Coverage of Services in BLS Price Programs

Presentation to the Department of Commerce / International Trade

Administration / Department of Labor sponsored conference:

Measuring and Enhancing Services trade Data and Information

September 14, 2010

Mike HorriganAssociate Commissioner

Office of Prices and Living Conditions1

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Outline of Talk

Why data on services are so important

Data produced by BLS

Expansion of service coverage in PPI

IPP coverage of services

Measurement Challenges: Globalization Health Care reform

Why data on services are so important

U.S. economy increasingly driven by the service sector

1/3rd of U.S. exports

78% of U.S. private sector GDP

82% of U.S. private sector employment

Critically important for calculating real GDP

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Price data on services from BLS

PPI indexes

By detailed industry

By line of service wherever provided

By line of service within industry

Stage of Processing*

All Economy PPI*4

Price data on services from BLS

Import and Export Price indexes

End use classification from BEA

NAICS classification

Harmonized classification system

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PPI Services Historical Perspective

1980 1990 2000 today

Research begins

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PPI Services Through the Years: 1980s

Development of the service sector industry indices began in the mid 1980s

with the publication of several industries in the transportation sector.

Railroad, Line Haul Operations Scheduled Passenger Air Transportation Scheduled Freight Air Transportation Deep Sea Freight Transportation Pipeline Transportation of Crude Oil

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PPI Services Through the Years: 1990s

In the early 1990s research began on more complex industries.

Some examples include:• Information service

- Telephone Communication - Prepackaged Software - Broadcasting

• Professional services - Lawyers - Architects - Accountants - Real Estate Services

• Health care - Hospitals - Physicians

• Administrative services - Employment agencies - Temporary help

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PPI Services Through the Years: 2000s

In 2000 the PPI achieved another milestone with the publication of the first Retail Trade Industry indices, Grocery Stores.

By 2001 the PPI introduced price indices for industries that represented 50% coverage of the in-scope services sectors as measured by 1992 GDP.

FY 2001 the PPI received funding to continue the services sector expansion. Banking Wholesale Trade Information Technology industries

– Internet Service Providers– Web Search Portals

Where are we now?

Over 77.4% of in-scope service industries.

Over 140 6-digit industries.

Over 1000 indexes within service industries representing different lines of service.

Over 350 where-ever provided indexes representing lines of services regardless of the industry providing the service.

Selected high revenue export industries

Covered by PPI 4811 Scheduled air transportation 4812 Non-scheduled air transportation 483111 Deep sea freight transportation 511210 Software publishers 523110 Investment banking and securities

dealing 541610 Management consulting

Not covered by PPI 51211 Motion picture and video production 524130 Reinsurance carriers 5417 Scientific Research and Development

services11

IPP coverage of services

Coverage Export Air Freight and Air Passenger 7% Import Air Freight and Air Passenger 10%

Discontinued series Export travel and tourism 21% Export Post secondary education 3%

Import Crude Oil Tanker Freight 3% Import Ocean Liner Freight 8%

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IPP Coverage

Discontinued planned expansion Export Ocean Port 3% Import Travel and Tourism 22% Import Reinsurance 9%

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Measurement Challenges

Globalization

Health care reform

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Do BLS import/export price indexes overstate U.S. real GDP growth?

Mike Mandel

Measuring price change in the era of globalization

As producers switch from internal or domestic sourced supply to foreign sourced suppliers for inputs, BLS fail to capture the associated price drops.

If we don’t account for these falling prices, then we are overestimating the rate of price inflation for imports, and underestimating the value of real imports.

Real GDP = C + I + G + (X-M)

If we underestimate real M, we are overestimating real ‘domestic’ GDP, and by default the productivity of the U.S. economy.

Measuring price change in the era of globalization

The PPI is an output based price index. We measure the payments received by producers for the production of output or the provision of services. To the extent that falling input prices are

reflected in falling domestic output prices, then we do capture that impact in domestic inflation – both for PPI finished goods and CPIs.

Measuring price change in the era of globalization

In terms of deflators for imports, our import indexes do not reflect price drops as the sourcing of imports switches from domestic to foreign based. When the sourcing of an input switches from

one foreign country to another, however, we do capture this price drop

The prices paid for an input is not part of our current methodological approach.

Measuring price change in the era of globalization

One way to capture these price drops is to develop an input price index.

Such indexes would reflect price drops for inputs regardless of source.

These indexes would provide more direct measures of input inflation for the BEA input-output tables.

Measuring price change in the era of globalization

Challenges still remain: The distinction between manufacturing and

wholesale trade

Classification of goods and services is not seamless between PPI and IPP

Prices at the border do not capture global supply or value chains

Is BLS overstating the rate of inflation in medical care? A

perspective on health care reform

Goal of reducing out of pocket costs. Role of CPIs and PPIs. Pricing medical care services by

provider does not track the treatment of an episode of illness or disease.

Protocol shifts such as replacing ulcer surgery with a pharmaceutical agent are not captured.

The magnitude of this impact is unknown, although preliminary research at BLS suggests it may not be very large.

Is BLS overstating the rate of inflation in medical care? A

perspective on health care reform

The 2007 Census of Establishments for the medical care industry included the collection of revenue by Disease category. Doctor’s office (ICD-9), Hospitals (DRG) and

MRI Centers (ICD-9), and Pharmaceutical agents can be aggregated up to a disease based classification system

BLS / PPI plans to produce disease based price indexes that capture the effect of changing revenue weights across provider classes as disease protocols change

Contact Information

Mike HorriganAssociate Commissioner

Office of Prices and Living Conditionswww.bls.gov/202-691-5735

horrigan.michael@bls.gov