by Kermit Baker, PhD, Hon. AIA
Chief Economist

Summary: Indicating that the recent weakness in design activity has fully stabilized, billings at architecture firms rose again in November, with the October and November gains totaling over four points in the Architecture Billings Index. The November score stood at 55.3, its fourth highest level for 2007.

Inquiries for new work continued to trend down, having dropped almost 10 points since July. The inquiries index is at its lowest level since the summer of 2003. So, although the recent nonresidential slowdown caused principally by problems in credit markets seems to have dissipated, the underlying problem of a weakening economy remains. Easing inquiries for new design projects is indicative of the slower underlying demand for new nonresidential facilities.

Firms in the Northeast have reported strong gains in billings in recent months, while those in the West have reported declines. Firms in the Midwest and South have seen business conditions edge up. Firms concentrating in the commercial/industrial sector are reporting slow improvement in conditions in recent months. Institutional firms have seen growth since reporting weaker conditions earlier this summer.

Consumers feeling nervous
The broader economy has shown increasing signs of weakness in recent months. The continuing housing downturn has now turned into a full-scale credit market problem, and weak house prices—causing many homeowners to feel less wealthy—threaten to slow consumer spending in the quarters ahead. Consumers already are feeling more nervous about the economic outlook. The University of Michigan’s preliminary Consumer Sentiment index for December fell again to a level of 74.5. It is down more than 20 points from the beginning of the year, and at its lowest level since late 2005.

Rising oil prices have sparked a new round of concern for both producer and consumer prices. Inflation concerns make it difficult for the Federal Reserve Board to continue to lower interest rates to deal with a softening economy. Lower interest rates tend to spur more spending and therefore more inflation, which could discourage the Fed from dealing as aggressively with any downturn.

Finding new work is the top concern
Although architecture firms are reporting strong business conditions, they also are aware of the emerging weakness in the broader economy. At the top of their list of business concerns for 2008 is identifying new projects/new markets/new clients, as almost a quarter of all respondents listed this as their number one concern. Third on this list, with 12 percent of respondents listing it as their major concern, is coping with a weak economy.

However, there are other major concerns resulting from strong levels of business. Attracting new qualified staff and managing current project workloads were the second and fourth most commonly listed biggest business-related concern for 2008. Managing rising costs of running a firm, and dealing with ownership transition and merge and acquisition activity were the next most commonly listed concerns.

Dealing with rising construction materials costs, a serious problem in recent years, is a less immediate problem now, with only 3 percent of respondents putting it at the top of their list. Likewise, dealing with national credit market problems was listed by fewer than 2 percent of respondent as their top concern for 2008. Implementing new technologies such as BIM (4 percent), negotiating appropriate fees (4 percent), dealing with growing regulatory barriers (3 percent), and competition from other architecture firms or design professionals (3 percent) were all mentioned by a small percentage of respondents as top concerns for the coming year.