Are Architecture Billings a Leading Indicator for the Economy?

(MoneyWatch)  Yesterday, the American Institute of Architects announced that its monthly index of architecture billings rose more than eight points in March 2009. That's on top of a two-point gain in February.

Don't pop the cork yet. The monthly index of 43.7 indicates that the amount of money being spent on an architect's services is still shrinking, according to a spokeswoman from the AIA. (Anything under 50 indicates that property owners are spending less rather than more on architecture design services. ) Still, that 43.7 number is up from an absolutely dismal 35.3 in February, and it's the first time the index has broken 40 since September 2008.

Why is this number important? Architecture fees can indicate a change is coming in the real estate market. They can lead a change in the market by 9 to 12 months, because that's about how long it takes to design a project, hire the contractor and sub-contractors, and pull your permits. If architecture billings are truly a leading indicator of the real estate market, and these numbers hold up or improve, you'll see a bottom of the real estate market this year, with a new direction in the first quarter of 2010. And that should put the economy back on course.

"This news should be viewed with cautious optimism," AIA chief economist Kermit Baker said in the announcement. "The fact that inquiries for new projects increased is encouraging, but it will likely be a few months before we see an improvement in overall billings."

True enough. In fact, if you look at the breakdown of the index, it's apparent that the demand for architectural services is actually quite limited. As far as regions go, the South (43.4) was the strongest, followed by the Northeast (41.8), Midwest (37.5), and West (36.1). (Note that none of these numbers is above the index number of 43.7, which doesn't make much sense, but I never was a statistics kinda girl.)

It could also be an illusion. The South could be benefiting from hurricane-related cash flowing into damaged regions of Louisiana and the other coastal areas still rebuilding from Katrina and Rita. That's not a turnaround -- that's an insurance payout combined with the same stimulus that Bobby Jindal doesn't really feel good about taking.

When you look at the sector breakdown, you might want to reach for the Maalox instead. Architects with a mixed practice scored the best (at 44.0), followed by those with an institutional practice (42.9), and then multi-family residential practice (39.4). Architects with a commercial/industrial practice aren't doing well at all (35.0). The only good news in the press release is that the project inquiries index was up, at 56.6.

Baker admits that "the majority [of architects are] still seeing weak activity levels."

I'd have to agree. Just look at all of the empty buildings in Atlanta. The city has something like a 40-year supply of condominiums at the current sales level!

While I think that by the start of the Spring 2010 home buying season will feel a whole lot different than this year's, I'm not convinced that all of the celebrating we're doing on Wall Street is justified just yet.