Category: Reports

It’s always interesting to watch the trends of construction’s big four leading economic indicators while comparing those results to our conversations with our designer and contractor peers. Overwhelmingly, the discussions focus on inflation – both in material and labor inputs. Yet, the amount of work in the system continues to expand.

• The AIA Billing Index rose nominally from 55.6 to 56.6, indicating that architects billed more in September than in August 2021. More importantly, backlogs of architects across the country reached a new all-time high since the AIA started collecting the data quarterly in late 2010, now averaging 6.6 months.
• One additional note worth mentioning from the AIA September survey is that the Project Inquiries Index jumped above 60 to 62.0, which tells us there are plenty of opportunities in the market to pursue.
• 17 new projects, each $100 million and greater, entered the Dodge tracking system.
• The Dodge Momentum Index jumped from 148.0 in August to 164.9 in September 2021. This is the single strongest predictor of our market over the upcoming 12 months.
• While the ABC Backlog Indicator fell nominally from 7.7 to 7.6 months, Miles-McClellan’s backlog, as well as those backlogs of our contemporaries here in Ohio and North Carolina, all remain strong.

All the signs outlined suggest that owners and developers are looking past the current pricing concerns, the continued spread of COVID-19 variants, and the political climate are moving forward with projects to meet demand.

As 2021 second-quarter numbers get reported, all the news feeds are full of inflation talk – is it a transitory or dangerous trend? As we release our Q2 Economic Indicator Report, the Producer Price Index (PPI) numbers were also released, and they are “hotter” than expected. For reference, the PPI index measures price changes from the purchaser’s perspective.

About PPI:

• The PPI is different from the CPI (Consumer Price Index) in that it measures costs from the viewpoint of industries that make the products, whereas the CPI measures prices from the perspective of consumers.
• The BLS (Bureau of Labor Statistics) separates PPI data into three main areas of classification: industry, commodity, and commodity-based final and intermediate demand (FD-ID).
• The PPI is considered an objective tool for adjusting prices in long-term purchasing agreements.

(Majaski, 2021)

The Producer Price Index for final demand rose 1% in July as reported by the Bureau of Labor Statistics. On an adjusted basis, the final demand index moved up 7.8% for the 12 months ended July 2021. This is the largest advance since 12-month data were first calculated in November 2010.

Nearly three-fourths of the July increase in the final demand index can be traced to a 1.1% advance in prices for final demand services. The index for final demand goods rose .6%.

This makes sense – as I poll our project teams, the single consistent theme is the cost and lack of labor.

Interpreting the Trends

• The Architect’s Billing Index remained elevated at a score of 57.1. The regional ABI reported for the Midwest was at 62, an incredibly high number. As a reminder, any score above 50 indicates an increase in architect’s billings and is highly correlated with the number of market opportunities we see in the 8-12 month range. These reports continue to signify a hot construction market in 2022.
• The Dodge Momentum Index indicator, as reported last quarter, had a record-breaking jump from 139.1 in January to 148.8 in March (the most significant single jump in the index’s history), increasing again to 151.4 in April. This trend continued with the index moving to 163.2 in April, 175.1 in May, and 165.8 in June. This continues to signal an ever-increasing number of total projects entering the planning process and an increasing number of large projects in the pipeline. This index tells me that we will have plenty of opportunities available during spring-summer bidding 2022.
• The last indicator that I want to emphasize is the ABC Backlog Indicator, which has now moved above 8 months. This is not surprising given its lagging nature, and you should expect to see this measurement continue to follow the rise in both the AIA Billing Index and the Dodge Momentum Index as we move through fall 2021.

In summary, we are experiencing “hotter” price increases (inflation) than initially anticipated as the economy first started to recover. Labor costs are notably higher, and the market for skilled trades continues to be THE hurdle for the construction industry. While the temporary shortage of some building materials can be managed, the continued tightening of the labor market will continue to affect the schedule. The construction market is continuing to experience increases in construction costs across all types of construction. The lead indicators point toward more of the same as we move through the back half of 2021 and into 2022.

Advanced planning is the single best way to control your budget – so if you have a project in your future – work closely with your architect and construction partners now and start the planning process a little earlier than you typically would to save money.

References
Majaski, C. (2021, July 26). Producer Price Index (PPI). Retrieved from investopedia.com: https://www.investopedia.com/terms/p/ppi.asp

As 2021 Q1 numbers get reported, it has been commonly agreed that the post-pandemic surge is underway. The first-quarter real GDP growth is +6.4%, following the surprising Q4 2020 report of +4.3%.  While many economists believe this will be primarily consumer-driven given a combination of pent-up demand and recently distributed stimulus checks, the lead indicators we follow all also suggest a surging construction industry.

