[Transcript from State of the AEC Industry August 2020 by Scott D. Butcher, FSMPS, CPSM. Minor edits for clarity.]
Greetings, I’m Scott Butcher, and today I’m going to discuss the state of the AEC industry, so fasten your seat belts and put those seat backs and tray tables in full upright position, because there’s turbulence all around!
Well we’ve had a pretty interesting 2020, haven’t we?
Although I’ve helped many firms with strategic planning, I have to confess that heading into 2020 I didn’t have global pandemic on my radar, much less worst unemployment rate since The Great Depression or largest GDP drop in history. Did you have that on your 2020 bingo card?
So today I’m going to share some “moment in time” data for the architecture, engineering, and construction industry, including some general economic data. This information is in a constant state of flux, so it is critical to regularly evaluate these figures to make informed decisions.
Agility vs. Anticipatory
In the business world, we’ve talked about the importance of agility for years. By definition, it simply means to move quickly and easily, and the term you continually hear these days is pivot which, by the way, simply means turning from a fixed point.
Agile is also an iterative process that came out of the software industry and focuses on breaking tasks into smaller pieces, then regularly evaluating and modifying as you move forward, based on continual feedback.
Right now, being agile is an extremely important talent for our firms.
But being agile means being reactive, so it some ways you are always a step or two behind.
So we also need to be anticipatory. This means getting in front of trends that will or probably will happen. It means conducting research and doing environmental scanning, which entails looking at the trends that will be impact the economy, the AEC industry, and the individual markets in which your firm operates, both vertical and geographic.
That way you can get out in front of new trends before they happen and gain a competitive advantage.
So let’s start our tour of the State of the AEC Industry by looking at the unemployment rate in the United States.
The good news is that we had a record month for job gains in June, followed by a smaller gain in July.
Unfortunately, those increases come on the heels of record drops in job numbers, and the horrific unemployment rate of almost 15% in April!
As of July, the unemployment rate is still 10.2%. However, the summer numbers we’ve been seeing may be somewhat inflated because of the Payroll Protection Program, which has funded many jobs that may have otherwise been lost.
Unemployment drives down consumer confidence and spending, with great impacts across many industries.
Also note that there are multiple unemployment figures. The one known as U3 is typically the one you hear about in the press.
Another really important unemployment figure is the U6, which counts both unemployed as well as under-employed. Think of the fulltime employee who was laid off and took a part-time job. Or a professional making $50 an hour who is now working for $15 an hour to help ends meet. They are counted as employed, but they aren’t working up to their full capacity or ability.
This figure also counts those who have essentially “given up” on finding employment, at least for the time being.
As of July 2020, the U6 figure is still way too high, logging 16.5 percent. At least that is down from the April peak of 22 percent.
If you go back to early in the year, you can see that the U3 and U6 unemployment rates today are still double what they were just a few months ago.
And if we go back to The Great Recession, you’ll find that the current U3 rate is roughly what it was at the peak in October 2009 while the U6 is slightly below its April 2010 peak.
Canada has seen some similar trends, and their current unemployment rate is almost 11%. Although Canada has had far fewer Covid cases per capita compared with the United States, their economy heavily relies on the US, so our challenges become their challenges. In fact, about 20% of Canada’s GDP is driven by exports to the US.
So what does the unemployment rate look like in the AEC industry?
For that, we look at the most recent data from the Bureau of Labor Statistics.
Employment in the architecture and engineering fields dropped by almost 46,000 between July 2019 and July 2020, which represents a decline of 3 percent. Between June and July of this year, no new jobs were added.
Overall construction employment dropped by 309,000 during the same period and equates to a decline of 4.1 percent. Over the past month, approximately 20,000 jobs were added.
Both of these figures are preliminary and include seasonal adjustments.
Certainly these declines are nothing to celebrate, and yet we can take a small victory in the fact that they are much smaller than the overall 10.2 percent national unemployment rate across all industries.
Gross Domestic Product
Next we’ll look at the whopping hit to the US Gross Domestic Product.
We ended 2019 with modest growth of almost two-and-a-half percent, but as Covid took hold in the United States, our first quarter GDP declined 5 percent.
But that troubling number is miniscule compared with the nightmarish drop of almost 33% in the second quarter of 2020. However, with all the business closures – both temporary and permanent – this figure is certainly not surprising, but it is nonetheless shocking to see.
So what does this portend for the AEC industry?
