The Architecture Billings Index Fell Slightly to 50.9 in January,

Indicating Flat Growth in Non-Residential Construction

• The sharp decline from 57.8 in June 2007 to a cycle low of 34.6 in January 2009, followed by 53.9 in December 2010 in the U.S. Architecture Firms “Work-on-the-Board” Billing Index defined the major recession in non-residential construction in 2009 and 2010, but forecasted potentially flat growth in 2012, as the index fell slightly to 50.9 by January (see table below).  The U.S. Architecture Billing Index leads private non-residential construction growth by 9-months to 1-year (see Chart I).
• The Architects Billing Index around 50, forecasts flat growth in private non-residential construction in the first half of 2012.  Combined with weak residential building, a decline in growth of total construction in 2009/2010 forecasted the severe recession.  A level of 50.9 in architectural billings forecasts flat growth in private commercial construction in 2012 (see Chart II).
• “Even though we had a similar upturn in design billings in late 2010 and early 2011, this recent showing is encouraging because it is being reflected across most regions of the country and across the major construction sectors,” said AIA Chief Economist, Kermit Baker, PhD, Hon. AIA. “But because we still continue to hear about struggling firms and some continued uncertainly in the market, we expect that overall economic improvements in the design and construction sector to be modest in the coming months.”

U.S. Architecture Firms “Work-on-the-Board” Billing Index

*     3 month moving average due to small sample size

**    Multi-family

***  Low of 28.1 in Com/Ind Sector in November 2008

Every January the AIA research department uses a formula from the Department of Commerce that re-estimates ABI data based on seasonal factors resulting in a recalibration of recent figures.

 Chart I

Chart II

Modest Strength in Small Business Expected Credit Conditions and Job Openings Index Forecast Slow Growth in 2012

 A huge gap has opened in the early stages of economic recovery between big and small companies, with the former enjoying strong balance sheets, access to credit, and growing global markets, compared to the latter hurting from a lack of access to credit and reduced hiring plans, as sales volume remains weak.  Small business credit conditions, hiring plans, sales volume, and strengthening balance sheets depend on recovery in residential construction and consumer spending (see Chart IV).

 Small business credit conditions remained strong (above a negative from 1986 to 2007, allowing the Small Business Hiring Plans Index to remain positive (above a plus 5 – see Chart I).  The decline in small business credit conditions in late 2007 led by a year the decline in the Small Business Hiring Index.  Credit conditions fell to an all-time low of a negative16 in 2009and March 2010 and recovered to a negative 9 by January 2012 (scale left, Chart I).  The Hiring Plans Index, required to be a plus 5 or higher to indicate economic recovery, rose to a positive 7 by November 2011, but other indicators failed to support the increase and Hiring Plans fell to a positive 5 (scale right Chart I).

 ISM Non-manufacturing Employment Index increased to 57.4 in January 2012, forecasting 2.0% employment growth for this huge sector for 2012.  The Small Business Job Opening Index rose to 18 in January 2012, supporting the strong increase in ISM Non-manufacturing Employment (see Chart II).

 Michigan Confidence Index increased to 75.0 in January and must increase above 80 to support a sustained recovery.  The Small Business Optimism Index was 93.9 in January, down from the February peak of 94.5, and below the 100 level of sustained small business recovery (see Chart III).

Chart I

  Chart II

Chart III

 Small Business Credit Conditions Depend on Residential Construction

The decline below 50 in 2006 in the Home Builders (Sentiment) Market Index, measuring the sentiment of home builders and realtors, led by 12 months the decline in small business credit conditions in 2007 below recession levels (a negative 8 reading – see Chart IV).  The drop below a negative 8 in expected credit conditions led by 12 months the drop in small business hiring plans (see Chart I).

 In order for small business to recover, (1) the Credit Conditions Index must rise to a negative 8 from a negative 9 in January 2012, (2) the Hiring Plans Index must remain above a positive 5, (3) the Small Business Optimism Index needs to climb from 93.9 to 100, and (4) the job openings index must increase from 18 in January to the 20 level.  Modest growth in small business remains the forecast for 2012.

 Most important, the recent recovery in the Home Builders (Sentiment) Market Index provides support to improvement in Small Business (see Chart IV).

