Architecture Billings as a Leading Indicator of Construction: Analysis of the Relationship between a Billings Index and Construction Spending
Baker, Kermit, Saltes, Diego, Business Economics
Due to the size and cyclicality of construction, a premium is placed on accurately predicting nonresidential construction trends, particularly at turning points in the construction cycle. Given that construction decisions are made by hundreds of thousands of businesses, nonprofit institutions, and government organizations, it is extremely difficult to get comprehensive information on building plans. However, since architects design the overwhelming majority of nonresidential construction projects, gathering information on billings at architecture firms provides leading information on future construction trends. Statistical analysis demonstrates that information provided by architecture firms on trends in their billings is highly correlated with the eventual nonresidential construction activity, with leads of up to one year.
The U.S. nonresidential construction industry is one of the larger sectors of our economy. (1) Construction spending for nonresidential buildings totaled more than $330 billion in 2004, according to data from the U.S. Census Bureau, with about 45 percent coming from the more volatile commercial and industrial sectors and 55 percent from the typically more stable institutional building categories.
While a large segment of the overall economy, nonresidential construction is also a very volatile sector. When the economy is strong, construction spending on nonresidential buildings generally accelerates faster than the broader economy. Likewise, when the economy is weak, most types of construction decline faster than the overall economy (Figure 1). Forecasting a volatile industry like nonresidential construction can be particularly challenging, where a considerable premium is placed on accurately identifying turning points. The purpose of this paper is to demonstrate how billings at U.S. architecture firms provide a leading indicator for construction activity in nonresidential buildings, particularly for the more cyclical commercial and industrial sector.
The AIA Work-on-the-Boards Survey and the Architectural Billings Index
Beginning in late 1995, the American Institute of Architects (AIA) assembled a panel of architecture firms to participate in an ongoing national survey to measure their business conditions. The principal purpose was to develop a database of national and regional business trends at architecture firms so that an individual firm would have a better sense of how business at that firm compared with its peers.
Architects are well positioned to report on the direction of the construction industry. Although decisions to build nonresidential structures are made by hundreds of thousands of private businesses, nonprofit institutions, and government agencies, the first comprehensive indication of planned development typically shows up on an architect's drafting board. Surveys conducted by the AIA of its member firms (2) and information from McGraw-Hill Construction indicate that about 75 percent of nonresidential buildings are designed by architects. A greater share of nonresidential activity is reviewed and approved by architects but without complete design involvement.
Constructing the Architectural Billings Index
The AIA Work-on-the-Boards survey is conducted monthly across a national panel of architecture firms. Currently, about 300 architecture firms actively participate in this program. Firms included in this survey provide architectural services as their principal design service offered. Firms may also provide engineering, interior design, landscape architecture, planning, urban design, or related services. Most firms also provide pre-design or construction-phase services (e.g., construction management) in addition to their architectural design services.
Firms that participate in the survey provide the AIA with information on key firm characteristics, such as annual billings, construction sectors served, and number of employees. …