Producer Price Indexes, 1993

Industrial materials

The PPI for intermediate materials other than
foods and energy advanced 1.6 percent in 1993
after rising 1.2 percent from December 1991 to
December 1992. The indexes for construction
materials, durable manufacturing materials, and
supplies rose more than in 1992. In contrast,
prices for materials for nondurable manufactur-
ing fell after rising slightly in the previous year,
while the index for components for manufactur-
ing rose 0.7 percent, about as much as the 0.8-
percent increase in 1992.

Basic industrial materials. From December
1992 to December 1993, the Producer Price In-
dex for crude nonfood materials other than en-
ergy climbed 11.6 percent, more than twice as
much as the 5.7-percent advance in 1992. This
index, usually considered an indicator of the fu-
ture strength of the general economy, climbed at
a 16.5-percent seasonally adjusted annual rate
during the first half of 1993, but slowed to a 6.9-
percent rate during the second half. This repeated
the 1992 pattern that proved to be a precursor of
a weaker economy in early 1993. But unlike the
second half of 1992, when prices moved up mod-
estly in the third and fourth quarters, basic in-
dustrial material prices turned down during the
third quarter of 1993 before rebounding sharply
in the fourth.

The index for ferrous scrap, which surged sub-
stantially higher after showing virtually no
change in 1992, dominated the acceleration in
the basic industrial materials index in 1993. The
logs and timber index advanced sharply last year,
following an increase about as large in 1992.
Construction sand and gravel prices rose some-
what more than in the preceding year, and raw
cotton and gold ore prices turned up substantially
after decreasing in 1992. By contrast, nonferrous
scrap and wastepaper prices tuned down sharply,
and prices for copper ores fell much more than
in the previous year. The cattle hides index
moved up far less than in 1992.

Selected industries

The Producer Price Index for the net output of
the domestic manufacturing sector increased 0.8
percent during 1993, half as much as its 1.6-per-
cent increase in 1992. The most dramatic differ-
ence between the two years was in tobacco manu-
factures: the index slumped 22.8 percent, follow-
ing a 7.5-percent advance in 1992. In addition,
the petroleum refining index dropped 12.8 per-
cent, far greater than its 1.4-percent decrease in

10. Monthly Labor Review May 1994

1992. In contrast, the lumber and wood prod-
ucts index climbed 13.7 percent, compared with
about 11 percent in the previous year. Indexes
for other major manufacturing industry groups
did not change by more than 3 percent in either
direction during the year.

After increasing 1.8 percent in calendar 1992,
the index for the net output of total mining in-
dustries decreased 9.4 percent in 1993. The
downturn was paced by the oil and gas extrac-
tion industry group index, which dropped 12.8
percent, following a rise of 3.0 percent in the
previous year. In addition, the metal mining in-
dustries group index moved down 7.2 percent,
considerably more than in 1992.

The index for air passenger transportation
climbed 13.1 percent from December 1992 to
December 1993. This was a substantial contrast
with the decline of 4.9 percent in 1992 during a
series of major airfare wars. Discounting in 1993
was much more limited in size and duration than
in the previous year. Despite stronger demand,
the increase in air cargo transportation deceler-
ated from 4.1 percent in 1992 to 2.3 percent in
1993,

The passenger car rentals index turned down
following a sizable climb in 1992. The index
moved down 4.8 percent from December 1992
to December 1993; a year earlier, this index
surged upward by 18.3 percent.

The index for domestic deep sea freight trans-
portation moved sharply lower after edging up
in the previous year; and because of widespread
flooding in 1993, the index for Mississippi River
freight transportation fell much more than in the
previous year.

