Second Quarter April June 2016
Highlights Second quarter showed positive but slowing billings momentum for the design industry. Positive business conditions persisted for interior design firms as measured by the American Society of Interior Designers (ASID) Interior Design Billings Index (IDBI) second quarter report, indicated by a June IDBI score of 55.9. Scores above 50 indicate expansion within the industry, while scores below 50 indicate contraction. The majority of interior design firms (51 percent) reported that business conditions were about the same as they were in May, and 31 percent realized an increase of at least five percent or more in billings. However, the pace of billings growth has decelerated. While favorable for many interior design firms, business conditions fell off for sole practitioners. Current business conditions were favorable for most design firms across size classifications with the exception of sole practitioners. This group has seen a deterioration in billings since February 2016 with IDBI scores below 50. ASID firms by region were split on billings growth. Looking across the nation, interior design firms in the Midwest and Northeast reported a decrease in billings at the end of the 2nd quarter, while firms in the South and West reported stronger gains. illing results vary by market specialization. Billings for design firms specializing in single-family and multifamily residential sectors reflect the push and pull of the housing market. The pace of new home sales, existing home sales, and new home construction have been erratic over the last several years. Recent data indicates that this is a bright spot for the economy and should be a solid trend for interior design firms as all three housing market indicators are posting mid-year gains. The pace of billings for firms providing design services in the institutional sector (healthcare, government, education) declined in June, a continuation of the setbacks incurred over the two previous months, and a broader deceleration over the last nine months. While experiencing a fall-off in billings in May, firms specializing in the commercial sector (office, entertainment, hospitality) showed an uptick in June. Six-month Outlook: Firms remain positive about business conditions. Looking forward, survey panelists remain positive about the near term outlook for the interior design industry, but less positive than they were at the end of the first quarter. The six-month business expectations score of 56.4 is six points lower than the March score of 62.5. Nonetheless, scores remain above 50, suggesting ongoing optimism about business conditions for the interior design industry. 1
While employment fell off in May, a rebound in June reassures the outlook. After a weak gain of 11,000 jobs in May, private payrolls increased by 287,000 net new jobs in June, and the payroll figure was well above its three-month average of 135,000. Average hourly earnings moved in the right direction increasing 2.6 percent on a year-over-year basis. Unfortunately, the unemployment rate increased from 4.7 percent to 4.9 percent in June. Construction spending decelerating from its strong 2015 pace. Construction spending totaled $1.14 trillion in May 2016, 0.8 percent lower than April s figure. Private and public spending fell off its year-over-year pace, and commercial private and public construction spending registered the largest decreases. However, total construction spending was still 2.8 percent higher than its May 2015 level. According to Jack Kleinhenz, Ph.D., ASID economist: Despite ongoing unevenness in economic activity, the economy is expected to continue to grow gradually, largely driven by the consumer sector and supported by an improving housing market. Consumer confidence remains very favorable but could turn cautious if global economic and geopolitical events create volatility and increase uncertainty. Promising signals for the design industry include job growth, rising wages, and increasing home and equity prices. 2
The Second Quarter 2016 ASID Business Performance Survey Report ASID Survey: Interior design firm billings expanding but growing at a slower pace in second quarter, 2016 Positive business conditions persisted for interior design firms as measured by the American Society of Interior Designers (ASID) Interior Design Billings Index (IDBI) second quarter report, indicated by a June IDBI score of 55.9. Scores above 50 indicate expansion within the industry, while scores below 50 indicate contraction. The majority of interior design firms (51 percent) reported that business conditions were about the same as they were in May, and 31 percent realized an increase of at least five percent or more in billings. The pace of billings growth has decelerated since February s high score of 63.4, and the IDBI s three-month moving average for June was 56.6, down from March s average of 59.3. Inquiries into new design projects were relatively strong with a score of 58.2 in June, remaining essentially unchanged from the end of the first quarter of 2016 and a bit lower than the three month moving average of 59.0. Table 1: Billings and Inquiries, June 2016 Question to ASID Survey Participant Significantly increased (up 5% or more) About the same Significantly decreased (down 5% or more) Index How do billings compare to previous month? 31% 51% 19% 55.9 How do new project inquiries* compare to the previous month? 38% 41% 21% 58.2 *calls, emails, interviews, bids, solicitations, RFPs Figure 1: American Society of Interior Designers Billings and Inquiries Index, June 2015 to June 2016 3
Figure 2 illustrates that The American Institute of Architects (AIA) three-month moving average index is generally lower than the ASID IDBI three-month index. Both scores suggest positive business conditions during the second quarter of 2016. The IDBI score tends to run above AIA s pattern, in part reflecting differences in the underlying base of activities. Figure 2: ASID and AIA Billings Indices, June 2015 to June 2016 4
Billings by Firm Size Current business conditions were favorable for most design firms across size classifications with the exception of sole practitioners. This group has seen a deterioration in billings since February 2016 with IDBI scores below 50. The number of respondents is low in the larger firm size categories and results should be interpreted with caution. Figure 3 shows the volatility of these series. Table 2: Billings by Size of Firm, June 2016 How were billings for the month of June compared to May? Size of ASID Member Firm INDEX: June 2016 Number of Respondents Sole practitioner 2 to 9 10 to 24 25 or more 47.2 64.3 50.0 83.3 36 35 6 3 Figure 3: Billings by Size of Firm, June 2015 to June 2016, 5
Billings by Region Looking across the nation, interior design firms in the Midwest and Northeast reported a decrease in billings at the end of the 2nd quarter, while firms in the South and West reported stronger gains (Figure 4). Figure 4: ASID IDBI by Region, June 2015 to June 2016 There are regional similarities and differences when comparing June s IDBI and AIA indices (Figures 4 and 5). AIA and ASID firms in the South and West indicate positive billings with scores above 50, while interior design and architecture firms located in the Midwest show a decrease in billings for the most recent period. Northeastern design firms report a reduction in June billings, but architecture firms report an increase. 6
