The Western U.S. and the Multi-family Sector Hold Strong, but the AIA ABI Slips for Consecutive Months

The title shows my west coast bias and how I don't want most (all?) of the people who read this to panic. Things are OK on the west coast (particularly in the Bay Area). The real headline from the American Institute of Architects (AIA) is that the Architectural Billing Index (ABI), a leading indicator for construction activity by nine to 12 months, is down for consecutive months for the first time since May to June 1012. It fell from 49.8 in November to 48.5 in December 2013. Any figure below 50 shows a contraction in architectural billings (and hence, less building construction down the road). The 48.5 figure for December represents the total U.S. building market as a whole. Breaking the number down by region and sector type tells a nuanced story:

Regional averages:

• West: 53.2
• South: 51.2
• Midwest: 47.0
• Northeast: 42.8

Sector averages:

• Multi-family residential: 53.8
• Mixed practice: 51.0
• Commercial/industrial: 47.1
• Institutional: 44.8

The ABI is essentially being dragged down by the Northeast (and to a lesser extent, the Midwest) and by the Institutional and Commercial/industrial sectors. The AIA's Chief Economist, Kermit Baker, states part of this overall decline in ABI this may be hangover affects from the Federal government shutdown last year. I buy that, particularly for Institutional projects (schools, college campuses, corrections facilities). But it doesn't explain why the West is showing continued strength. My hope is that things are just temporaily slow in the Northeast and Midwest due to the harsh winter and people working less. I guess we'll find out in the spring. Commercial construction continues to face headwinds in retail (malls are dying a slow death) and office (relatively high unemployment means less need for offices).

One last thing: building construction is highly dependent on local markets. Some cities are up, others are down. Same goes for sectors. This adds to the volatility of the regional numbers, which snowball into volatility in the national number, as the figure below from Bill McBride at the Calculated Risk Blog so elegantly demonstrates:

The recent slide in ABI is not encouraging, but keep it in perspective. The design/construction is volatile, and it's more important to keep an eye on your respective market.

To read the full AIA press release, click here.