by Kermit Baker, PhD, Hon. AIA
Chief Economist

Though the pace of growth slowed a bit from September, business conditions at U.S. architecture firms in October improved for the tenth straight month. The October reading of 57.5 (any reading above 50 in the Architecture Billings Index indicates growth in billings nationally) represents a somewhat slower pace of growth than the 60.5 score in September, but is ahead of the 57.1 average reading for the first 10 months of 2005. Additionally, the index reading for inquiries for new work jumped to 64.8, the third highest reading of the year, indicating strong interest in future design projects.

Firms in all regions of the country report healthy business conditions. For firms in the Northeast and Midwest, conditions have strengthened considerably in recent months. For firms in the West, growth has begun to level off, while firms in the South have seen a slight easing in growth after several months of reporting the strongest growth of any region.

Commercial/industrial firms are reporting the strongest growth in billings in recent months, pointing to acceleration in construction activity in this sector around the middle of 2006. Institutional firms are reporting stable growth, while residential firms are reporting growth easing.

Hurricanes’ effects still felt
The broader economy is still battling its way out of the slowdown resulting from the recent hurricanes. After increasing by almost 200,000 payroll jobs per month on average through the first eight months of the year, employment declined nationally by 8,000 jobs in September and increased by only 56,000 in September. Construction, fortunately, has not suffered. Construction payrolls increased in September and again in October. The October gain of 33,000 payroll positions accounted for over half of the job gains nationally last month.

The consumer outlook has also suffered over this period, in part due to rising energy costs. After declines in the consumer sentiment index in August, September, and October, the preliminary November reading shows a reasonably healthy rebound. Whether this will be enough to strengthen retail spending remains to be seen. Retail sales growth has been slowing in recent months, and, as of October, retail sales were up only 5.6 percent as compared to year-ago levels.

Energy costs hurting the industry
Rising energy costs have negatively affected the design and construction industry in several ways. By slowing the broader economy, they limit the need for new facilities. By increasing transportation costs, they have added to delivery costs of construction products. Finally, construction products and materials that have a high petroleum content (e.g., asphalt shingles and PVC piping) have seen direct price increases.

Still, fewer than 40 percent of firms report that rising energy costs have changed the way that they approach design projects. The areas where firms report the most significant impact are: greater use of energy-efficient products (31 percent), scaling back on projects due to increased construction costs resulting from higher energy costs (30 percent), and greater interest in sustainable architecture to reduce longer-term energy costs (22 percent). Fewer firms mentioned more significant impacts like delaying projects, investing in energy management systems in new buildings, or changing product specifications in projects.

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