 Chart IV

IDC Confidence Index Rose to 45.5 in January 2012, But Remains in Slow Growth or Modest Recession Territory, Limiting Bank Loan Growth(See Chart I)

Conclusion:

IDC’s blend of these sentiment indicators provides a confidence level of 45.5 in January 2012.  University of Michigan consumer sentiment rose to 75.0 in January on a scale around a center point of 80 (translates to 46.9 on a scale centering around 50).  The Architects Billing Index remained at 52.0 in December and the Home Builders Market Index increased to 25 in January 2012, both with a scale centering around 50.

 Over time, financial recovery is hoped to create economic recovery and growth in jobs.  At such time as Michigan sentiment rises above 80, U.S. Architects billings stays above 50, and the Home Builders Market index increases substantially toward 50, will the economy be in a sustained recovery.

 Chart I

  IDC Confidence Index is a Blend of Three Sentiment Indicators and Weights:

1)      University of Michigan Consumer Sentiment (75%)

2)      U.S. Architects Billing Index (15%)

3)      Home Builders Market Index (10%)

 An IDC Confidence Index above 50 forecasts an environment favorable to revenue growth, high and improving returns on equity, and superior earnings growth.  Positive confidence levels, over 50, lasted long periods, such as March 1982 to July 1990 and December 1992 to September 2007.  During these two periods, the S&P 500 rose 132.8% and 250.4%, respectively.  During periods with IDC confidence over 50, stock selection based on franchise value offered the best returns with IDC large cap S&P portfolios outperforming the S&P 500 by 50% from 1995 to 2007, and midcaps more than doubling the returns of the S&P 500 in the same period (see Appendix I).

 University of Michigan Consumer Sentiment (75%) (see Chart II)

The problem occurs when theUniversityofMichigan Sentiment Indexdeclines below 80.  The consumer, who accounts for 70% of GDP, is measured by theUniversityofMichigan Sentiment Index.  The lack of consumer confidence reduces sales and profits of companies doing business in theU.S.  The recession of 1979 to 1983 was forecast byUniversityofMichigansentiment declining below 80 to a low of 52, as interest rates rose to 20% or more, as the Federal Reserve attempted to control inflation.

Consumer confidence again fell below80 in 1990through 1993, but recovered above 80 for short periods in between.  Revenue and earnings growth were disrupted in the recession.  The collapse of consumer confidence in the 2000 to 2002 period was from a peak of over 110 to 80.  The bear market in technology stocks and September 11, 2001 shock failed to create a consumer recession.  Revenue and earnings growth continued, as did the relative performance of IDC’s stock selection using franchise values.  Three year total returns were positive over the 2000 to 2002 period (see Appendix I).

The major decline in theUniversityofMichigan Consumer Sentiment Indexto below 80 occurred in August and was confirmed in September 2007.  The economic engine of theU.S.was shut down, as consumer confidence fell to lows below60 in 2008and 2009.  Stock selection using franchise value was not as successful after the S&P 500 peak in October 2007.  Since IDC stock selection performed so well in the previous bull market, investors sold the favorable stocks to capture gains, as the stock market fell from over 1500 to 800 by November 21, 2008 (the first buy date from Fed liquidity or quantitative easing).

Stock markets in the previous periods of consumer confidence under 50 were controlled by the Federal Reserve reducing the Fed Funds rate.  In the 2008 and 2009 collapse in equities in a period of financial crisis with threat of deflation, quantitative easing was the method of choice by the Fed, which, in turn, controlled the prices of tradable assets (S&P 500).

U.S. Architects Billing Index (15%) (see Chart III)

The U.S. Architects Billing Index above 50 indicates more architects have increasing billings (sales) than decreasing, and it forecasts rising nonresidential construction.  Conversely, and index below 50 indicates a forecast of declining nonresidential construction.  The theory is “before you build, you must have an architect draw the structure”.

The recession of 2001 and 2002 had short periods of readings under 50.  In early 2008, the U.S. Architects Billing Index fell sharply below 50, bottoming at 33 in early 2009.  A level of 50 or above is required for the decline in commercial property prices to increase.  Only then would nonresidential construction begin a sustained recovery.

 Home Builders Market Index (10%) (see Chart IV)

The Home Builders Market Index measures the sentiment of home builders and the realtors traffic of consumers viewing homes.  A reading over 50 coincided with each housing boom.  A drop below 50 forecast a housing decline. In 1989 and 1990 and, again, after mid 2006, the decline in the index below 50 forecasted a housing recession.  A sustained recovery in housing requires an index level over 50, not foreseen in the next year or maybe longer.

Chart II

 Chart III

Chart IV

Chart V