Architecture Billings Index Starts 2017 in Negative Territory

The January Architecture Billings Index score was down 6.1 points in January from December's strong showing

American Institute of Architects/Wells Fargo Securities
Following a strong reading in December, billings contracted in January, registering a score of 49.5.
Following a strong reading in December, billings contracted in January, registering a score of 49.5.

The Architecture Billings Index (ABI) dipped slightly into negative territory in January, after a very strong showing in December. As a leading economic indicator of construction activity, the ABI reflects the approximate nine to 12 month lead time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the January ABI score was 49.5, down from a score of 55.6 in the previous month. This score reflects a minor decrease in design services (any score above 50 indicates an increase in billings).

The new projects inquiry index was 60.0, up from a reading of 57.6 the previous month. The design contracts index was at 52.1.

“This small decrease in activity, taking into consideration strong readings in project inquiries and new design contracts, isn’t exactly a cause for concern,” said AIA Chief Economist, Kermit Baker, Hon. AIA, PhD. “The fundamentals of a sound nonresidential design and construction market persist.”  

Every January the AIA research department updates the seasonal factors used to calculate the ABI, resulting in a revision of recent ABI values.

According to Wells Fargo Securities, the 6.1 drop in January was the largest since September 2008. Wells Fargo suspects the plunge into negative territory is largely payback from the prior month’s solid reading rather than the start of a deleterious trend, especially given the spike in billing inquiries.  

Despite minor slowdown in overall billings, the commercial/industrial and institutional sectors post strongest gains in over 12 months.

According to Wells Fargo, regional performance was mixed with activity improving in the Northeast (53), South (54.2), and West (48.8), while billings in the Midwest (52.4) cooled a bit during the month. That said, the West is the only region in contraction territory, likely reflecting the slower pace of high-technology employment and pullback in venture capital. In January, the West registered its fourth-straight decline. 

By sector, billings advanced in the nonresidential components including commercial/industrial (53.4) and institutional (54.6), while mixed (48.1) and residential, mostly multifamily (48.1), posted negative readings during the month. Billings for design services typically lead construction spending by about one year and provide useful clues into the trend in overall outlays. 

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

The three-month moving average shows billings posted a second-straight positive reading in January, following a soft patch from September through November, which was likely due to a pullback in activity due to election uncertainty, Wells Fargo says. The company also noted that billings slipped below the demarcation in January 2016 despite the seasonal adjustment. 

Wells Fargo expects overall nominal private nonresidential construction spending to grow about 4.5% in 2017, but the pace intimates a deceleration in activity, which is consistent with the moderation in 12-month lagged billings. The weaker reading in the residential component is consistent with the slower pace in multifamily housing starts.

The American Institute of Architects does not break out commercial and industrial, but activity in the sector is expected to remain strong during the year but also show some moderation from a combined increase of 10.5% in 2016 to about 7% in 2017.

For institutional, billings show a much stronger reading than what is expected during the year, especially as health care remains a hot topic as the Trump Administration and House GOP consider repealing and replacing the Affordable Care Act, which could impact hospital new construction. Although the details remain scant, uncertainty will keep developers on the sidelines. Wells Fargo expects nominal private institutional outlays to decline in 2017 and 2018.

Overall private nonresidential construction outlays will also be tempered by softer commercial real estate operating fundamentals, a rise in materials costs and a shortage of skilled labor. 

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