Monthly Labor Review July 1999 3

Producer Price Highlights

Producer price

highlights, 1998

The crude and intermediate stage-of-processing components

of the Producer Price Index declined in 1998; however,

the finished goods index showed no change, as falling prices

for energy goods offset rising prices for consumer

goods other than foods and energy

William D. Thomas

and

Joseph Kowal

William D. Thomas

and Joseph Kowal

are economists in the

Office of Prices and

Living Conditions,

Bureau of Labor

Statistics.

The Producer Price Index (PPI) for Finished Goods showed no change in 1998,after falling 1.2 percent in 1997 and rising

2.8 percent in 1996. The 1997–98 period marked

the first time since 1947—the earliest year for

which data are available—that this index failed

to show an increase over a 2-year span. Within

finished goods, prices for finished goods other

than foods and energy—a category that includes

both consumer goods and capital equipment—

increased 2.5 percent in 1998, after showing no

change a year earlier. The index for consumer

foods rose 0.1 percent in 1998, after decreasing

0.8 percent in 1997. However, the index for finished energy goods fell 11.7 percent, after declining 6.4 percent over the previous 12 months.

(See table 1.)

At the earlier stages of processing, the PPI for

Intermediate Materials, Supplies, and Components fell 3.3 percent, after declining 0.8 percent

a year earlier. This index measures price movements for goods such as flour, steel, lumber, industrial chemicals, diesel fuel, and paper boxes

and containers. Similarly, prices for crude goods

for further processing also fell in 1998, declining

16.7 percent, after falling 11.3 percent in 1997.

Crude goods include commodities such as wheat,

slaughter cattle, crude petroleum, natural gas, scrap

metals, logs and timber, and cotton. Prices for energy- and food-related materials at both the intermediate and crude stages of processing fell more

in 1998 than in 1997. Excluding foods and energy,

the intermediate index turned down in 1998, after

moving up 0.3 percent in 1997. For crude nonfood

materials less energy, a 16.0-percent decline in 1998

followed no change in the previous year.

Table 2 shows that in each of the stage-of-processing categories, the ratio of advancing to declining indexes fell over the 1997–98 period.1 For example, although the index for finished goods was

unchanged in 1998, the ratio of advancing to declining indexes within finished goods fell slightly. This

shift was due primarily to the component index, finished goods other than foods and energy, where the

percentage of indexes in decline rose in 1998. This

occurred in spite of the fact that this index advanced

2.5 percent for the year, after showing no change

in 1997.

A detailed look at the 1998 commodity data reveals that much of the rise in prices for finished

goods other than foods and energy is linked to one

commodity area—cigarettes. In fact, the 49.4-percent increase in cigarette prices during 1998 accounted for roughly three-fifths of the rise in the

index for finished goods less foods and energy. If

cigarettes were excluded from total finished goods,

that index would have declined roughly 1.2 percent

in 1998, the same rate as in 1997. Within finished

energy goods, only 1 of the 12 commodity components advanced—the index for lubricating grease.

In 1998, the ratio of advancing to declining indexes

within finished consumer foods rose. During the

same period, prices increased at a 0.1-percent

annual rate, after falling at a 0.8-percent rate the
4 Monthly Labor Review July 1999

Producer Price Highlights

year before.

Within intermediate materials, the shift to a greater proportion of declining indexes as a percentage of all indexes

was in lockstep with price movement. Each major stage-ofprocessing category within intermediate materials—foods,

energy, and core intermediate materials—showed both a decelerating rate of change and declining prices for 1998. While

finished goods showed no change and intermediate materials displayed downward price movement in 1998, the number

of advancing indexes still outweighed the number of declining indexes. By contrast, within crude goods, this ratio turned

solidly in favor of decliners. The price declines observed in

overall crude goods and its components were generally

sweeping in nature, with declines for nearly two-thirds of the

indexes in this stage-of-processing category.

Real gross domestic product (GDP) increased 3.9 percent

in 1998, following growth rates of 3.9 percent in 1997 and 3.4

percent in 1996. As in recent years, business investment in

equipment bolstered GDP growth in 1998, while weak exports were offset by stepped-up, already robust, household

spending on goods, services, and housing. The unemployment rate for much of the year hovered around 4.5 percent,

its lowest rate in 29 years. (For most of 1997, the unemployment rate lingered at or near 5.0 percent.) Prices for exports

leaving the United States fell 3.5 percent in 1998, while import prices declined 6.4 percent for the same period.2 At the

same time, consumer-level inflation, as measured by the Consumer Price Index, was 1.6 percent in 1998, just slightly less

than the previous year's rate of 1.7 percent, the lowest rate

observed since 1986.