AIA Architectural Billings Index
Well, a great place to start is with the AIA Architectural Billings Index, which is a lagging indicator that address work happening in architectural offices. Thus, it captures the building-focused engineering firms as well. It also serves as a leading indicator for future construction work in the building sector.
The ABI is a diffusion index, with a score of 50 representing no change from the prior month. The further away from fifty the score, the greater the increase or decrease. So scores in the low-to-mid 30s of the past month are quite brutal.
The data you’re seeing includes billings, represented by the B, as well as new design contracts secured by architectural firms, represented by the C.
Things were not as bloody in the latest report, but you have to keep in mind that because this is a diffusion index, these scores represent a FURTHER decline over last month. We’d need to see scores ABOVE 50 to show an improvement.
This data just demonstrates that the decline wasn’t as severe as the prior month.
The AIA’s ABI also breaks out billings in two different ways – by market sector and by geographic region.
Here we have the high-level market sectors, and you can see that the commercial/industrial sector declined significantly over the prior month while the declines in institutional and residential, although still quite ugly, were not as bad.
And here’s the same data segmented by geographic region.
All four regions scored in the mid-30s, with the South being slightly less severe than the other regions. Still, this is not a pretty picture!
But we need to balance the disheartening information with a bit of a reality check, because the AIA data is month-to-month.
The US Census Bureau tracks Construction Put in Place, which is a lagging indicator of construction coming online. The change from May to June was slight, down 0.2 percent.
But if we compare the construction spending from June 2019 to June 2020 – which is the latest data available, you’ll see that construction spending actually increased by almost half a percent over the past year.
Perspective is always important when looking at data!
This information is also broken out by market sector, and the results are all over the board.
Comparing June 2019 with June 2020, we can see that public safety construction spending was way up, with double-digit gains in water supply as well. Power, highway and street all have nice spending increases.
Conversely, construction spending for religious facilities dropped significantly during this period, with the lodging and manufacturing sectors also experiencing large decreases.
When you consider that Covid has prevented people from attending religious services and traveling, these numbers should not be surprising. And many manufacturing facilities across the country closed for many weeks, either to prevent an outbreak or because of an outbreak. This in turn brought construction to a halt.
Construction-Put-In place is a lagging indicator, and provides an overview of the health of the industry.
So what lies ahead?
For that, we need to look to construction spending forecasts. And there are a lot of them out there!
Fortunately, the American Institute of Architects aggregates many of these forecasts to create the AIA Consensus Construction Forecast. They use many sources, and here I’ve broken out three of them: Dodge Data & Analytics, FMI, and Associated Builders & Contractors.
The midyear consensus forecast predicts a decline of 8.1 percent for the construction industry. FMI is a bit more pessimistic, projecting a decline of 9 percent while ABC is much more optimistic, predicting the decline will be just 3.1 percent.
When looking at the individual sectors, the consensus is for a severe drop of 11.6 percent for commercial, 8.2 percent for industrial, and 4.5 percent for institutional.
Again, ABC is the most optimistic for all three sectors, projecting a small decline for industrial and even a slight increase for institutional.
This demonstrates the benefit of the consensus forecast, which aggregates eight different forecasts to make sense of the variances.
Of course, we’re well into 2020, and the construction decline was pretty obvious because of the economic shutdowns that hit the economy in the spring, including some states that totally stopped all construction.
But things will turn around in 2021, right?
Again turning to the AIA consensus forecast, the current mid-year projection is for construction to decline another 4.8 percent next year – on top of this year’s decline. However, FMI is currently predicting the decline to be more severe, dropping 9 percent. Dodge is the most optimistic of the sources I’m featuring here, projecting a further decline of just 2 percent.
The forecasts for the individual market sectors holds a mixed back, with Dodge anticipating a slight increase in the Commercial sector, ABC projecting growth in the Industrial sector, and Dodge forecasting a small gain in the Institutional sector.
Again, we need a little perspective here.
If the projections hold true, this is NOT a “sky is falling” scenario for the AEC industry.
Here I’ve taken the historic Construction Put In Place data from the US Census Bureau from 2008 through 2019, then used the AIA Consensus Forecast projections of an 8.1 percent decline in 2020 and 4.8 percent decline in 2021.
Look, this is not a perfect interpolation – the Census Bureau data includes nonbuildings, while the AIA data does not. But it still gives us some perspective.
