Architecture Billings Index Foretells Big Drop in Construction Spending

This is the kind of data series that I like to monitor. The American Institute of Architects publishes an index of industry activity, the so-called Architecture Billings Index. They announced yesterday that it hit an historic low of 33.3 in January. To put that into context, any score below 50 indicates a reduction in billing activity. Until the current crisis, the index had never fallen below 40.

The billings index is a pretty good leading indicator of non-residential construction activity. According to a 2005 study by AIA economists Kermit Baker and Diego Saltes, the billings index leads construction spending by nine to twelve months. I did a quick search for historical data so I could do my own analysis, and ran across this posting on Calculated Risk. I've reproduced one of the key charts below.

The red line (right-hand axis) is the billings index. The blue line (left-hand axis) is the percentage change in private, non-residential construction spending over the trailing twelve-month period. It's clear that the two series track each other fairly closely.

The billings index has fallen by 30% in the last twelve months. (See the updated chart, above.) Calculated Risk points out that a 30% fall in construction spending would be equivalent to $128 billion. That's small compared to the overall economy, but it is significant when compared to any number that's relevant to the real estate industry. (You can read the Calculated Risk posting for more insight.)