by Kermit Baker, PhD, Hon. AIA
Chief Economist

Business conditions at architecture firms remain healthy as we enter a critical time of the year for design activity. March is historically the month where we see the greatest gains in billings, followed closely by February and April. Firms are reporting more stable levels after a year-end spike that mainly affected firms in the Northeast. Compensation levels for architecture positions are expected to increase about 4 percent in 2007, with a significant portion of firms expecting increases in paid overtime as well as in bonuses and profit sharing.

Activity remained virtually unchanged in March from February levels, as the AIA’s Architectural Billings Index (ABI) ticked up a modest 0.1 point to 52.6, while the index for inquiries for new projects dropped 0.1 point to 61.8. Because any reading above 50 indicates growth, both measures point to healthy business conditions at present and for the near future. After spiking from November through January, the ABI has returned to levels seen earlier last fall. Because new project inquiries remain healthy, we can expect to see further gains in the ABI in the months ahead.

Northeast most volatile
Firms in the Northeast have accounted for most of the volatility in recent months. The ABI for firms in the Northeast jumped from 52.5 in October to 71.4 in December and then fell back to 50.2 in March. Since this region experienced the most variation in weather conditions over this period, it may have been part of the reason for these wide swings in billings levels. Firms in the Midwest and South have reported fairly stable billings gains, while firms in the West are reporting a somewhat slower growth in billings.

By sector, commercial/industrial firms are reporting a slowing in billings growth in recent months. They may be pointing to a general easing in commercial/industrial construction activity later this year, or the slower growth may be an indication that many of these firms are at capacity after strong growth over the past 18 months, and are being forced to increase their project backlogs rather than their current production. Likewise, institutional firms are reporting somewhat slower growth, although still above the levels reported at commercial/industrial firms. Residential firms are reporting some modest pickup after slower activity throughout most of 2006. However, there is no evidence of a broader residential rebound.

Economy remains basically healthy
The broader economy remains basically healthy. U.S. businesses added 180,000 payroll positions in March, bringing the number of jobs added to 450,000 through the first quarter of the year. If we remain on that pace, our economy will add almost two million new positions this year, a figure that serves as a benchmark for a healthy economy. Job growth in construction has slowed recently with the residential downturn. However, we did add almost 30,000 construction jobs during the first quarter, or about 6 percent of all jobs added.

The recent jump in oil prices, on top of their already high levels, has taken a toll on consumer sentiment readings. The preliminary figures for April from the University of Michigan showed another drop, which is the third decline in four months so far for 2007, and the eighth decline over the past 12 months. However, consumer pessimism has been somewhat offset by business optimism. The Conference Board’s CEO Business Confidence Survey dropped to negative territory in the third quarter of 2006, but has rebounded nicely in the fourth quarter last year and again in the first quarter this year.

Compensation increases remain steady
With reasonably strong business conditions at architecture firms, compensation increases for architecture positions this year are expected to mirror gains in 2006 and 2005. Overall, two-thirds of firms expect principal and partner base compensation to be up this year, while 80 percent expect increases for licensed architects, 85 percent for nonregistered graduates, and 82 percent for interns. The average expected increase in base compensation in 2007 for principals and partners is 3.7 percent, 4.2 percent for licensed architects, 4.1 percent for nonregistered graduates, and 4.0 percent for interns.

Additionally, almost 38 percent of firms expect paid overtime for hourly architecture staff to increase this year, while fewer than 10 percent expect it to decline. Almost half (48.5 percent) of firms expect bonuses and profit sharing to increase this year for employees, while only 13 percent expect a decline.