And that perspective is this: even with the forecast decline this year, construction spending will be equivalent to spending levels in 2017. Was there work to be had in 2017? Were you busy? Did your firm have a good year?
The 2021 spending projections do drop us further, back to 2015 levels, but nowhere near 2011 levels.
I should note that these numbers are not inflation-adjusted, and we’ve certainly experienced construction inflation over the past few years.
Again, I’m just sharing this to provide some perspective.
Dodge Momentum Index
Another industry metric worth tracking is the Dodge Momentum Index, published monthly by Dodge Data & Analytics.
This index tracks new projects that have entered the planning stage, typically with an architect or engineer beginning work on it. So it is a good indicator of the health of the industry, and work that will soon be feeding into the construction pipeline.
As you can see here, entering 2020 the Momentum Index was already in decline – a gentle decline that dropped more significantly in April as a result of Covid-19. It flattened for a month, then dropped again in June before turning around in July.
When you look at the history of this index, the most recent peak occurred in July 2018, slightly more than two years ago.
From December 2019 through July 20, the index has dropped about 20%.
However, we again need some perspective.
The highest point ever for the Dodge Momentum Index occurred in early 2009, when the index reached the upper 180s.
And the low point was in July 2011, when the index declined to the upper 70s. Considering that the value of the index was 100 in the year 2000, this was a hugely significant drop.
By July 2011, architectural and engineering firms were beginning to work on new projects, which was reflected as the index began the long turnaround as 2011 progressed.
So although the most recent index reading of roughly 125 is down from six months ago, it is far above the low of 77 achieved almost a decade ago.
SMPS COVID Impact
And finally on our short tour of the state of the AEC industry, here’s some recent data from the Society for Marketing Professional Services.
The SMPS Foundation has been conducting surveys on the impact of COVID on AEC firms, and here’s some findings from the most recent data. Participants were asked about their ability to secure new clients and projects, and just under one-third reported that it was business as usual.
Of course, this means that two-thirds of companies have experienced a decline in activities toward securing new work. Just over 28 percent reported a slight reduction in activities while about one-third reported “some” reduction, which for this survey was the category between “slight” and “most.”
Speaking of most, slightly more than 6 percent of companies reported that most activities have stopped, while just over 1 percent reported that all activities have stopped.
Keep in mind that states and geographic regions have experienced increases and decreases at different times, so while some firms in quiet areas were reporting business as usual, other firms in surging areas were experiencing greater disruption to their ability to land new clients and projects.
The same SMPS Foundation research also queried firms about the state of their Request for Proposal or RFP activities. Almost 30 percent of firms reported that RFPs were on the upswing. As this is a 2020 survey, there’s no 2019 data to compare it to – just a moment in time.
Slightly more than one-third of respondents shared that their proposal activities were unchanged.
This leaves 36 percent of firms that have experienced decreases in RFP requests, including 6 percent reporting that RFP activities have come to a total standstill.
There’s other AEC specific metrics out there worth monitoring. I often check in on the Construction Confidence Index from Associated Builders and Contractors, as well as their Construction Backlog Indicator. If fact, the current backlog indicator shows firms have an average backlog of 8.1 months, compared with 8.9 months one year ago. So yes, it is down, but not currently down significantly.
So the question becomes, what do we do with this information?
Well, I firmly believe that there’s a proven process for generating business, both in good and uncertain times.
It entails gaining internal and external business intelligence, and then interpreting the data. Next it involves strategic planning to evaluate the target markets, analyze your business development and market programs, map your sales, evaluate your client experience program, and ensure you are on-brand with your messaging.
Then you need to look at your business development and marketing tactics, and make sure you have a realistic budget to accomplish your goals. And finally, it entails training your staff to give them the right tools to succeed.
I’m happy to share that I’ll be joining Kristi Weirbaugh and Stambaugh Ness on Tuesday, September 1 to discuss Generating Work in Uncertain Times. The webinar is free, and you can learn more through the link shared here, or by surfing to aecumen.com and pulling up the transcript of this video.
So there you have it, the State of the AEC Industry! Good, bad, and ugly. Just remember that whenever you see data, you always need to go below the surface to gain a better understanding.
I hope you found value in this, and I greatly appreciate your time.
I’m Scott Butcher, and I help design and construction firms improve their marketing and business development acumen through consulting, training, and facilitation.
Stay well and I hope to see you soon!
[End of Transcript.]