Two new industry indexes moved in opposite
directions. The hospitals index moved up in the
year following its introduction in December
1992, but the index for cable and other pay tele-
vision services declined between its initiation in
June 1993 and the end of the year. The hospitals
index rose 4.3 percent in 1993. The index for
medicaid inpatient treatments at general hospi-
tals moved up 4 percent over the year, somewhat
more than the 2.3-percent rise registered for
medicare patients but not as much as the 5.4-
percent advance for patients outside either med-
icaid or medicare. The 1993 increase in the PPI
for nonmedicaid or nonmedicare inpatients at
general hospitals was considerably less than the
7.6-percent rise in its rough equivalent, the
CPI-U for hospitals and related services. Rates
for psychiatric hospitals were up 6.7 percent for
the year, nearly twice as much as the increase
for other types of specialty hospitals. ol


Craig Howell
and

Harry Briggs

Craig Howell and Harry

Briggs are economists in
the Division of Industrial
Prices and Price Indexes,

Bureau of Labor Statistics.

Producer price rises slowed
in improving economy in 1993

A moderate economic recovery,

industry cost-cutting to boost productivity,
and weak overseas demand contributed
to relatively small price increases for producers

finished goods moved up 0.2 percent in

1993, following a 1.6-percent advance in
1992 and a dip of 0.1 percent in 1991. The in-
crease in the index for finished goods other than
foods and energy, which includes consumer
goods such as passenger cars and apparel as well
as capital equipment such as trucks and machine
tools, continued to slow in 1993. After gains of
2.0 percent in 1992 and 3.1 percent in 1991, this
measure rose only 0.4 percent in 1993. In addi-
tion, the energy goods index, chiefly gasoline,
home heating oil, and residential gas and elec-
tricity, decreased 3.8 percent, far more than its
slight decline in the previous year, but not as
much as its slump of 9.6 percent following Op-
eration Desert Storm in 1991. Prices for foods
such as meats, bread, and fresh produce, how-
ever, increased 2.4 percent in 1993, after a
smaller climb in 1992 and a drop in 1991. (See
table 1.)

The Intermediate Goods Price index, which
measures the movement of prices for goods such
as flour, steel, lumber, industrial chemicals, die-
sel fuel, and paper boxes, advanced 1.0 percent
in 1993, the same as during the previous year.
The Crude Goods Price Index, which measures
price movements for items such as wheat, scrap
metals, logs, crude petroleum, and cotton, moved
down 0.5 percent following an increase of 3.3
percent in 1992. In 1993, prices for food-related
materials were up but energy items were down
in the intermediate and crude stages. Prices for

Pp rices received by domestic producers of

intermediate goods other than foods and energy
rose 1.6 percent over the year, somewhat more
than in 1992, while basic industrial material
prices climbed 11.6 percent, about twice as much
as in 1992.

Economic background

The generally moderate rate of recovery from
the last recession, the impetus of private indus-
try cost-cutting that enhanced productivity, and
weak foreign demand were among the factors
contributing to the continuation of relatively low
rates of price increases for most products in 1993.

After surging strongly at the close of 1992,
the economy slowed considerably through much
of 1993 before strengthening again toward the
end of the year. By December, the Federal Re-
serve Board's capacity utilization index for min-
ing, manufacturing, and utilities was up to 82.9
percent, a level not seen since mid-1989. Con-
sumer demand for cars, light trucks, and some
household durables was stronger than in recent
years; however, demand for many other kinds of
consumer goods was sluggish until employment
and income gains in the fourth quarter boosted
consumer confidence and retai! sales. For the
year as a whole, real income was up nearly 3
percent. The residentia] housing market was
weak through the first half of the year, but im-
proved later in the year, partly reflecting the im-
pact of a sharp drop in mortgage interest rates.
The general decline in interest rates during the
year helped put more disposable income into con-

Monthly Labor Review May 1994 7



Producer Price Indexes, 1993

sumers’ pockets, particularly by making possible
new waves of refinancing that often dramatically
cut required monthly mortgage payments.

Spending for capital equipment rose nearly 12
percent in 1993; to boost productivity, industry,
as in other recent years, often concentrated capi-
tal expenditures in upgraded computer systems.
Many firms, unable to impose lasting price hikes,
continued to emphasize cuts in labor costs that
often brought about significant reductions in their
work force.

Manufacturing productivity advanced 5.3 per-
cent in 1993, compared with 4.3 percent in the
previous year, while unit labor costs in manu-
facturing dropped 2.4 percent, the first downturn
since 1987. The Employment Cost Index for to-
tal compensation for workers in private industry
was up 3.6 percent from December 1992 to De-
cember 1993, virtually the same as in 1992. Busi-
ness spending on inventories remained tightly
constrained, partly reflecting the spread of the
“just-in-time” philosophy to minimize corporate
funds locked up in inventory.

