Recession’s toll likely to keep many from returning to the profession, says AIA’s Work-on-the-Boards panel
By Kermit Baker, Hon. AIA
AIA Chief Economist
After an encouraging uptick in August, the AIA’s Architecture Billings Index (ABI) retreated again in September, falling to a score of 46.9. Since any score below 50 indicates a decline in billings at architecture firms, this was the fifth of the past six months in which business conditions have deteriorated. Additionally, backlogs at architecture firms—the amount of project activity in-house at present—dropped to 4.2 months on average in the third quarter, meaning that firms could keep current staff employed for 4.2 months without any new projects. This rate is down from 4.4 months at the end of the second quarter. Lower levels of project backlogs, coupled with less encouraging levels of new project inquiries in September, point to continued concern for architecture firms in the coming months.
Even with the national downturn in billings in September, some regions reported improvement. Regional billings scores are computed as rolling three-month moving averages, and recent numbers showed enough strength to boost scores for firms in the Northeast and Midwest into positive territory. Scores for firms in the South and West continued to show relatively steep declines.
Likewise, commercial/industrial firms reported reasonably healthy improvement in September, while residential firms and institutional firms were showing continued weakness. Commercial/industrial firms reported nine straight months of billings gains from mid-2010 through the first quarter of 2011, so there are grounds for optimism for firms in this sector.
Economy remains in slow gear
The broader economy continues to show only modest growth. Just over 100,000 jobs were added in September, bringing the total added for the first nine months of the year to just over one million. That is well below the number required to generate healthy growth in the economy, and, as such, the national unemployment rate is up from 9.0 percent in January to 9.1 percent in September. Construction employment saw an increase of 26,000 positions in September, the second strongest number of the year. However, only 53,000 positions in this sector have been added since the beginning of the year, or fewer than 6,000 per month. Architecture firms have added only 1,200 positions since January, to a current workforce of just over 153,000 in August, the most recent figures available.
Many economists feel that one of the key ingredients missing from the economy is greater confidence on the part of consumers and businesses. With a more positive outlook, consumers would start spending again, and businesses would begin adding employees and increasing their spending. But, unfortunately, business confidence has been falling recently. The third-quarter reading on the Conference Board Measure of CEO Confidence was 42 (anything below 50 is considered negative), the lowest score since early 2009, down 25 points since the first quarter of the year.
Consumer optimism has not fared much better. Consumer sentiment has fallen in four out of the past five months, according to the University of Michigan Consumer Sentiment Index. With a preliminary October reading of 57.5 (on an index where Q1 1966 is set at 100), it’s down almost 17 points from its 74.2 reading in January. In spite of consumer concern over the economy, consumer spending is holding up quite well. In September, retail sales increased almost 9 percent over levels of a year ago, and average monthly gains in 2011 over levels from a year ago have been averaging about 8 percent. By comparison, there had been a 6.5 percent increase in retail sales in 2010, and a 7.2 percent decline in 2009.
Permanent losses to the profession
Employment at U.S.architecture firms peaked during the summer of 2008, and exhibited steady declines for the next two years. For the past 12–15 months, employment levels have been bouncing around this bottom rung. This prolonged downturn has meant that many architects who were downsized at the beginning of the economic crash have been waiting a very long time for a recovery. This month, participants in the AIA Work-on-the-Boards panel were asked to comment on the current status of these downsized architectural staff.
Many who lost positions have either returned to their original firms, gone to other firms, or started their own architectural practices. However, those not currently working full-time in the profession are in a diverse set of situations. According to these estimates, about 30 percent of previously full-time staff who lost their positions are still working in the architecture profession, but are underemployed and working on a part-time or contract basis. These are likely the first people who would return to full-time status once design activity shows a more significant rebound. Well over a third of downsized staff is currently out of the profession, but waiting for business to pick up to return to architecture positions. This includes about 18 percent working in other jobs, but waiting for architecture positions to open up, and almost as many who are currently not working and waiting for architecture positions to open up.
However, this leaves a significant number of former employees who are not expected to return to the profession at all. About 9 percent are retired or not looking for work for other reasons. More than 12 percent are working in other jobs and are unlikely to return even when architecture positions open up. Nearly 6 percent are not currently working, but are unlikely to return to architecture even when the economy improves and positions open.
This month, Work-on-the-Boards participants are saying:
• We specialize in residential and have stayed in business doing multifamily, as the single-family residential market is dead. Firms that held on with government work are now slowing down significantly. —7-person firm in the West, residential specialization
• RFPs have dropped to first-quarter levels. Some projects already under contract have been slow to get the owner to agree to finalize and send out to bid. —4-person firm in the Northeast, mixed specialization
• Our office interiors and retail work for large corporate clients are strong, but government, education, etc., are very weak. —60-person firm in the South, commercial/industrial specialization
• Larger companies are going after local work instead of their typical national work, so smaller companies are having a struggle to get work. We typically have been doing 90 percent national work and 10 percent local. It is now 90 percent local and 10 percent national. —50-person firm in the Midwest, commercial/industrial specialization
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About the AIA ArchitectureBillingsIndex
The Architecture Billings Index (ABI), produced by the AIA Economics and 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 diffusion indexes contained in the full report are derived from a monthly “Work-on-the-Boards” survey that is sent to a panel of AIA member–owned firms. Participants are asked whether their billings increased, decreased, or stayed the same in the month that just ended, as compared to the prior month, and the results are then compiled into the ABI. These monthly results are also seasonally adjusted to allow for comparison to prior months. The monthly ABI index scores are centered near 50, with scores above 50 indicating an aggregate increase in billings, and scores below 50 indicating a decline. The regional and sector data are formulated using a three-month moving average. More information on the ABI and the analysis of its relationship to construction activity can be found in the white paper “Architecture Billings as a Leading Indicator of Construction: Analysis of the Relationship Between a Billings Index and Construction Spending” on AIA.org.