proxy for the construction industry. Let's take a minute to discuss a metric that is directly related to the construction industry. It so happens that the Associated Builders and Contractors (ABC) has such a metric: the Construction Backlog Indicator (CBI). What if the CBI presents a better picture that the ABI? Maybe things are not that bad. Well...they are not great. The CBI is the number of month's worth of work under contract. The numbers have been falling since January.
While ABC provides monthly data, I have some questions about the data. ABC typically reports a month's data approximately 1.5 months later, so January data would be reported mid-March. However, April's data was presented in in May. Also, and even more puzzling, the reported data for February and March 2020 are exactly the same. This is all inside baseball, but I have rolled the data up into quarterly results instead of monthly.
But back to the results. January showed an average backlog of 8.9 months. The "April" values released last week showed an average backlog of 7.8 months. While 1.1 months may not seem like much, it is a drop of over 12%.
2017 and 2018 were spiky but pretty good. But in mid-2018, backlogs began to slide and the first quarter of 2020 they began falling. The ABC data allows for some drilling down. In terms of industry sector, backlogs have been falling since the second half of 2019 and accelerating for the heavy industry and infrastructure sectors in the first quarter of this year.
Decreases in backlogs by geographic region are far less pronounced as the data is pretty choppy. Interestingly, the West saw an increase in backlog in Q1 2020, but we will see if that continues next month. Metropolitan areas in California and Washington were hit particularly hard by COVID-related project shutdowns (which could be good or bad).
Last is a graph of backlog by contractor size (in dollar volume). Smaller contractors have been fairly consistent with approximately eight months of backlog since 2016. But all of the larger segments have seen a sharp decline in backlog since Q4 2020.
So backlogs have generally been falling since 2019 but haven't seen the perilous drop that the ABI has seen in recent months. But by combining both factors, it looks as if the construction industry started slowing in 2019 and will likely hit the skids in the second half of 2020. Not great news, but perhaps this will be enough to encourage bi-partisan efforts to fund infrastructure improvements (hey, let's try to find a silver lining somewhere).
Hey there all you cool cats and kittens (yes, I'm opening with some Carole Baskin to distract from the impending bad news). Well, the American Institute of Architects (AIA) Architecture Billing Index (ABI) had another bad month. Why do we care? Because the ABI is a leading indicator of commercial building construction by approximately nine to 12 months. Any value greater than 50 means that architecture billings are increasing; conversely, any value less than 50 means billings are decreasing. The ABI for April 2020 was (checks notes one more time in astonishment) 29.5. Sigh....
The fall from 53.4 in February to 33.3 in March was the worst fall in the index's 25 year history. April continues the plumb for new lows.
The regional breakdown for April 2020:
The Sector Averages for April 2020 are as follows:
I will reiterate what I said after last month's drubbing: the need for buildings, especially housing, didn't just dry up overnight. But as the likelihood of a "V" shaped recovery for the overall economy dims, it increasingly looks as if the design and construction industry is headed for hard times.
I just read my last post from September about how the AIA Architecture Billing Index (ABI) tumbled. How cute was that? The score dropped from 50.1 in July to 47.2 in August and remained below 50 by settling in at 49.7 in September. (For background, 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.) The scores zoomed back above 50, peaking at 53.4 for February. Wow, that was crazy!
Well, it seemed crazy until this month. Before continuing, you may want to pour yourself a stiff drink.
The ABI for March fell 20.1 points to 33.3. This is the largest drop in the index's 25 year history. For reference, the largest previous drops during the 2001 and 2008-2009 recessions were 9.4 and 8.3 respectively.
The regional breakdown for March 2020:
The Sector Averages for February 2020 are as follows:
The need for buildings, especially housing, didn't just dry up overnight. However, given the overall health of the economy and the deep uncertainty as to the depths of the COVID-19 fallout, it will take several months for these bruises to heal, if not much longer.
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.