Finished goods other than foods and energy

The index for finished goods other than foods and energy

advanced 2.5 percent in 1998, after showing no change in

1997. Much of the upturn was due to an acceleration in

price increases for cigarettes and prescription drugs. The

stage-of-processing component index for finished consumer

goods other than foods and energy increased 4.2 percent in

1998, after rising 0.3 percent a year earlier. Prices for capital equipment showed no change, following a 0.6-percent

decline in 1997. (See table 3.)

Among finished consumer goods other than foods and

energy, 1998 prices rose more rapidly for cigarettes, prescription drugs, cosmetics and other toilet preparations, specialty

cleaning products, wood household furniture, and mobile

homes. After declining the previous year, prices increased

for passenger cars, light motor trucks, malt beverages, lawn

and garden equipment, and primary wet and dry storage batteries. Prices declined (although less than in the previous year)

for major appliances, sanitary paper products, tires, and television receivers. By contrast, prices declined after rising the

previous year for soaps and detergents, wines and brandy

spirits, and photographic supplies. Price increases slowed for

periodical circulation. As has been the case in recent years,

prices for electronic computers fell substantially in 1998, 26.6

percent, following a 21.6-percent decline in 1997. Meanwhile, the index for computer peripheral equipment, which

includes items such as printers, monitors, and optical scanning devices, also declined more rapidly in 1998.

The index for capital equipment showed no change in 1998,

following a 0.6-percent decline a year earlier. Prices increased

after falling for passenger cars, light motor trucks, air conditioning and refrigeration equipment, and fluid meters and

counting devices. Price increases accelerated for engineering and scientific instruments, as well as for aircraft. Price

decreases slowed for refrigerators and medical instruments

and equipment. By contrast, the index for electronic computers and computer equipment fell more rapidly in 1998 than in

1997. Prices turned down after rising a year earlier for communication and related equipment, while the index for integrating and measuring instruments fell, after showing no

change in 1997. Price increases slowed for agricultural machinery and equipment, service industry machinery and parts,

process control instruments, and wood office furniture and

store fixtures.

Tobacco products and alcohol. Prices for tobacco products rose rapidly in 1998, increasing by 41.3 percent, following an increase of 7.7 percent the previous year. Most of the

acceleration was due to the index for cigarettes, which advanced 49.4 percent in 1998, following a 10.0-percent rise in

1997. In fact, the cigarette price hike influenced the overall

PPI for Finished Goods more than any other single index. If it

were excluded, the Finished Goods index would have declined at nearly the same rate as in 1997, 1.2 percent. Similarly, the 2.5-percent rise in finished goods other than foods

Annual percent changes for major categories

of the Producer Price Index by stage of

processing, 1994–98

Index 1994 1995 1996 1997 1998

Finished goods ....................... 1.7 2.3 2.8 –1.2 0.0

Foods ................................... 1.1 1.9 3.4 –.8 .1

Energy ................................. 3.5 1.1 11.7 –6.4 –11.7

Other ................................... 1.6 2.6 .6 .0 2.5

Intermediate materials,

 supplies, and components .... 4.4 3.3 .7 –.8 –3.3

Foods and feeds .................. –4.5 10.3 2.1 –1.7 –7.3

Energy ................................. 2.9 1.1 11.2 –7.0 –12.1

Other ................................... 5.2 3.2 –.9 .3 –1.6

Crude materials for

 further processing ................. –.5 5.5 14.7 –11.3 –16.7

Foodstuffs and feedstuffs ... –9.4 12.9 –1.0 -4.0 –11.0

Energy ................................. –.1 3.7 51.2 –23.1 –23.8

Other ................................... 17.3 –4.2 –5.5 .0 –16.0

Table 1.
Monthly Labor Review July 1999 5

and energy is reduced by roughly three-fifths if cigarettes

are excluded from the calculation.

Much of the advance in cigarette prices came with the release of December data, following the $206 billion settlement

agreed to between the Nation’s five largest cigarette manufacturers and attorneys-general from 46 States, the District of Columbia, and five U.S. territories. (Producers had reached settlements earlier with Mississippi, Florida, Texas, and Minnesota.)

