by Kermit Baker, PhD, Hon. AIA
Chief Economist

Positive trends in business conditions at U.S. architecture firms continued in May. Close to 30 percent of firms reported increases in billings and more than 40 percent saw gains in inquiries for new projects, with few firms noting declines in either of these measures. Residential firms reported the strongest business conditions of any firms specializing in a single market sector. Still, prospects look positive for the commercial/industrial outlook as inquiries for new work were very strong in May for firms concentrating on these facilities.

Regional trends also show balanced activity. Firms in the South report the strongest growth in billings, but firms in the other regions also showed healthy gains. Firms in the Midwest and West have reported substantial improvement in business conditions since late 2004.

Slow overall growth; construction still strong
The broader economy is trending up, but higher rates of inflation and increases in short-term interest rates by the Fed to fend off future inflation are taking their toll on growth. Inflation in wholesale prices is increasing at a 4–5 percent annual pace, mostly due to higher oil prices, but other commodity prices are also rising, including those of some key construction materials.

Construction activity remains strong despite rising costs. Spending on construction projects increased 10 percent during the first quarter of the year, after rising more than 9 percent last year. Consumer spending also remains healthy, as retail sales increased 6.4 percent in May compared to a year ago, and have risen at a comparable pace each month this year.

Employment gains were disappointing in May, even though the national unemployment rate dipped last month. The coming months should see continued slow growth, as the Economic Cycle Research Institute leading index for the economy has declined for each of the past two months. This leading indicator generally anticipates movement in the economy several months out.

Contractor bids are fewer, higher
A strengthening construction market is creating more design opportunities for architecture firms. However, a strong market coupled with cost increases for key construction materials is creating significant inflation in construction bids. Well more than a third of firms report that they are getting fewer bids from contractors than they got a year ago, as contractors begin to build up significant backlogs and construction labor shortages again are becoming an issue.

More significantly, though, the overwhelming majority of architecture firms report that bid prices from contractors are coming in higher than they did a year ago for comparable projects. Almost 88 percent of firms report higher bids for comparable projects, and only 4 percent report lower bids.

Most firms don’t see the situation improving from a cost and contractor availability perspective anytime soon. Almost half (47 percent) of firms expect to see higher bid prices from contractors and potentially fewer bids over the coming months. Fewer than 5 percent see the situation improving, with the rest expecting the situation not likely to change much in the near future.

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