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