ABI inches toward 50; when will industry see growth?

The Architecture Billings Index, the American Institute of Architects' monthly gauge of design activity, moved up for the third straight month in August from 47.9 to 48.2, but still reflects an overall decline by falling short of 50. AIA Chief Economist Kermit Baker tells The Zweig Letter in an exclusive interview in the Sept. 27 issue he sees signs of life but thinks the ABI needs to reach the mid-50s before firms feel much of a difference.

What's happening at your firm? Are you feeling better about the ABI's direction?

ABI still struggling to crack 50

The American Institute of Architects' monthly gauge of design activity, the Architecture Billings Index, jumped almost two full points in July to 47.9, the second-highest score in almost two years, but remains well below 50, meaning there is still a dip in work across the industry.

“It didn’t move dramatically, but I think it is kind of back on track to the trend that we were seeing back in the first months of the year,” says AIA Chief Economist Kermit Baker in an exclusive interview with The Zweig Letter.

Nevertheless, Baker says, a recovery isn’t looking as solidly in the cards as the pundits predicted earlier in the year. He expressed frustration with the up-and-down nature of the economic recovery, saying that none of his predictions of sustained recovery in the second half of 2010 have materialized.

When do you think the ABI will break 50 again? Were you predicting it would happen by now too?

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.

Growth on the horizon?

The Architecture Billings Index, the monthly gauge of design activity by the American Institute of Architects (AIA), in April reached its highest level since the economic recession began in late 2008, jumping from 46.1 in March to 48.4.
While the latest figure still reflects a decline in activity because it’s below 50, AIA Chief Economist Kermit Baker calls this month’s jump—and the other associated measures that team with the ABI—“pretty encouraging overall.”

“It looks to me like we’re getting closer to the bottom and things are gradually getting better,” he tells The Board Room in an exclusive interview. “It’s one more step down the road. We’re starting to see some of the pieces show up a little healthier.”

Interestingly, one of those healthy pieces is the commercial/industrial sector, which is up from 46.4 in March to 48.5 in April. That's surprising giving the recent prediction by one congressman of a "tsunami in the sector." The residential sector, on the other hand, dropped from 47.6 to 45.8, the second straight month it’s fallen.

Overall, Baker is confident that the industry as a whole will see brighter days ahead, but he doesn’t expect the bounce-back to happen as quickly as the downturn.

“The steep decline is usually pretty typical in these cycles, but we don’t always see that on the upturn,” he says. “For most firms, it’s just marginally better. It’s about more firms seeing growth than decline. At this stage, when things are moving up, it doesn’t rocket off too quickly. I don’t think the profession is going to feel a big difference when the number finally does get over 50. That will probably take a few quarters.”

For more about the Architecture Billings Index, check out the May 24 issue of The Zweig Letter.

Billings show slight improvement, more to come?

The end of the first quarter of 2010 brought with it another slight bump in the monthly gauge of design activity by the American Institute of Architects, but the 46.1 number still reflects a decline in billings in March.
The AIA’s Architectural Billings Index was up from 44.8 in February, but until it reaches 50.0, it will still be a sign that the industry hasn’t yet turned the corner on the economic recession.

“It’s up a little, but right now we’re treading water,” AIA Chief Economist Kermit Baker told ZweigWhite in an exclusive interview about the latest numbers. “We’re waiting for something to pop through. There’s really not a lot of strength in these numbers.

“I thought we’d see a little movement, but frankly I thought it would be a bit more. We’re still working our way through this, but the number for March is the highest it’s been for a year and a half,” he says.

New project inquiries made a significant jump from 52.0 in February to 58.5 in March, but Baker has discounted the rise in that number for several months, saying it hasn’t been translating into new work despite the move upward. He has said the increase is likely due to more firms reaching out for any projects they think could possibly generate work for them at a time when revenue is at a premium.

Baker believes an increase in payrolls in the larger economy could bode well for the future in terms of billings in the design industry. He continues to point to the second half of 2010 as the time when the ABI will finally crack the elusive 50.0 barrier, reflecting an increase in design activity.

“If we see a 1- to 1.5-point increase for each of the next three months, we’re right there at that 50 number so we’re on track to reach it by the middle of this year,” he says. “That bump we’re seeing in payrolls will ultimately percolate into the design sector. It’s just a question of when it happens.”

After the recession in 2001, it took about three years for the billings index to reach 50 again, Baker says, and of course that recession was not nearly as deep as the one in which we are now engulfed.

