Current Outlook and Architectural Billings Index

One of the questions I’m often asked is “What do things look like out there?”, typically followed these days with “How long will these better times last, when will it end?”.  Every contractor has their own experiences, their own challenges and successes.  The generic answer needs to address the “typical” experience out there, the contractor who falls somewhere in the middle of the bell curve.

The answer I give today is things are generally pretty good out there, not as euphoric as it was just prior to the great recession, circa 2006 or 2007) but increasingly good in recent years.  My perspective is that things bottomed out, for the average private commercial/industrial contractor, sometime in 2012.  Each year since 2013 we’ve seen further modest improvement, stabilization and good earnings for contractors here in Southern California.

Frankly, a few years ago, I thought based on listening to economists and others that 2017 might be the peak and we’d fall off from there for a while.  Well we are within a handful of weeks from getting out of 2017 and things still look pretty good.  Backlogs are strong into 2018, with some of my clients reporting commitments into 2019. Business optimism remains strong.    Of course a large geo-political event could put work to a halt like we saw after 9/11, commitments notwithstanding.  That being said, it looks like we have good times for the foreseeable future and we can only hope it continues.  

The concept of "reversion to the mean" creeps into my mind as we currently enjoy the 3^rd longest economic expansion in U.S. history.  Hopefully the Federal Reserve and others whom have control over how our economy behaves pull on the all the appropriate levers in all the right ways at all the right times, or something close to that metaphor.

A quick look at the Architectural Billings Index, a leading indicator we’ve touched upon a number of times over the years on this blog shows that here in the West, things appear to have softened some with a reading of 48.4 for September 2017.  These numbers are just indications of work to be performed, more of a guideline than a rule.  If you aren't familiar with how the index works, click on the link in the preceding sentence for more background.  One poster on the AIA website from the West indicated that a few of their projects were put on hold, citing rising construction costs and labor shortages.  Interesting, makes sense given the data out there, particularly with the historically low unemployment levels we are currently experiencing.

These regional numbers for September 2017 are shown in the table below:

	West	South	Northeast	Midwest	National
September 2017	48.4	54.0	56.9	50.4	49.1

By contrast, taking a look back to July 2014 numbers, we see the following:

	West	South	Northeast	Midwest	National
March 2013	51.9	53.6	54.6	53.9	51.9

Perhaps the lower input costs for materials in 2013 as well as the more available labor market created conditions for increased construction activity, correlating to our experiences in 2013 and the ensuing years.  At that time, the unemployment rate quoted by the Bureau of Labor Statistics for March 2013 in the West was 8.3%, the highest in the nation with supply of labor more available than today.

Could the current labor market and the implied labor shortages be a precursor to slowing construction activity?  Or possibly stable construction activity with increasing prices?  Inflation in construction inputs could also be a factor to watch.  For the immediate future, it seems to be steady as she goes.  

The actionable takeaway from this data is to always be vigilant regarding your fixed overhead, keep it low and be prepared to make dispassionate decisions regarding your variable costs, including your labor.