Wednesday, June 23, 2010

ABI loses steam after three straight months of increases

After reaching its highest level since the start of the economic recession in late 2008, the monthly gauge of design activity by the American Institute of Architects stumbled in May, falling below its March level.

The 45.8 number means there remains a decline in design activity for the month, an issue the ABI has been dealing with for most of the recession, AIA Chief Economist Kermit Baker says.

Much of the drop, he tells The Board Room in an exclusive interview, is centered on worry and concern, from small firms especially, about the larger economy and how that volatility could affect the A/E space. The stock market “took a big hit” in May, largely because of panic over the economy in Europe. The Gulf of Mexico oil spill could also play a role, he says.

“Small firms are certainly a little more vulnerable, particularly in a down economy,” Baker says. “Larger firms tend to be working more on larger projects, have larger backlogs, so they don’t move around as much in terms of being concerned about things going on in the rest of the world.”

The commercial/industrial sector remains one of the bright spots in this month’s index, moving from 48.5 in April to 51.3 in May. That means that sector has jumped almost five points in just two months. Institutional work, on the other hand, slid back to 43.4 in May, making it the lowest-ranked area.

By geography, the Northeast (50.6) and Midwest (48.5) provide the most reason for an optimistic outlook, but overall the numbers were disappointing, Baker says.

“This is certainly a move in the wrong direction after three months where we picked up almost six points,” he says. “It looked like we were developing a head of steam for the last few months. I’m not really sure what’s going on.”

The economic uncertainty in May led more respondents— and more economic pundits— to revive the theory of a double-dip recession, Baker says. That would mean the economy would recover to some degree, but then quickly decline again before fully bouncing back.

“I’ve definitely heard more about that, and had that theory get more traction in the past month than I had in the previous four or five months,” Baker says. “It’s getting to the point where it’s difficult to predict exactly what’s going to happen from month to month. With manufacturing numbers going up and housing starts coming down, this is a vulnerable period in the economy, so things can change the momentum pretty quickly.”

For more on the ABI and ZweigWhite's exclusive interview with Kermit Baker, check out the June 28 issue of The Zweig Letter.

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