Settlement payments are to be made over the next 25 years. In

addition to December’s 30.7-percent increase in cigarette prices,

four other noteworthy price hikes occurred in 1998, ranging in

size from 2.1 percent to 4.2 percent. The cigar index advanced

8.8 percent in 1998. Over the last decade, cigar prices have

consistently risen, leaving prices nearly double what they were

10 years ago.

The index for alcoholic beverages rose 1.5 percent in 1998,

after falling 0.5 percent in the previous year. This upturn was

driven solely by rising prices for malt beverages, which advanced

at a 2.8-percent rate, following a 1.5-percent rate of decline in

1997. A stabilization in what had been declining rates of domestic beer consumption seems to have helped firm up prices. However, the indexes for wine and brandy and for distilled spirits fell

in 1998, after showing increases a year earlier. Exports of wine

and distilled spirits to the Far East also fell, while domestic consumption of hard liquor continued its downward trend.

Transportation equipment. The index for motor vehicles

increased 0.9 percent in 1998, after moving down 2.7 percent

in 1997. Prices rose 0.5 percent for passenger cars, 1.0 percent for light trucks, and 3.9 percent for heavy trucks. Motor

vehicle sales were buoyant in 1998, as manufacturers sold

roughly 15.6 million new cars and light trucks during the year,

up 2.9 percent from the previous year. This was the secondhighest sales-volume year on record, with 1986 being the alltime mark. However, a sizable portion of overall sales during

early 1998 resulted from incentives and discounts instituted to

move inventory. As a result, prices for passenger cars and

light trucks fell noticeably during spring and summer. Prices,

however, did rebound with the introduction of the new modelyear vehicles in October. Cost cutting efforts continued in the

passenger car and light motor truck markets, with manufacturers attempting to increase profits while holding costs and

prices steady. During this period of highly competitive markets, global overcapacity, the prospect of lower sales, and

weakness in Asian economies, automakers pursued mergers

and joint ventures in hope of realizing manufacturing cost savings and economies-of-scale benefits.

The index for aircraft and aircraft equipment increased 1.1

Table 2.

Index

Advancing and declining Producer Price Indexes for selected stage-of-processing groupings, 1996–98

[Not seasonally adjusted]

1996–97 1997–98

Advances Declines Unchanged Advances Declines Unchanged

 Number of indexes

Finished goods ............................................................... 386 153 16 368 167 11

Consumer foods ........................................................... 38 43 0 47 31 0

Energy goods ............................................................... 3 10 0 1 11 0

Except food and energy ............................................... 345 100 16 320 125 11

Intermediate goods ........................................................ 413 210 18 367 251 14

Foodstuffs and feedstuffs ............................................ 23 32 0 24 28 0

Energy materials ........................................................... 7 12 1 1 17 0

Except food and energy ............................................... 390 178 17 345 220 14

Crude goods ................................................................... 35 28 0 20 41 2

Foodstuffs and feedstuffs ............................................ 15 15 0 11 18 0

Energy materials ........................................................... 1 2 0030

Nonfood materials less energy ..................................... 20 13 0 10 24 0

 Percent

Finished goods ............................................................... 69.5 27.6 2.9 67.4 30.6 2.0

Consumer foods ........................................................... 46.9 53.1 0 60.3 39.7 0

Energy goods ............................................................... 23.1 76.9 0 8.3 91.7 0

Except food and energy ............................................... 74.8 21.7 3.5 70.2 27.4 2.4

Intermediate goods ........................................................ 64.4 32.8 2.8 58.1 39.7 2.2

Foodstuffs and feedstuffs ............................................ 41.8 58.2 0 46.2 53.8 0

Energy materials ........................................................... 35.0 60.0 5.0 5.6 94.4 0

Except food and energy ............................................... 66.7 30.4 2.9 59.6 38.0 2.4

Crude goods ................................................................... 55.6 44.4 0 31.7 65.1 3.2

Foodstuffs and feedstuffs ............................................ 50.0 50.0 0 37.9 62.1 0

Energy materials ........................................................... 33.3 66.7 0 0 100.0 0

Nonfood materials less energy ..................................... 60.6 39.4 0 29.4 70.6 0

NOTE: Calculations are based on 12-month change from December to December of indicated years.
6 Monthly Labor Review July 1999

Producer Price Highlights

percent in 1998, with prices rising in response to routine contract escalations due to cost increases for labor and materials.

