Another Minor Downtick in Firm Billings for August

As firms continue to staff up, availability of qualified candidates becomes an issue

By Kermit Baker, Hon. AIA, AIA Chief Economist

Billings at U.S. architecture firms saw a minor dip in August, the third monthly step back so far in 2015. The AIA’s Architecture Billings Index (ABI) fell to 49.1, down from the healthy 54.7 reading in July. However, with strong reported growth in new project inquiries and in new design contracts for the month, this minor dip should be as quickly reversed as were the other ones in 2015, and architecture firms should return to its upward growth trend of the past four years.

The midsummer setback was felt more by firms in the Northeast than in other regions of the country. Firms in the West reported essentially stable conditions in August, while firms in the South and Midwest reported continued healthy gains. By construction sector, residential firms and commercial/industrial firms also reported a very minor reversal. Institutional firms are reporting the strongest growth with an ABI sector reading of 53.7, and have seen scores at the 53 mark or above for each of the past five months, a streak that the profession has not seen since early 2007.

Economic Growth Not Sufficient to Prompt an Interest Rate Hike

In general, economic indicators are looking quite favorable. In spite of a weak first quarter, growth in the U.S. economy rebounded to 3.7% in the second quarter, and many expect the economy to increase by about 2.5% this year after adjusting for inflation. We’re on a pace to add 2.5 million new payroll jobs this year nationally – about 170,000 of those in the construction sector – and the national unemployment is down to 5.1%.

Still, the Federal Reserve Board has enough concerns about the economic outlook that they decided to hold short-term rates steady at essentially 0% at their September meeting. While acknowledging the recent improvement in household spending, business fixed investment, and homebuilding, they noted that exports have been soft due to the economic slowdown among many of our trading partners. Of particular concern to the Fed is the risk of deflation globally, which suggests continued weakness in many international economies.

Keeping short-term interest rates such a low level, where they have been since late 2008, is intended to encourage more consumer and business investment. It should produce higher prices for equities and real estate values, since investors will be more attracted to these assets given the low returns for debt options. If low rates generate greater levels of demand, pushing up prices for goods and services as well as generating stronger growth in the labor market, the Fed will feel more comfortable moving ahead with an interest rate hike in the coming months.

Labor Shortages Challenge Firm Growth

Even though the professional architecture staff at U.S. architecture firms is much smaller than it was before this past downturn, a labor shortage seems to be emerging in the architecture profession. While there may be former architecture staffers ready to rejoin the profession as new opportunities continues to emerge, an offsetting factor is that impending retirements among aging Baby Boomers are adding to the need for replacement staff. On average, firms report that almost 10% of their current architectural staff is likely to retire or significantly curtail involvement in the firm over the next five years.

This month, we asked our AIA Work-on-the-Boards panel about their experiences in looking to rebuild their architecture staff. Fully half of architecture firms have either already added one or more professional architecture staff this year, or are planning to do so. Additionally, almost 10% of firms are unsure of hiring plans for the year.

Of those planning to add architecture positions, almost one-in-five report that finding qualified candidates is an extremely serious problem, while nearly 40% of firms additionally report that it is a fairly serious problem. Only 6% of firms looking to these positions report that finding qualified applicants is not a problem. Larger firms with over $5 million a year in revenue report having particular problems, with over two-thirds of firms look to add staff having difficulty finding qualified applicants. About the same share of commercial/industrial firms are also reporting problems finding qualitied applicants. Finally, firms in the West are more likely to report finding qualified applicants that are firms in other regions.

This month, Work-on-the-Boards participants are saying:

• Continue to be stable. There seem to be a lot of new firms emerging.
—145-person firm in the Midwest, mixed specialization

• Robust to say the least. I think we are all secretly hoping things start to slow a bit so we can get back to "normal."
—22-person firm in the West, institutional specialization

• Clients have become more transactional, cutting deeply into margins.
—20-person firm in the Northeast, mixed specialization

• Corporate energy projects have dramatically declined around Houston, but hospital work remains strong. Overall, very strong activity up along Interstate 45.
—13-person firm in the South, commercial/industrial specialization

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    Kermit Baker, Hon. AIA, is the Institute’s chief economist and a senior research fellow at the Joint Center for Housing Studies at Harvard University.

    The Architecture Billings Index (ABI), produced by the AIA Economics & Market Research group, is a leading economic indicator that provides an approximately nine- to 12-month glimpse into the future of nonresidential construction spending activity.


    The ABI Work-on-the-Boards Survey Panel is open to any AIA member who is principal/partner of their firm. Apply to join the ABI panel by completing a brief background information form on your firm here.