“The more new jobs there are out there, these companies are going to need more facilities,” he says. “There’s been a pretty tight correlation over time between jobs picking up and design activity, then of course you see construction pick up nine to 12 months later.”

Baker doesn’t believe the apparent glut of commercial space will slow down the design recovery, saying the vacancy rates aren’t significantly higher than they have been in the trough of previous downturns.

Don’t look for the passage of health care reform to be the answer when it comes to design activity picking up, he says.

“I really don’t see a direct connection there,” Baker says. “I haven’t heard a good persuasive argument that the sector will change very much as a result of health care reform.”

The federal economic stimulus package could help, as about half of the money in the pot for design work is expected to be distributed in 2010. Although many have criticized the $787 billion spending package as not delivering the expected results, Baker sees it in a different way.

“The money has to work its way through the economy,” he says.

Billings remain in slow decline, turnaround coming?

In “another plain vanilla month,” the American Institute of Architects’ monthly tracking of design activity showed some signs of life, jumping more than two points to 44.8 in February, up from 42.5 in January.


Despite the increase, the sub-50 score in the AIA’s Architectural Billings Index still reflects a decline in billings activity for the month. New project inquiries continued their trend of scores above 50, at 52.0 for February, but AIA Chief Economist Kermit Baker says he’s still waiting for that to translate into new work for the industry.

“We got back most of what we lost (in January), but (the ABI) has been in the low to mid-40s for almost a year now,” Baker tells ZweigWhite in an exclusive interview. “We’re still waiting for something to put it over the top.”

Baker maintains “a feeling in my bones” that the ABI will return to scores of 50 or higher in the middle of the year, based largely on “encouraging signs from the broader economy,” and the history of the three most recent recessions. In those, Baker says, it’s taken about two or three quarters for a turn in the stock market to reach the bottom of the economic barrel, another two quarters to register an uptick in the labor market and payrolls, and another two or three quarters for design activity to turn around.

“There’s nothing we need to resolve,” Baker says. “All that’s missing is a general feeling of confidence that the economy is going to continue to recover. This recession is somewhat unique in how severe it’s been, but it’s not that different from what we’ve seen and been through in the past.”

Baker sees April and May as the likely months for growth in employee payrolls, and expects design activity to increase soon after that happens.

“Once companies start bringing back their employees, they’re going to start thinking about adding space,” he says. “That’s the process we’re looking at. We’re on a path for this to play out in a fairly typical recovery pattern.”

As for the shape of this recovery, Baker sees no reason to fear the worst, as some forecasters do.

“Everyone’s nervous that we’re going to see a W-shape or a U-shape, when really I don’t think there’s any evidence to support that,” he says.

ABI sinks in January

It was “more of the same” for the monthly indicators of design activity in January, with the Architectural Billings Index falling almost three points from 45.4 in December to 42.5 in December.

Kermit Baker, chief economist for the American Institute of Architects (AIA), told ZweigWhite he looks at the January figures as “a modestly negative signal,” saying the 42.5 number is similar to the levels of last summer. Any score above 50 indicates growth in design activity.

“It’s certainly a setback,” he said. “There’s no sign of moving toward a recovery.”

But, with his eyes on mid-2010 for several months now, Baker still thinks his target of the second half of the year for a recovery across the industry is reasonable.

“It continues to be a slow, troubled recovery, so we’re taking this month to month,” he said. "If the number is still in the low 40s in April and May, I might retrench a little bit on the idea of mid-year being the focus for the recovery.

“For better or worse, it does turn pretty quickly. There’s enough good news coming out of the broader economy now that we should start seeing better numbers,” Baker said.

He pointed to an increase in retail sales and overall manufacturing as good signs for the ABI, especially when added to the uptick in gross domestic product in the fourth quarter of 2009 and leveling in the unemployment rate.

New project inquiries were at 52.5 for January, but Baker doesn’t see that number meaning much when the plus-50 scores haven’t translated into new work in the last several months. The AIA may adjust the factors that are included in that calculation by the end of the year, he said.

The Midwest ABI was 48.0 for January, with the Northeast (45.7), South (41.3), and West (40.5) rounding out the scores. All stayed at about the same level as December, with the Midwest representing “a pretty healthy number,” Baker said.

Residential led the sector breakdown at 50.1, followed by commercial/industrial (44.9), institutional (43.1), and mixed (40.3). Institutional work tailed off recently after a few solid months, Baker says, largely due to a lack of state and local government funding.