Demand for aircraft and parts was mixed, with ample domestic demand offset by weakness abroad and competition from

European manufacturers. The index for railroad equipment and

parts rose 0.7 percent in 1998, after declining 1.5 percent a year

earlier. This turnaround came about mainly due to new-found

price strength in locomotives and parts, which advanced 1.1 percent in 1998, after registering a 4.5-percent decline in 1997.

Overall, increasing transportation needs, fueled by the strong

domestic economy, seem to have helped firm up prices for transportation products such as locomotives and heavy-motor trucks,

as well as for transportation services such as local and long-haul

trucking and water transportation of freight.

Drugs and pharmaceuticals. Price increases for drugs and

pharmaceuticals accelerated in 1998, on the strength of a

much more rapid advance in prescription drugs, which surged

20.9 percent, after posting a 3.6-percent rise in 1997. This advance was fueled by a dramatic increase in prices for psychotherapeutic drugs. However, more moderate increases were observed in other prescription drug categories. Prices for systemic anti-infectives, cardiovascular therapy, dermatologicals, and

internal analgesics showed modest increases, while the index

for antiarthritic prescription drugs declined 0.2 percent. In contrast to prices for prescription drugs, prices for over-the-counter

drugs showed no change, after posting a 0.3-percent gain in the

prior year. Over-the-counter drug manufacturers spent much

of 1998 adjusting prices modestly through the use of coupons

and other special promotions.

Computers. The index for electronic computers fell 26.6 percent in 1998—the third straight calendar year that this index has

declined more than 20 percent. Prices fell sharply for personal

computers and workstations (46.3 percent), portable computers

(47.4 percent), and midrange computers (23.8 percent). The index for large-scale general purpose computers dropped more

moderately (10.9 percent). Consumers had more choices than

ever before in 1998, as improving technology and production

processes continued to result in a multiplicity of improved, lowpriced configurations. As in other recent years, heightened price

competition was prevalent throughout the industry. The Asian

economic crisis added additional price pressure by acting as a

source of inexpensive components.

Foods and related products

Prices received by domestic producers of finished consumer

foods inched up 0.1 percent in 1998, after falling 0.8 percent

in 1997. (See table 4.) Contributing to this turnaround, the

indexes for natural, processed and imitation cheese, fluid milk

products, fresh vegetables (except potatoes), and shortening

and cooking oils all displayed accelerating rates of inflation.

Prices turned up after falling a year earlier for young chickens, processed fruits and vegetables, and soft drinks, and for

