The first quarter of 2008 has been marked by two countervailing trends in the construction market. The first is the dramatic decline in construction activity in most regions. This has been most marked in residential  construction, but many non-residential sectors are showing signs of sharply lower growth or decreased activity. The second trend is the continuing high level of cost rise and cost volatility in construction inputs, most notably raw materials and commodities.

These two trends have opposing effects on the construction market.  Slowing of construction activity will typically lead to falling prices, particularly when the change is rapid, as it has been in many market sectors. The fall in demand leads to excess capacity in the market, and bidders will tend to respond by reducing margins to cover fixed operating costs. The past few years of high demand have allowed margins to grow, particularly in the strongest states in the west and south. In these regions, there should be room for reasonable reduction in margins, leading to deflationary pressure.

On the other side, rapidly rising input costs are placing significant strain on contractors. Not only do they have to accommodate sharp increases in cost, but they also have to cover the uncertainty and risk of future cost increases. This puts a high degree of inflationary pressure into the market.