Interpreting the Trends

• The Architect’s Billing Index strengthened to a score not seen since pre-great recession and continues the trend of rising billings and reported scores greater than 50. According to AIA Chief Economist Kermit Baker, “The activity that architecture firms are seeing is a positive bellwether not only for the construction outlook but also for the larger economy.” The ABI tends to be tied to the amount of market opportunities we see in the 8-12 month range, signifying industry growth in 2022.
• The Dodge Momentum Index indicator followed its record-breaking jump from 139.1 in January to 148.8 in March (the most significant single jump in the history of the index), increasing again to 151.4. This continues to signal an increasing number of total projects entering the planning process and an increasing number of large projects in the pipeline. This index is very heavily correlated to the opportunities available in the industry during spring bidding 2022.
• The last indicator to look at is the ABC Backlog Indicator, which is below 8 months. This is not surprising given its lagging nature, and you should expect to see this follow the rise in both the AIA Billing Index and the Dodge Momentum Index as we move through summer and fall 2021.

In summary, we are experiencing a quicker rebound in the construction industry than expected as of our Q4 2020 review. This has led to a tightening labor market and shortage of building products (for too many reasons to cover quickly). Our clients are now experiencing increases in construction costs across all types of construction. The lead indicators point toward more of the same as we move through 2021 and into 2022. Advanced planning will always help your budget – so if you have a project in your future – start the planning process a little earlier than you typically would to save money.

My last write-up ended, “To conclude our Q3 analysis, our backlog remains strong, and our clients remain optimistic. Many of our industrial clients are scheduling renovation work to meet current and future demand, and many of our healthcare clients are actively looking at their backfill-renovation needs for 2021. I still expect overall industry volume to remain lower in 2021 than it was pre-COVID, and as a result, pricing will remain more competitive for our clients.”

The Congressional Budget Office currently projects Real GDP growth of 3.7% for 2021. This is a strong growth rate and relies heavily upon the economic surge expected as the vaccines start to reach mass saturation.

FMI Corp’s “2021 Annual Engineering and Construction Industry Overview,” available via download from www.fminet.com. The report projects total engineering and construction spending for the US ending up 1% in 2020 compared to ending up 2% in 2019. Looking ahead to 2021, FMI forecasts a 6% decline in engineering and construction spending levels when compared to 2020. The economic growth will be consumer-driven (the reopening) and not construction-driven.

Interpreting the trends from our two lead indicators, we can reach a similar conclusion:
The Architect’s Billing Index took a turn downward from 46.3 to 42.6. Anything above 50 is growth in billings, and while the indicator has been below 50 since March 2020, this month’s drop reversed a 6-7 month positive trend. This indicator serves as a strong 9-12 month lead indicator for our industry, and if there is less work being billed, there will be less work to build – we expect fewer opportunities throughout 2021.
The Dodge Momentum Index indicator took a jump forward from 123.3 to 134.6. This is a sizable jump for the indexed calculation and should imply that we will see a growth in opportunities beginning 12 months from now – spring 2022.

In summary, we are experiencing exactly what is being described above. Our backlog is currently strong but slightly down from 2020 levels. We see opportunities, but not quite the numbers from early 2020 (pre-Covid temporary freeze). The number of bidders pursuing these opportunities seems to be more significant, and as a result, we see a tightening of margins. In general, our clients should continue to see an increase in price competitiveness during 2021.

In our last Economic Indicator report dated June 2020 (Q2), we concluded with the following statement:
“Given the information I have today, I prefer to keep a “glass half full” view and will continue to watch and report on the quality and quantity of our backlog as we move through 2020 and 2021. In conversations with our clients, I find most remain optimistic, and as a result, our backlog remains solid. We have seen a slight drop in the number of new opportunities, and that is understandable. As a result, we see an increase in bidding competition, which will ultimately lead to lower prices for our clients. If your business continues to thrive, and you are considering expanding, now is a great time to get a better “bang-for-your-buck.”

As a warning to our readers, I am generally an optimistic person, and after reviewing the data for Q3 2020, I remain sitting at my desk with my “glass half full.” Take a glance at the front cover summary of the four measurements we track. The two lead indicators, The Architect Billing index and the Dodge Momentum Indicator, show numbers that look like recovery progress.

Specifically, the Architect’s Billing Index, which bottomed in April 2020, shows an upward trend over the past 5 months: 29.3, 32, 40, 40, 40, 47. The September score of 47 is below the standard of 50, indicating a growth in the architect’s billing across the industry. However, the upward trend does hint at recovery.