dry, condensed, and evaporated milk products. Declines were

smaller in 1998 than in 1997 for beef and veal and eggs for

fresh use. By contrast, prices turned down in 1998 after

increasing in 1997 for roasted coffee, butter, and finfish and

shellfish. The indexes for pork and fresh fruits and melons

Table 3. Annual percent changes in Producer Price

Indexes for selected finished goods other than

foods and energy, 1994–98

Index 1994 1995 1996 1997 1998

Finished goods other than

foods and energy .............. 1.6 2.6 0.6 0.0 2.5

Finished consumer goods

 less foods and energy .... 1.4 2.8 .8 .3 4.2

Passenger cars ............. 2.1 1.7 –.8 –2.6 .5

Light trucks .................... 3.3 1.5 .2 –3.6 1.0

Prescription drugs ......... 3.1 4.2 2.0 3.6 20.9

Over-the-counter drugs . 1.7 1.7 –1.7 .3 .0

Cigarettes ...................... –.1 3.7 3.3 10.0 49.4

Books ............................ 5.4 6.5 3.2 3.3 4.1

Periodical circulation ...... 3.6 4.8 2.0 4.0 3.4

Newspaper circulation ... 3.3 8.8 4.2 .1 1.1

Household furniture ....... 2.7 2.7 1.4 1.1 1.9

Capital equipment ............ 2.0 2.2 .4 –.6 .0

Heavy trucks .................. 3.0 4.1 –4.5 .6 3.9

Truck trailers .................. 7.7 2.2 –1.4 2.0 1.9

Metal-cutting machine

tools ............................. 1.8 4.1 3.1 2.1 1.5

Metal-forming machine

tools ............................. 3.5 2.2 2.6 3.2 1.8

Computers ..................... –6.8 –12.7 –22.3 –21.6 –26.6

Agricultural machinery ... 2.7 4.7 1.4 1.4 .7

Construction machinery . 2.0 2.5 1.8 1.9 1.7

Table 4. Annual percent changes in Producer Price

Indexes for selected food items, 1994–98

Index 1994 1995 1996 1997 1998

Finished consumer foods .... 1.1 1.9 3.4 –0.8 0.1

Pork .................................. –11.1 15.3 21.9 –13.6 –27.3

Dairy products .................. –2.0 5.4 2.4 4.7 10.7

Fresh fruits and melons ... –11.2 2.5 37.2 –8.2 –19.0

Fresh and dry vegetables 25.6 –36.0 –24.3 21.6 8.8

Roasted coffee ................ 49.8 –8.2 –8.4 18.1 –9.5

Beef and veal .................. –4.8 –1.4 7.4 –5.4 –2.7

Processed poultry ............ –3.7 8.4 2.6 –6.3 3.8

Intermediate foods and

feeds .................................. –4.5 10.3 2.1 –1.7 –7.3

Prepared animal feeds .... –10.6 20.6 5.4 –3.1 –20.4

Crude vegetable oils ........ 4.1 –14.1 –9.3 13.9 –2.7

Flour ................................. –1.1 20.1 –9.0 –8.2 –5.6

Confectionery materials ... 2.2 1.5 2.2 –15.8 –-1.0

Refined sugar .................. .8 .8 4.2 -4.5 .6

Crude foodstuffs and

feedstuffs .......................... –9.4 12.9 –1.0 -4.0 –11.0

Slaughter hogs ................ –21.3 40.6 23.2 –21.7 –76.8

Soybeans ........................ –18.1 26.7 –-3.7 1.8 –21.3

Wheat .............................. –5.6 29.9 –19.3 –11.3 –15.0

Corn ................................. –22.4 49.4 –21.0 2.2 –22.5

Fluid milk .......................... –5.2 8.4 1.1 2.8 25.6

Slaughter cattle ............... –5.3 –5.2 –2.5 2.0 –12.0
Monthly Labor Review July 1999 7

fell at a faster rate during the most recent year. Price increases slowed markedly for Irish potatoes for consumer use.

The index for intermediate foods and feeds fell 7.3 percent

in 1998, following a 1.7-percent decline a year earlier. Prepared animal feed prices declined 20.4 percent, after registering a much smaller drop in 1997 (3.1 percent). Prices for pork

also fell at a faster rate, tumbling 27.3 percent, following an

already steep 13.6-percent rate of decline in 1997. Price increases slowed for the following items: bulk fluid milk and

cream; refined vegetable oils; frozen packaged fish and seafood; canned, cooked, smoked, and prepared poultry; and jams,

jellies, and preserves. Prices turned down after increasing in

1997 for crude vegetable oils, chicken hens and other smallgame poultry, and tea. By contrast, price increases for natural

cheese (except cottage cheese) accelerated to 21.4 percent in

1998, following a 6.1-percent increase in 1997. Prices for refined sugar turned up after falling the previous year, while the

index for granulated sugar showed no change after falling the

year before. Prices fell less in 1998 than in 1997 for beef and

veal, confectionery materials, and flour.

Farm prices, as measured by the Producer Price Index for

Crude Foodstuffs and Feedstuffs, decreased 11.0 percent in

1998, after declining 4.0 percent in 1997. The index for slaughter cattle declined 12.0 percent, after registering a 2.0-percent

gain 12 months earlier. Slaughter-hog prices plunged 76.8 percent, following an already large, 21.7-percent drop a year earlier. Prices turned down after rising for corn, soybeans, alfalfa

hay, and unprocessed and packaged fish. The indexes for wheat,

Louisiana rough rice, and breaker-stock and undergrade chicken

eggs declined at a faster rate in 1998 than in the previous year.

By contrast, fluid milk prices surged in 1998. Citrus fruit, slaughter broilers, and slaughter turkey prices advanced, after declining the previous year.

Grains and feeds. Grain prices fell 18.9 percent in 1998,

following a 2.0-percent drop in 1997, and a 20.3-percent decline in 1996. Generally favorable growing conditions throughout 1998 resulted in ample crop harvests and yields per acre.3

The 1998 corn harvest improved 6.0 percent from its 1997

level, to stand at 9.76 billion bushels. Only the 10.1 billion bushels harvested in 1994 provided a better production total. Furthermore, corn yields increased 7.7 bushels to 134.4 bushels

per acre. Total wheat and rice harvests also rose, gaining 2.8

percent and 3.0 percent respectively. However, while wheat

yields rose a healthy 9.4 percent to 43.2 bushels per acre, rice

yields fell 3.9 percent to 5,669 pounds per acre, due to cold

and wet springtime weather.

