The slow down in construction activity continued into the second quarter of 2007, with many states dropping into modest contraction. For some, particularly those in the west, this follows a long period of strong growth, and overall construction activity is still at extremely high levels. In the upper Midwest and central states, the picture is much bleaker, with construction activity struggling to put together a sustained period of stable expansion. This continues the divide between the two distinctly different segments of the US construction market: the areas with strong activity, and demand-led inflation, and the areas with weak markets, and cost-led inflation. This divide is both geographic and by market sector.

Even though construction activity is slowing, escalation and bid volatility remain serious concerns in the construction market in many areas. There are indications of a cooling in inflation, and a reduction in the degree of volatility in pricing in most areas, particularly in the weaker markets and in smaller and less complex projects. There is also a sense of waiting for a dramatic change in the inflation picture, resulting from a sharp drop in material prices due either to increased raw material capacity or a sudden fall in global construction activity. At the moment, however, this remains speculation, and is not influencing bid pricing to any marked degree.

For the remainder of 2007, we anticipate that escalation will continue to be a concern, but at a reduced level from the past two to three years. Material prices are beginning to stabilize, and in some cases fall. In addition, it appears that the extreme volatility in commodities and strategic materials is beginning to abate, reducing the pricing uncertainty for bidders. It will, however, take a long time for price stability to develop into long term confidence.