2016 2nd Quarter Economic Indicators

Executive Summary

Construction opportunities are leveling out in all sectors except for a decrease in retail, and backlog remains at high levels across the country and across market sectors. Workforce shortage is still plaguing our industry by increasing the cost of skilled labor. The competition for qualified employees has now begun to affect office/ management positions, as well as field positions. This is leading to an increase in construction turn-over rates which is now higher than the national average for all industries.

Over the past three months, the Architectural Billing Index remains positive due to variations in design activity in major business categories and predicts growth over the next months. Residential design led the 1st half of the year while the second quarter shows a rise in institution projects. The value of design contracts did dip below 50 in January 2016, for the 1st time in 2 years. It will be interesting to see if construction sees a corresponding dip in bidding activity late fall of this year.

Core inflations has steadily been in the 2% range throughout 2016 (cost of products excluding food and energy), while the GDP has been growing steadily in the low 1% range. Both measurements help to tell the story of this long, steady (not flashy) period of economic expansion we have experienced. This coincides with a bull market now in its 7th year and predicted to continue its run to record stock market highs.

The housing industry is remaining strong due to low mortgage rates. In April 2016, new home sales hit their highest level since 2008 (yep – 2008). Average home prices have also hit an all time high.

Unemployment rates remain low, but the number of long-term unemployed changed little and accounted for 25.8% of the total unemployed. The number of involuntary part-time workers (folks who are looking for full-time work but can not find full-time jobs or their employer reduced their hours) did decrease by 587,000 to lower the national total to 5.8 million. And, we just reported the second straight strong jobs-growth number – an increase of 255,000 in July versus an expected increase of 180,000.

Overall, we expect to see more of the same throughout 2016. Our monthly bidding and work-in-place numbers are as strong as they have been in past 5 years. We will keep our eye on the fall/winter opportunities to see if we mirror the AIA billing index, however, we see the expansion continuing into 2017.

Performance Summary

Construction Backlogs Reaches New High for Largest Contractors

Nationally, ABC said its Construction Backlog Indicator (CBI) inched down to 8.6 months during the first quarter of 2016, which represents a decline of 0.8% from 2015’s final quarter. CBI has expanded by 2.7% on a year-over-year basis, however, which translates into an increase of more than 0.2 months.

“Contractors are no longer becoming busier, rather, the level of activity has stabilized at a reasonably high level,” said ABC Chief Economist Anirban Basu. “Most contractors continue to express satisfaction regarding the amount of work they have under contract. This is of course truer in certain parts of the nation than others.”

“Subcontractors are much busier than they were several years ago, with general contractors reporting greater difficulty securing experienced contractors,” said Basu. “Some construction firms are turning away work for the first time in years. The recent stabilization of backlog may reflect supply constraints as much as demand stagnation.”

“That said, there are indications that certain commercial real estate segments are nearing the end of their development cycle,” warned Basu. “Developers, bankers and regulators have become generally more concerned by the possibility of overbuilding in hotel, office and retail markets. Many developers indicate that the current cycle is much closer to its end than to its beginning. The implication is that for the first time in years, backlog may be poised to decline after recovering massively since early 2010.”

FMI Non-Residential Construction Indicator 2nd Quarter 2016

– NRCI Panelist

One of the most critical concerns for competition in the construction industry right now is the competition for qualified employees. On average, panelists are experiencing a 6.9% rate of turnover for office/management positions and an 8.3% rate of turnover for field management positions. As our analysis below shows, this is a higher turnover rate for construction than the national average for all industries. In the comments associated with our questions below, we received a number of reasons for turnover. Some panelists noted that they have very little turnover. One of the most cited reasons, the improved market for job opportunities for younger employees, has been the subject of a number of papers and reports in the past few years.

Two other current issues were included in this quarter’s survey. The questions that found most agreement concerned the best training delivery methods and the inclusion of safety in training programs. While there is some room for improvement in the amount of safety training for office/management employees, 96% of companies said all training for field employees has a safety component.

The most contentious issue we asked about this quarter was about the understanding of and potential concerns about the so-called “Blacklisting” order (E.O. 13673), which requires firms to disclose any violations of 14 different federal labor and employment laws for the previous three years to be eligible for contracts worth more than $500,000 with the federal government. Surprisingly, only 40% of contractors that do federal work were aware that this new rule was set to take effect in 2016. Not surprising was that the majority of comments we received about this new executive order were clearly unfavorable.

Architecture Billings Index Remains on Solid Footing

Highest levels of demand at residential firms in over two years.

Buoyed by increasing levels of demand across all project types, the Architecture Billings Index (ABI) was positive in June for the fifth consecutive month. As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lead time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the June ABI score was 52.6, down from the mark of 53.1 in the previous month. This score still reflects an increase in design services (any score above 50 indicates an increase in billings). The new projects inquiry index was 58.6, down from a reading of 60.1 the previous month.

“The first quarter was somewhat disappointing in terms of the growth of design activity, but fortunately expanded a bit entering the traditionally busy spring season. The Midwest is lagging behind the other regions, but otherwise business conditions are generally healthy across the country,” said AIA Chief Economist, Kermit Baker, Hon. AIA, PhD. “As the institutional market has cooled somewhat after a surge in design activity a year ago, the multi-family sector is reaccelerating at a healthy pace.”

The Architecture Billings Index reflects consecutive months of increasing demand for design activity at architecture firms. As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lead time between architecture billings and construction spending.

Key June ABI highlights:

  • Regional averages:
    South (55.5), West (54.1), Northeast (51.8), Midwest (48.2)
  • Sector index breakdown:
    multi-family residential (57.9), institutional (52.7), mixed practice (51.0), commercial / industrial (50.3)
  • Project inquiries index: 58.6
  • Design contracts index: 49.7

The regional and sector categories are calculated as a 3-month moving average, whereas the national index, design contracts and inquiries are monthly numbers.