Prices were further influenced by the Asian financial crisis, which, beginning in the latter half of 1997 and continuing

through all of 1998, stifled demand for U.S. exports of corn

and wheat. Devalued foreign currencies compounded this

problem by giving foreign-grown grains and feeds a competitive price advantage. Wheat ended the year at an index level

not seen since 1990, while corn prices closed the year at

their lowest level since 1987.

Soybean prices fell 21.3 percent in 1998, after moving up 1.8

percent in 1997. Domestically, soybean production totaled 2.76

billion bushels in 1998, up 3.0 percent from 1997. The 1998 harvest was the largest on record, with the 1997 crop being the

second largest harvest to date. Yield per acre stood at 38.9 bushels, the same as in 1997. Only the 41.4 bushels per acre recorded in 1994 was more productive. As with corn and wheat,

foreign trade in soybeans was dominated by the Asian financial

crisis and its related effects.

With corn, wheat, and soybean prices all in decline, it comes

as no surprise that the index for prepared animal feeds also fell

precipitously during 1998. Prices fell 20.4 percent, after registering a modest 3.1-percent decrease in the prior year. This was

the third largest calendar-year decline on record, behind a 20.7-

percent drop in 1955 and a 25.6-percent decrease in 1948. Falling prices for prepared animal feeds helped livestock farmers,

who, in 1998, suffered from a market collapse of their own.

Slaughter livestock and meats. After a much ballyhooed

year for hog farmers in 1996, slaughter-hog and pork prices

began deteriorating in the latter half of 1997 and continued in

a downward spiral throughout 1998. During the spike in prices

in 1996, many hog farmers expanded their existing herds, and

many others entered the market. The resulting increase in

production combined with a slowdown in foreign demand (particularly from East Asia) caused slaughter-hog and pork prices

to plummet. The index for slaughter hogs declined 76.8 percent in 1998, leaving it at an unprecedented low. The Department of Agriculture estimated yearend slaughter hog prices

to be $17.05 per hundredweight, a 60-year low. (The breakeven price is considered to be roughly $35.85 per hundredweight.)

In much the same manner, pork prices fell 27.3 percent in

1998, following a 13.6-percent drop in 1997. This decrease in

pork prices is the largest calendar-year decline on record, and

the fourth largest declining 12-month rate of change observed

by the PPI. The current market for slaughter hogs and pork,

however, has not resulted in a mass exodus of producers. Instead, cautious optimism arose in the industry, with a general

feeling that slaughter hog and pork prices could sink no further,

and that a resurgence in the market was therefore inevitable.

During the latter half of 1997 and much of 1998, the Nation’s

red-meat pipeline was glutted with supply. Low feed costs resulted in record weights for slaughter cattle. Prices for beef,

however, fell well below expectations. In the spring of 1998,

demand for beef products increased just before the summer grilling season hit its peak. Prices began to track downward in late

summer and early autumn, however, primarily because of

plummeting prices for pork, a product often substituted for beef.
8 Monthly Labor Review July 1999

Producer Price Highlights

The year ended mixed—the index for slaughter cattle was 12.0

percent below its level in the previous year, but beef and veal

prices were down only 2.7 percent, after registering a 5.4-percent drop in 1997.

Prices for slaughter poultry trended upward in 1998, mainly

on the strength of rising prices for slaughter broilers and fryers

and for slaughter turkeys. The index for processed young chickens also rose, but turkey-meat prices declined 1.8 percent. Strong

domestic demand for breast meat from both food-service outlets and retail food markets helped prices recover from steep

declines in 1997. Demand from Russia, particularly for dark

meat, lifted prices early in the year. Russia alone accounted for

40 percent of total U.S. chicken exports in 1998. However, the

Russian currency crisis of late August left these buyers unable

to continue purchasing at their earlier levels. Thus, the slaughter

and processed poultry indexes ended the year on a down note.