Efforts to reduce Federal spending, particu-
larly in the defense budget, restrained the gen-
eral recovery. The commercial construction mar-
ket remained sluggish in most parts of the coun-
try because of the surplus of office space resulting
from overbuilding in the 1980’s. But public con-
struction spending on infrastructure and other
projects advanced over 1992 levels.

Although foreign demand for U.S.-made
goods was somewhat constrained by the rela-
tively weak economies of many major U.S. trad-
ing partners, such as Japan and Germany, exports
to Great Britain, Canada, and some developing
countries increased. Imports remained heavy for
some products; however, market shares for cars
and some other goods made in Japan were eroded
by currency fluctuations and the continued trend

by foreign producers to build manufacturing
plants in this country.

Finished goods other than foods, energy

The index for finished goods other than foods
and energy edged up 0.4 percent in 1993, fol-
lowing a rise of 2.0 percent a year earlier. This
slowdown was overwhelmingly due to a dramatic
cut in cigarette prices in mid-1993.

Prices for consumer goods fell 0.6 percent for
the year, following a 2.1-percent increase in
1992. The index for capital equipment, however,
rose slightly more (1.9 percent) than it had a year
before (1.7 percent).

Tobacco products. The tobacco products index
experienced a net decrease of 22.4 percent from
December 1992 to December 1993. This index
had increased approximately 13 percent annu-
ally for 5 consecutive years through 1991 be-
fore slowing to a 6.7-percent pace in 1992. The
index accelerated again during the first 5 months
of 1993, before dropping substantially in June,
resulting in a seasonally adjusted annual rate of
increase of less than 2 percent for the first half
of the year. Prices for tobacco products then
slumped about 25 percent in just 1 month, from
July to August.

Apparel. In 1993, prices were generally weak
for apparel, reflecting sluggish consumer demand
and falling prices for some synthetic materials
in the wake of lower crude oil costs. The index
for women's apparel eased down 0.7 percent,
after moving up 1.2 percent in 1992; similarly,
the girls’ and children’s apparel index turned
down 0.4 percent following a 2-percent increase
in 1992. Prices for men’s and boys’ apparel rose
0.6 percent, compared with 2.5 percent a year
earlier. Footwear prices were up 1.3 percent in

Table 1. Annual percent change for major categories of goods in the Producer Price Index,
by stage of processing, 1989-93
_ Index 1989 1990 1991 1992 1993
Finished goods 49 57 1 16 02
Foods .. 52 2.6 5 1.6 24
Energy . 95 30.7 -9.6 -3 -3.8
Other .... 42 35 31 20 4
Tobacco products 13.5 12.6 13.2 67 ~22.4
Passenger cars cove eee ene 24 43 34 6 3.3
Intermediate materials, supplies, and components . 23 43 2.6 1.0 1.0
Foods and feeds ° 13 ~2 -5 57
Energy . 10.6 21.8 “11.6 7 48
Other . veeecnereeeesees 9 1.9 -8 12 16
Crude materials for further processing al 60 | -11.6 33 =5
Foodstuffs and feedstutts 28 4.2 58 30 66
Energy . oe 179 19.4 16.6 23 13.7
_Other beeeeeee eee wee -3.6 6 76 5.7 11.6
Note: Data are calculated on a December-to-December basis.

8 Monthly Labor Review May 1994


1993, less than half the rise in 1992. The resur-
gence of consumer demand that was so marked
for motor vehicles and household durable goods
in 1993 was not as apparent in markets for ap-
pare) and several other consumer nondurable
items.

