Why it’s worth keeping an eye on the size of work being let, not just the overall value, in the RIBA new series on economics
The monthly official estimate of overall construction output, released last week, prompted some rather downbeat headlines. In truth the figures from the Office for National Statistics (ONS) were pretty much in line with the general picture emerging over recent months for activity within both construction and the economy at large – a bit underwhelming.
It’s generally unwise to focus too much on a single month’s data point, as many do, particularly when it will almost inevitably be revised in coming months.
In many ways the revisions of past data in the latest figures held the most interest. While fairly modest in scale, they subtly lifted the short-term trend and eased what was beginning to look like an uncomfortable but steady downward path. As a result, construction output in the final quarter of 2015 officially rose slightly rather than fell slightly.
Construction output is hard to measure in fine detail and the data should be seen in that light. It’s generally wiser to scan a range of sources over a suitably long timeframe.
Statistics showing the amount of new orders let to contractors, released by ONS in parallel with the output figures, helpfully adds to the pot of indicators. They provide some indication of how much future construction work is being pumped into the pipeline, and can also give us a sense of client confidence.
Chart 1 shows, in index form, the changing level of new construction work, repair and maintenance and all construction output. Chart 2 shows new orders won quarterly for three building sectors and all new work.
Given the uncertainty inherent in the statistics, the broad picture we might draw from the output figures is of rapid growth from early 2014 followed by a pause starting in the middle of last year. Looking at new orders, this seems reasonable given that growth in orders seemed to slow a year or so earlier.
The pattern in output is echoed in the index provided by procurement bodies Markit/CIPS and the Bank of England Agents’ scores. These data all point to growth softening from a year or so ago. Indeed, the Markit/CIPS index score for February was 54.2. That’s the lowest since June 2013.
So it should be no surprise to see a tempering of expectations among architects. The RIBA Future Trends Survey continued to signal further growth in December, but expectations fell back after what looked like a possible rally in November (see Chart 3). Looking along the time series it appears that since about last summer architects have been rebasing their expectations downward.
One point worth noting about confidence is that it tends, broadly speaking, to be a bigger factor in decisions over large contracts than smaller contracts. This is to be expected, as on average they take longer to complete so carry a larger risk.
Using Barbour ABI data, it’s possible to look at the proportion of contracts by size. Chart 4 shows in bar form the number of contracts awarded in the month in Great Britain worth between £100,000 and £1 million. The lines show the proportion of contracts between £100,000 and £1 million and between £1 million and £2 million.
We see that in late 2011 and early 2012, during the recovery, the share of smaller contracts awarded declined despite a stable if not increasing number of smaller contracts awarded. While part of this decline may be down to inflation, the data does seem to support our thesis that stronger economic activity prompts more confidence in larger projects.
For architects it’s worth being aware of the mix in the size of contracts. First, in many small practices smaller contracts are the bread and butter workload. But even for larger practices, it’s worth remembering that bigger contracts are riskier not just for clients, but throughout the supply chain.
Having a balanced portfolio of smaller and larger work seems a sensible strategy, especially when there is increased uncertainty.
This doesn’t mean that the overall number of smaller contracts increases when times are tough, just that they appear to be more likely to go ahead and possibly less prone to delay. And should they fail, the consequences will tend to be less damaging.
To get a clue of confidence in the smaller end of construction contracts we can look at the state-of-trade survey produced by the Federation of Master Builders. Chart 5 clearly shows a similar pattern to that which we are seeing across many indicators, with the growth in workload and expectations softening rapidly from the middle of last year.
Many factors will influence the level of smaller building works. For instance, the apparent decline in the government’s ambition to green the built environment will have removed some of the buoyancy from the repair and maintenance market. But plenty of prospects remain.
A report soon to be released by Barbour ABI examines the home-improver market. Chart 6 is taken from data it will present. It shows quarterly planning applications for home improvement projects tracked against gross domestic product, a measure of underlying economic activity.
There’s a hint in the data for the final half of 2015 that things may be set to cool a little. But generally the trend is positive. What’s more, the report notes a link between car sales and home improvements, both big-ticket household expenditures. Home improvement activity seems to follow moves in car sales about six to nine months later. Encouragingly, 2015 was a bumper year for car sales. So fingers crossed.