by Kermit Baker, PhD, Hon. AIA
Chief Economist

Billings at architecture firms typically dip a bit in July, but firms reported strong gains nationally last month as the nonresidential construction expansion continued to pick up steam. There are no signs of a slowdown on the horizon. New project inquiries also increased in July. All told, it is shaping up to be a strong fall for design firms.

The upturn in activity has reached the point where firms in all regions are reporting stronger business conditions. Firms in the South are seeing the most growth, but firms in the Northeast and Midwest are reporting an extended upturn in billings. Residential firms continue to see impressive gains in billings, and institutional firms have indicated sustained increases in business levels over the past several months.

Housing starts strong, inflation still generally contained
The positive numbers recorded at architecture firms in recent months are supported by an improving economy. Despite the Federal Reserve Board’s steady increase in short-term interest rates, long-term rates have remained steady, keeping homebuilding strong. Housing starts totaled 2.04 million homes at a seasonally adjusted and annualized rate in July, the sixth time in the seven months of 2005 that starts were over the 2.0 million levels.

The employment numbers continue to be favorable, with more than 1 million net payroll positions added during the first six months of the year, and another 207,000 added in July. Higher prices for gasoline, as well as for other commodities, have driven up the rate of inflation in recent months, but inflation is generally contained to those sectors. Once fluctuations in the volatile fuel and food sectors are removed, consumer prices have risen at a manageable 2.00–2.25 percent rate over the past year, with wholesale prices rising about a half point faster.

August is shaping up as a generally slower month for the economy, according to the preliminary reading for consumer sentiment from the University of Michigan. That indicator has dropped quite sharply in August, after rising slightly in July.

International involvement at fairly modest levels
Although domestic design markets are expanding nicely, some firms are pursuing international design opportunities. One in eight firms (12.5 percent) has been actively involved in international projects (built on foreign soil) over the past five years. Of these firms involved in projects over the past five years, 60 percent reported some international billings in 2004. Generally, the share of billings from international work is fairly small; for most firms it was under 5 percent of total billings last year, and was above 10 percent of billings for only 16 percent of firms with international billings last year.

Firms that have been involved in international projects over the past five years are more likely to be located in the South or Northeast and more likely to be larger firms (more than 17 percent of firms with $1 million or more a year in billings reported international involvement over the past five years). Commercial/industrial is the specialty of firms most likely to be working internationally.

The small share of billings from international projects may be a reflection of the lack of enthusiasm that firms express for these projects. Although a quarter of firms working internationally have no preference for domestic versus international projects, only 5 percent prefer international projects, while 70 percent generally prefer domestic projects.

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