by Kermit Baker, PhD, Hon. AIA
Chief Economist

In July, architecture firms felt the effects of a (hopefully) brief slowdown in the economy. After a strong first half of the year, the second half began on a down note as more firms reported a decline in billings than reported an increase. Despite a retrenchment in monthly business activity, firms reported strong gains in inquiries for new projects.

Firms concentrating in the residential sector reported continued strength in billings, while those with a majority of their activity in the commercial/industrial or institutional sectors were more likely to report declining billings. Firms of all concentrations uniformly reported strong inquiries for new work.

Regional business conditions were quite uniform through the first half of the year. Recently, they are beginning to diverge. Firms in the Midwest reported a sharp drop in billings in July, while firms in the West reported a mild downturn. Firms in the Northeast and South saw growth in billings ease a bit, but still remained positive.

Broader economy has slowed
The broader economy has slipped over the past two months, with employment growth being the most obvious sign of a slowdown. Business payrolls increased by an average of only 55,000 net new positions per month nationally in June and July, after averaging 225,000 per month through the first five months of the year. Construction payrolls unfortunately have followed this trend, increasing by only 3,500 per month over the past two months as compared to 27,000 on average over the first five.

While employment growth has been slowing, inflation has been accelerating. Consumer prices have risen more than 3 percent over the past year, while wholesale prices have climbed 4 percent. Much of this gain is from more volatile food and fuel prices. Construction materials have felt the pinch of rising prices. Iron and steel scrap prices, which often are used as benchmarks for broader steel pricing, shot up in July and have doubled over the past year.

All this volatility in the economy is adding to consumer and business nervousness. Business confidence fell in the second quarter according to the Conference Board’s CEO Business Confidence Survey, and consumer sentiment fell with the preliminary August reading, according to the University of Michigan survey. The Federal Reserve Board feels the weakness is temporary. By raising short-term interest rates a quarter point at their mid-August meeting, they signaled that inflation generated by strong growth overshadows an economic slowdown on their list of concerns.

Design phases show considerable variation
Even with mounting pressures to compress the construction phase of projects, the design phase often extends for 9 to 12 months. Firms were asked for the typical length of time between when architects begin work on a project, and when the construction contract is awarded. Firms report that the design period for residential projects averages over 9 months, almost 10 months for commercial/industrial projects, and 14 months for institutional projects.

As you might expect, there is considerable variation around these averages. For about 40 percent of residential as well as commercial/industrial projects, the design phase lasts under six months, although for about a quarter of projects in these building types, the design phase lasts over a year. Only about 20 percent of institutional projects are designed in six months or less, although close to half (47.6 percent) extend a year or longer.

Other than project size and complexity, firms report three major factors influencing the design time. Client decision making was frequently mentioned as a factor, and whether these decisions need single or multiple approvals. Financing and funding for the project often influenced the design period. Finally, regulatory approvals—land entitlement, special use permits, zoning, environmental issues, and historical considerations—were frequently mentioned as influencing the length phase of projects.

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