The next lead indicator-measurement to dig into is the Dodge Momentum Index. Again, this index is on a steady 3-month upward trend: 121.5 (low point), 124.7, 126.2, 130.8. The highest point we’ve recorded in our analysis is 156. 2 (recorded in December 2019). Again, the story here is increasing opportunities for bidding beginning in the summer of 2021.

To conclude our Q3 analysis, our backlog remains strong, and our clients remain optimistic. Many of our industrial clients are scheduling renovation work to meet current and future demand, and many of our healthcare clients are actively looking at their backfill-renovation needs for 2021. I still expect overall industry volume to remain lower in 2021 than it was pre-COVID, and as a result, pricing to remain more competitive for our clients.

In our Economic Indicator report dated March 2020, we stated that Covid-19 had not yet impacted the East Coast construction market, but that it would. Well . . . it did, and I am sure we all felt the impact over the past four months. The four indicators we follow all show the same trends – there will be a decrease in industry volume and industry margin this year and 2021. Two of these indicators, the Architect’s Billing Index (ABI) and the Dodge Momentum Indicator (DMI), are excellent predictors of commercial construction activity 12 months into the future. Both indices lead us to believe that there will be fewer construction opportunities in the 12-18 months ahead.

However, last week I dug a little deeper to see if I could find any broader trends, and one piece I came across was an article where Fortune Magazine surveyed the CEOs of the 2020 Fortune 500 companies. A couple of interesting questions were posed, and the responses help add to the story told by the indicators:

When do you expect capital spending at your company to exceed 2019 levels? Over half of the CEOs felt the return would happen in the next 18 months, and an overwhelming 82.1% think that cap-x spending will exceed 2019 dollars before the end of 2022.

• 2020 – 19.0%
• 2021 – 35.7%
• 2022 – 27.4%

Which country or regions do you see as presenting the best investment opportunity in the next year? With no other country being close, the answer was the United States – 74.3%.

After the pandemic passes, how will the world have changed? One preselected answer was – Nationalism will rise, and global supply chains will become less common. 80% of the CEOs either strongly agreed or agreed to this statement.

Given the information I have today, I prefer to keep an “a glass half full” view and continue to watch and report on the quality and quantity of our backlog as we move through 2020 and 2021. In conversations with our clients, I find most remain optimistic, and as a result, our backlog remains solid. We have seen a slight drop in the number of new opportunities, and that is understandable. As a result, we are also seeing an increase in bidding competition, which will ultimately lead to lower prices for our clients. If your business continues to thrive, now is a great time to get a better “bang-for-your-buck.”

Dodge Momentum Index Suppliment

We’ve been producing our quarterly economic indicator since 2009. Over the years, we’ve used a variety of economic indicators in our reports. Starting in 2020, we decided to narrow our focus on four A/E/C specific economic indicators. We continue to focus on the Associated Builders and Contractors Backlog Indicator, the AIA Architectural Billings Index, and FMI’s Non-Residential Construction Index. In addition, the Dodge Momentum Index, a well-respected 12-month leading indicator for construction spending, will be a new indicator in our quarterly report. This report is a special supplement to our traditional economic indicator to introduce the new measurement we are including going forward.

COVID-19 And the US Construction Industry

Two things happened to me this week that changed my evening reading. First, a long-time peer group member of mine sent out an email that he had purchased-material stuck in US Shipping ports due to Coronavirus fears (he wanted to know if I was experiencing the same issue). Second, the virus has hit the US, with the first cases spreading along the west coast.

In early articles, I found that there are plenty of documented impacts of the decreased Chinese production and the related devastation to the global supply chains. The US and international companies have felt the effect in the automotive, technology, and airline industries. Most recent articles are starting to speculate on the pending impact on the construction industry.

One good article quoted Richard Branch, Chief Economist for Dodge Data & Analytics. He stated that, “the American construction industry will not be immune to the coronavirus’ impact. For commercial builders that rely on Chinese-made goods or materials, this could mean higher material costs and potentially slower project completions.”

By Branch’s estimate, “building product imports from China account for nearly 30% of all US building product imports, making China the largest single supplier to the US.”

Our industry is already facing labor shortages, and the related labor cost increases, as well as material price fluctuations from inflation and tariffs. COVID-19 is another threat to the industry that we will consider during project planning.

While Miles-McClellan has not experienced any of the above issues related to the virus, my friend’s phone call now makes sense. We intend to start discussing this issue internally and working with our clients to bring strategies where necessary.