Fluid milk and dairy products. The index for fluid milk

surged 25.6 percent in 1998. Among its component indexes,

milk eligible for fluid use jumped 25.1 percent, after posting a

2.3-percent rise in 1997, and prices for manufacturing-grade

milk rose 33.3 percent, following a 12.1-percent increase in

1997. Prices for dairy products also rose considerably, advancing 10.7 percent in 1998, after increasing 4.7 percent in

the previous year. Inclement weather during the spring and

summer months, particularly in the western dairy States, was

cited as the driving force behind this run up. Poor weather

conditions stressed dairy cattle and increased incidences of

udder inflammation, which ultimately translated into higher

prices for packaged fluid milk products, as well as for commodities high in butterfat, such as cheese and ice cream. Butter prices were severely influenced, surging 73.8 percent

from December 1997 through September 1998. In response,

many buyers left the market, resulting in the butter index

plummeting 45.7 percent, ending the year 5.7 percent below

its 1997 level.

Energy

The PPI for crude energy materials fell 23.8 percent during

1998, following a similarly large drop in 1997. (See table 5.)

Prices declined across the board for crude-stage fossil fuels.

Prices for crude petroleum decreased 48.6 percent in 1998,

following a 28.3-percent decrease in the previous year. Worldwide, crude-oil production remained more than ample, while

pockets of economic slowdown, particularly in Asia, limited

global demand for crude oil and refined petroleum products.

By yearend, the PPI for crude petroleum stood at a level not

seen since 1974.

The index for coal declined 1.2 percent in 1998, after advancing 4.9 percent in 1997, when the supply of coal had been

disrupted during parts of the year by railroad-related problems. According to the Energy Information Administration,

domestic coal production increased 2.6 percent in 1998, while

coal imports increased 16.0 percent. After posting a 27.9-

percent drop in the prior year, the natural gas index fell 17.8

percent in 1998, as underground natural gas storage levels

rose 8.0 percent, following already plentiful levels in 1997.4

The PPI for intermediate energy goods decreased 12.1 percent in 1998, after registering a 7.0-percent decrease in 1997.

Gasoline prices fell 33.1 percent, following a 15.0-percent drop

a year earlier. For most of the year, total domestic-refinery gasoline production combined with imports outweighed total domestic demand. Other refined petroleum products—jet fuel, kerosene, diesel, and residual fuels—also fell at a faster rate during

1998. The same trend held true for the natural gas sector, where

the index for liquefied petroleum gas showed an accelerating

rate of decline, while prices for industrial natural gas, natural gas

to electric utilities, and commercial natural gas all fell, after rising

in 1997. Falling prices for extracted natural gas were a major

contributor to this movement. In all, prices for diesel fuel and

liquefied petroleum gas finished 1998 at levels not seen since the

latter half of the 1980s. Prices for gasoline, kerosene, and jet

fuels ended the year at their lowest levels in more than 20 years.

In addition, the index for industrial electric power fell 1.3 percent

in 1998, following a 0.5-percent rise in the previous year. Commercial electric power prices fell 1.8 percent, after showing no

change in 1997. Falling prices for power-generating fossil fuels

and increased competition among electricity providers helped

push prices lower.

The PPI for finished energy goods declined 11.7 percent in

1998, after posting a 6.4-percent decline in 1997. As in the intermediate stage-of-processing level, the primary cause of this accelerating rate of decline was falling gasoline prices. In addition, the index for residential electric power fell 2.5 percent,

after a 0.2-percent drop in 1997. (Residential electric power

Table 5. Annual percent changes in Producer Price

Indexes for selected energy items, 1994–98

Index 1994 1995 1996 1997 1998

Finished energy goods .......... 3.5 1.1 11.7 –6.4 –11.7

Gasoline .............................. 11.2 2.4 27.1 –15.0 –33.1

Home heating oil ................. 6.9 11.9 25.0 –21.7 –36.1

Residential electric power ... 1.5 .9 .6 –.2 –2.5

Residential natural gas ....... –2.6 –2.4 11.2 2.4 –2.4

Intermediate energy goods ... 2.9 1.1 11.2 –7.0 –12.1

Natural gas to electric

utilities ............................... 3.4 –1.4 6.1 9.3 –24.3

Diesel fuels .......................... 5.9 11.1 26.2 –22.5 –33.8

Jet fuels .............................. 4.3 6.1 26.1 –22.3 –35.8

Commercial electric power ... 2.3 .6 –.1 .0 –1.8

Liquefied petroleum gas ...... 13.0 3.9 71.4 –29.3 –32.6

Residual fuels ...................... 10.2 –4.7 32.8 –7.6 –39.8

Crude energy materials ........... –.1 3.7 51.2 –23.1 –23.8

Natural gas .......................... –14.0 –.3 92.0 –27.9 –17.8

Crude petroleum .................. 21.1 10.8 35.8 –28.3 –48.6

Coal ..................................... –2.1 –.8 –1.1 4.9 –1.2
Monthly Labor Review July 1999 9

