WORK-ON-THE-BOARDS
by Kermit Baker, PhD, Hon. AIA
Chief Economist

Billings at architecture firms declined in August, with a drop even steeper than that reported in July. While a one-month decline in billings at firms can be dismissed as a blip, declines two months in a row certainly need to be viewed with more concern. Inquiries for new work increased slightly in August, but both the July and August increases in inquiries were well below averages of the first six months of the year.

There was no major region of the country where firms reported billings increases in August, although firms in the South said billings were flat. Firms in the Northeast and West reported reasonably steep declines in billings. Firms in these regions also reported declines in inquiries in August, which is just as troubling as their steep drop in billings.

Billings were off more sharply at larger firms (those with over a million dollars a year in billings). At these firms, only 12 percent reported billings increases in August, while 30 percent reported declines. Residential firms reported an increase in billings in August; commercial/institutional and institutional firms reported steep declines. Curiously, residential firms reported a decline in inquiries, while commercial/industrial and institutional firms reported increases.

Yet, overall economy is stronger
Oddly, the recent weakness in billings is coinciding with a general strengthening in the broader economy. The manufacturing sector has shown steady improvement for the past two quarters, and retail sales in the economy are increasing at a 5 percent rate, the strongest growth since 2000. Housing starts in August were above 1.8 million at an annual rate, the third straight month starts have been at this level. The Economic Cycle Research Institute’s leading index for the economy increased in August for the sixth straight month, pointing to further improvement in the economy.

The decline in billings at architecture firms is in large measure due to state and local budget problems, which are cutting into the construction projects funded by municipalities. With payrolls continuing to shrink nationally, tax revenue is not rebounding as quickly as might be hoped, limiting the ability of state and local government to reverse their fiscal situation.

Limited resources for research
Even though firms on average are much larger than they were a decade or two ago, they still have limited resources to spend on business-related research. This month, we asked our Work-on-the-Boards panel whether they undertake a lot, some, or hardly any research in four key business areas.

Client research got the strongest response. Just over 20 percent of firms indicated that they undertake a lot of research on the economic health and future activities of current or potential clients. Fourteen percent of firms undertake a lot of research on the markets or geographical areas that they serve. Eight percent do a lot of research on their competitors, while 6 percent do a lot of research on construction sectors or areas under consideration for potential expansion by their firm. As might be expected, larger firms are much more likely to engage in business research. Firms with annual billings of $5 million or more are just about twice as likely as the average firm to do a lot of research in each of these areas.

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