Here are three quick strategies for all of our owners to consider:

1. Lockdown bids for 60-90 days, giving a little more time for decision making at a set price.
2. Consider diversifying the supplier base with an increase in priority on local goods and services.
3. If using products from overseas, build-in a schedule and budget contingency for future unknowns.

Stautner, J. (2020, February 27). How the Coronavirus Could Impact the US Construction Industry. Retrieved from constructioncitizen.com: https://constructioncitizen.com/blog/how-coronavirus-could-impact-us-construction-industry/2002271

Let’s look at some of the changes in the Construction Economic Indicators that I have witnessed since our last posting in August 2019. In this analysis, I’m diving into the Midwest and Southeast Regional numbers of the American Institute of Architects Architecture Billings Index (AIA ABI), and the Associated Builders and Contractors Construction Backlog Indicator (ABC CBI). In both cases, the Midwest Region numbers fall below the National and the Southeast Regional numbers – this may be an indication of a slowdown in our Ohio market during late 2020.

The AIA’s ABI for the Nation and the Southeast Region has been above 50 for most of the year, while the Midwest Region has been below 50 for the last two quarters (A score > 50 indicates growing architect billings, and a score <50 indicates a decline in architect billings). At the end of the 3rd quarter, the National ABI reported at 49.7, while the Midwest Region dropped to 45.3. The Southeast Region remained in growth territory at 52.3. This indicates that we most likely will experience a decreasing number of new opportunities during the 4th quarter of 2020.

The ABC’s CBI has shown a steady level of backlog at the National level, Midwest, and Southeast Regions throughout 2019. The Southeast Region is currently leading the way at 10 months of backlog, which is higher than the National level of 9 months. The Midwest Region has been steady all year with 7 months of reported backlog.

I monitor Miles-McClellan’s backlog monthly and compare it to both the regional and national levels. We have been steady at about 25% above the national average. This results from both good and bad. The good – we have excellent relationships with our customers that lead to high levels of repeat business. The bad – industrywide manpower issues have prevented work from being put-in-place during 2019, pushing backlog into 2020. I expect to see backlog remain high throughout 2020 as our industry continues to solve the skilled manpower issue.

Because of the projected high backlog, we are carefully monitoring our Superintendent capacity and our skilled trade workforce. We want to continue to serve our clients well, and therefore, we know we cannot overcommit our resources.

If you would like to talk through the numbers above – including detail on our backlog – please give me a call. I always enjoy the opportunity to discuss our industry on both macro and micro levels.

We’ve lived and worked through one of the longest economic expansions in history. So what’s coming next? The more I study it, the more confused I get – but here are some of the facts and trends as I see them.

The US Consumer is strong and is keeping our economy growing. The unemployment rate remains below 4%. Gross Domestic Product is still above 2%, and the stock market continues to push all-time highs. On the other side of that coin, there’s still a lot of economic uncertainty. We have an ongoing trade war with China. International central banks are keeping their interest rates below zero. The US Federal Bank is balancing between a strong US dollar, a strong economy and a political push for lower interest rates.

Confused? Me too. I study the construction numbers that I understand – the Architectural Billing Index (ABI), the Associated Builders and Contractors’ Backlog Indicator, and the FMI Non-Residential Construction Indicator NRCI). These three indicators are generated by industry-specific groups taking surveys from their members. I participate in both the ABC and FMI surveys.

If I look at the three surveys individually, here is what I think is next.
ABC’s Backlog Indicator has been running very consistent between 8-9 months. I participated in the survey on August 25th and calculated our backlog at 8.8 months. We’ve been between an 8-11 month backlog during the past three years – so I don’t see an immediate concern.

FMI’s NRCI is an executive opinion of the construction industry’s health. Above 50 is positive, and tends to fluctuate between low-40s and high-50s. This current survey results of 53.3 support the results seen in the ABC Backlog survey. Together these two measurements show a construction industry that continues at a steady, positive pace.

However, the true lead indicator for our industry is the AIA Architectural Billings Index. This survey has a baseline of 50. If fees are growing, the survey results are above 50, and if fees are shrinking, the results are below 50. This indicator is pretty accurate and shows me what construction looks like 8-12 months from now. The past five months shows fees holding steady to decreasing. This tells me that I am going to have to work harder to find construction opportunities in the spring of 2020.

Moving forward, I will keep a close watch on the ABI and our backlog levels to see how they correlate. I will share some of the early results in the 3rd Quarter Economic Indicator report.

I invite you to share what you see from these three indicators (ABC Backlog Indicator, AIA ABI, FMI NRCI). Where do you think the economy is going next?