Pharmaceuticals. Prices for pharmaceutical
preparations moved up only about half as much
as during the previous year. From December
1992 to December 1993, the prescription drugs
category advanced 3.1 percent, well below its
1992 rise of 6.4 percent. The over-the-counter
drugs grouping cut its increase nearly in half,
from 5.2 percent in 1992 to 2.7 percent in 1993.
Increasing pressure from institutional buyers on
the major pharmaceutical firms to hold down
drug price advances was effective for the sec-
ond consecutive year after many years of siz-
able price boosts. The significant public scru-
tiny on pricing behavior of pharmaceutical com-
panies in connection with the debates over
possible changes in health care financing also
served to encourage price moderation.

Motor vehicles. The index for motor vehicles
advanced 3.7 percent in 1993, more than its 2.0-
percent rise a year before and the same as its
1991 increase. Indexes for passenger cars and
heavy trucks climbed 3.3 and 5.2 percent, more
than 2 percentage points above the increases re-
corded for those categories in the previous year.
Prices for light trucks, however, rose somewhat
less in 1993—4,2 percent—than in 1992—4.8
percent. The tires and tubes index fell 1.7 per-
cent after rising by about the same amount a year
before.

The resurgence in demand for passenger cars
and the continued swing of consumer preferences
toward light trucks were among the primary
causes of the general economic expansion in
1993, particularly in the second half. Sales of
domestically produced automobiles were up 7.3
percent from 1992 levels. Light trucks captured
nearly 43 percent of the light-vehicle market in
1993, compared with 40 percent the previous
year. Much of the increased automobile sales rep-
resented pent-up demand: due to sluggish new
car sales for several years, the average age of
cars on the road was about 8 years, much older
than normal.

Energy

Although prices for energy goods turned down
at all stages of processing in 1993, the decline in
Prices at the crude level was the most dramatic,
with a drop of 13.7 percent; this followed a 2.3-
percent rise in 1992. The index for intermediate
energy goods decreased 4.8 percent, following a

rise of 0.7 percent in the previous year. Prices
for finished energy goods moved 3.8 percent
lower, after edging down 0.3 percent in 1992.

Among crude energy items, crude petroleum
prices dropped 27.3 percent in 1993 after falling
2.4 percent in the previous year and 30.5 per-
cent in 1991. The Organization of Petroleum
Exporting Countries (OPEC) was again unable to
stem the plunge in petroleum prices in 1993.
OPEC was unable to rein in members’ excess pro-
duction and maintain pricing discipline, while
some nonmember nations also expanded output
and world demand remained sluggish. As a re-
sult, the spot market price for North Sea crude, a
benchmark for the cost of foreign crude oil to
American refiners, fell to a 5-year low of about
$13.50 a barrel by the end of 1993, Domestic
production of crude oi} has accounted for a
smaller proportion of domestic consumption over
the past 10 years in the face of the longstanding
price weakness, falling from 72 percent of the
domestic crude oil market in 1983 to a 51-per-
cent share in 1993.

Foods

Prices received by domestic producers of finished
consumer foods climbed 2.4 percent from De-
cember 1992 to December 1993, somewhat more
than their 1992 advance of 1.6 percent. The in-
dex for intermediate foods and feeds rose 5.7
percent over the year, following dips of less than
{ percent in 1991 and 1992. The crude foodstuffs
and feedstuffs index moved up 6.6 percent, more
than twice as much as during the previous year.

Among finished consumer foods, prices in-
creased in 1993 for dairy products, fresh fruits,
processed fruits and vegetables, roasted coffee,
confectionery end products, pork, and milled rice
after declining in the previous year. In addition,
the index for shortening and cooking oil rose
more than in 1992. By contrast, prices turned
down after 1992 increases for beef and veal, fish,
and soft drinks, and indexes for fresh and dry
vegetables and for bakery products moved up less
than they had in the year before.

Weather problems in 1993 had a major im-
pact on the upward price movements of many
food-related products. Persistent and widespread
flooding in the upper midwest during the sum-
mer sharply curtailed production of feedstuffs,
vegetables, and other crops, and disrupted barge,
rail, and truck transportation networks. However,
some meat prices dropped as livestock owners
lowered their stocks when higher feed prices
made their operations unprofitable. Production
of fruits and vegetables in some parts of the coun-
try was severely affected by occasional outbreaks
of unseasonably cold and wet weather.

Monthly Labor Review May 1994 9