Figure 5: AIA Billings Index by Region, June 2015 to June 2016 A methodological note: The geographic distribution of June s ASID respondents over-represent the Midwest and West regions in terms of the geographic distribution of all interior design firms as shown in Table 3. For example, respondents from the Midwest region account for 20 percent of the survey s results while all interior design firms located in the Midwest account for 15 percent of the population. In the Northeast, 20 percent of survey respondents represent 22 percent of all interior design firms in that region. Table 3: Geographic Representation by Census Region, June 2016 Census Region ASID Survey Respondents* Distribution of Interior Design Population Midwest Northeast South West Total 20% 20% 33% 28% 100% 15% 22% 38% 25% 100% *Based on June 2016 survey results 7
Billings by Sector Figures 6, 7, and 8 illustrate the recent trends in billing performance by market sector. As shown in Figure 6, billings for design firms specializing in single-family and multifamily residential sectors reflect the push and pull of the housing market. The pace of new home sales, existing home sales, and new home construction have been erratic over the last several years. Recent data indicates that this is a bright spot for the economy and should be a solid trend for interior design firms as all three housing market indicators are posting mid-year gains. The ASID survey data are not adjusted for seasonality which can explain some of the dips and peaks in the series. Figure 6: Residential Sector Billings, June 2015 to June 2016 The pace of billings for firms providing design services in the institutional sector (healthcare, government, education) as shown in Figure 7, declined in June, a continuation of the setbacks incurred over the two previous months, and a broader deceleration over the last nine months as measured by the three-month moving average. While experiencing a fall-off in billings in May, firms specializing in the commercial sector (office, entertainment, hospitality) showed an uptick in June. Figure 7: Commercial Sector and Institutional Sector Billings, June 2015 to June 2016 8
Six-month outlook: Firms expect steady as you go business conditions Looking forward, survey panelists remain positive about the near term outlook for the interior design industry, but less positive than they were at the end of the first quarter. The six-month business expectations score of 56.4 is six points lower than the March score of 62.5. Nonetheless, scores remain above 50, suggesting ongoing optimism about business conditions for the interior design industry (Table 4). The Conference Board s July expectations component of the overall consumer confidence index rose 1.0 point to 84.6 in June. This component moves somewhat erratically from month to month, but has been relatively steady for the first part of 2016. Expectations have declined most notably on a year-over-year basis as evidenced by the June 2015 index reading of 92.8, 8.2 points higher than the current reading. The March Dodge Momentum Index (DMI) posted a strong rebound in June with a score of 134.4, the highest level since January 2009. The increase in the index was due in part to a gain of 14.6 percent in the institutional component and a 7.7 percent increase in the commercial component. This gain is a positive development for the construction, architecture, and interior design industries. The Dodge Momentum Index is a monthly measure of the first (or initial) report for nonresidential building projects in planning, and has been shown to lead construction spending for nonresidential buildings by a full year. Table 4: Expectations for the Interior Design Business Condition, June 2016 Expectations ASID About the same Better than they are now Worse than they are now 56% 28% 15% Business Six-Month Outlook Index 56.4 Figure 8: Six-month Outlook Comparison: ASID, Conference Board, and Dodge Momentum, June 2015 to June 2016 9
Construction spending decelerating in 2016 from its strong 2015 pace Construction spending totaled $1.14 trillion in May 2016, 0.8 percent lower than April s figure. Private and public spending fell off its year-over-year pace, and commercial private and public construction spending registered the largest decreases. However, total construction spending was still 2.8 percent higher than its May 2015 level. Figure 9: U.S. Construction Spending, May 2015 to May 2016 Year-over-year Percentage Change Residential improvement spending (Figure 10) is estimated to be $151,246 million in May 2016, slightly lower than its three month average of $153,462 and 2.0 lower than the same month a year ago. Home and equity prices in the first part of the year have strengthened and may be a driver of increased home improvement spending. According to the Joint Center for Housing Studies of Harvard University, growth in home improvement and repair spending is expected to reach eight percent by the start of 2017, well in excess of its 4.9 percent historical average. Figure 10: Residential Improvement Spending and ASID Billings Index, May 2015 to May 2016 10
Labor Market After a weak gain of 11,000 jobs in May, private payrolls increased by 287,000 net new jobs in June, and the payroll figure was well above its three-month average of 135,000. Average hourly earnings moved in the right direction increasing 2.6 percent on a year-over-year basis. Unfortunately, the unemployment rate increased from 4.7 percent to 4.9 percent in June. As shown in Figure 11, architectural services job growth picked up in the first quarter of the year while interior design positions contracted. An increase appears to be on the horizon as employment in the design and architecture industries reported year-over year gains in April and May. Figure 11: Interior Design and Architectural Services Payrolls, May 2013 to May 2016 12 Month Net Change in Employment Beginning in November 2010, The American Society of Interior Designers launched its business performance index. The ASID survey, conducted monthly, is designed to provide a unique perspective on current and future business conditions for the interior design industry nationally and regionally for all firm sizes. A total of 300 firms are invited to participate in this program. Firms included in this survey offer interior design services, architectural services, engineering, and other related enterprises. Panelists are asked to report on their current billings relative to the previous months and to report on recent business inquires. A business sentiment question is also asked and gauges respondents thoughts on how general business conditions for the entire economy will be six months from now. The results of the survey are compiled into diffusion indexes which are helpful indicators of changes in the direction of economic activity. The ASID indexes are centered on 50 percent (above 50 indicates expansion while below 50 denotes contraction). 11