by Kermit Baker, PhD, Hon. AIA
Chief Economist

Following some modest softening in December, billings at U.S. architecture firms began the new year on a stronger note by edging back up in January. Inquiries for new projects also moved up, pointing to even more improvement in business conditions in the months ahead.

Regionally, business conditions in January remained very strong for firms in the South and healthy for firms in the Northeast and Midwest, while growth eased for firms in the West. Residential firms reported strengthening conditions in January after easing for most of the second half of 2005. Commercial/industrial and institutional firms reported healthy business conditions in January, but with growth easing somewhat from conditions in the fourth quarter of 2005.

Weak overall finish to 2005; 2006 looking better
Last year ended on a surprisingly weak note as the Commerce Department reported that our economy grew by only 1.1 percent in the fourth quarter at an annualized rate and adjusted for inflation. Spending by consumers, particularly for durable goods such as autos, was a key reason for the disappointing performance of the economy.

This year has gotten off on somewhat better footing. Payrolls nationally increased by 193,000 positions in January, an improvement over the average performance in the third and fourth quarter of 2005. This helped push the national unemployment rate down to 4.7 percent, its lowest level since mid-2001. Construction payrolls increased by 46,000 in January, double the average growth for this sector during the second half of 2005.

Conditions look to improve in the months ahead. The Conference Board has reported a steady rise in consumer confidence levels since last October. The Economic Cycle Research Institute’s Leading Economic Index showed a healthy gain in January, following gains in November and December. This leading indicator anticipates the direction of the economy over the coming months.

Mergers, acquisitions looking attractive
With a strong economy and growing construction markets, architecture firms may see opportunities for acquiring or merging with other design firms. Over the past two years, almost 4 percent of the AIA Work-on-the-Boards panel indicated that they had acquired another firm, while an additional 1.3 percent report having merged with another firm.

Larger firms are much more likely to have been involved in a merger or acquisition over the past two years, and much more likely to be considering this strategy at present. Currently, almost 10 percent of firms in our panel indicate that they are actively considering acquiring or merging with another firm.

Firms have a variety of motives in considering a merger or acquisition. Adding credentials to the firm or giving the firm the ability to add new construction sectors or serve a broader market area were the most common responses, mentioned as a very important factor by almost 65 percent of firms that have recently completed mergers or acquisitions or that had actively considered these strategies.

Allowing the firms to compete more effectively or allowing the firm to operate more efficiently or profitably was each mentioned by almost half the respondents. A unique opportunity that presented itself, or allowing owners to realize benefits were rated as very important by almost 40 percent and 30 percent of respondents, respectively.

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