Annual percent change in Producer Price

Indexes for selected intermediate and crude

materials other than foods and energy, 1994–98

Index 1994 1995 1996 1997 1998

Intermediate goods other

than foods and energy ...... 5.2 3.2 –0.9 0.3 –1.6

Nondurable manufacturing

 materials ........................... 10.4 5.9 –3.3 .3 –5.3

Inedible fats and oils ...... 48.0 –3.9 2.1 3.8 –22.8

Woodpulp ....................... 38.1 40.7 –33.0 4.1 –12.5

Basic organic chemicals . 15.7 .4 3.6 –1.7 –6.4

Durable manufacturing

 materials .......................... 9.8 1.1 –1.4 .0 –5.5

Copper ............................ 68.2 –.1 –22.9 –22.8 –17.7

Aluminum ........................ 64.4 –7.3 –12.8 12.4 –17.5

Lead ............................... 37.5 9.1 4.2 –4.0 –6.3

Zinc ................................. 13.1 –5.7 –1.4 2.7 –10.0

Construction materials ....... 3.9 1.9 1.8 1.2 .1

Gypsum products ............ 30.8 1.0 6.6 7.1 7.3

Nonferrous wire

 and cable ...................... 13.8 1.6 -3.1 –2.2 –4.6

Softwood lumber ............. –9.6 –10.3 19.6 –3.8 –10.1

Crude nonfood materials

 less energy ...................... 17.3 –4.2 –5.5 .0 –16.0

Wastepaper .................... 179.6 –50.9 –1.3 11.6 –28.9

Nonferrous scrap ............ 70.3 –10.3 –7.9 –.6 –24.8

Raw cotton ...................... 34.9 4.2 –13.0 –11.2 –8.0

Sand and gravel ............. 2.3 3.6 1.9 1.8 3.5

is the most heavily weighted item in both finished energy

goods and finished goods as a whole.) Prices for home heating oil fell 36.1 percent in 1998, following a 21.7-percent drop a

year earlier. By year’s end, prices for home heating oil had

reached a 12-year low. Prices for residential natural gas decreased 2.4 percent, following a 2.4-percent advance in 1997.

Lower input costs and favorable weather conditions in many

parts of the country during the heating and cooling seasons were

widely cited as helping to keep household energy prices in check.

Intermediate industrial materials

The PPI for intermediate materials other than foods and energy

declined 1.6 percent during 1998. This, after registering a 0.3-

percent rise in 1997. Leading the way were steadily falling prices

for materials for nondurable manufacturing, which had increased

modestly in 1997. After showing no change in 1997, prices for

materials for durable manufacturing also declined. The index for

materials and components for construction rose at a much slower

rate in 1998 than in 1997. (See table 6.)

Nondurable manufacturing materials. The index for

nondurable manufacturing materials dropped 5.3 percent in

1998, after registering a 0.3-percent rise during 1997. Not

since 1951, when this index closed the calendar year down

6.1 percent, has the nondurable manufacturing materials index fallen at such a steep rate for a calendar year. (In publication since 1947, this index had its fastest rate of decline in

1949, falling 8.9 percent.) Throughout 1998, prices for nondurable manufacturing materials declined every month. Three

commodity sectors accounted for more than three-fourths of

the 1998 downturn: pulp and paper products (excluding building products), industrial chemicals, and plastic resins and

materials.

In the pulp and paper sector, paperboard prices declined

8.0 percent, after posting a 5.8-percent advance a year earlier. Writing and printing grade paper prices also turned down,

showing a 7.0-percent drop, after a 3.4-percent rise in the

previous year. The index for newsprint rose less in 1998 than

in 1997. The price of woodpulp—a material input to paper

and paperboard production—declined 12.5 percent in 1998,

after a 4.1-percent gain in the prior year. In addition, prices

for wastepaper and pulpwood—basic industrial materials that

are inputs to paper and paperboard—also fell in 1998, after

rising in 1997.

Looking to other BLS data relating to the paper and allied

products sector, import prices for paper, paperboard, and articles of paper pulp, paper, and board fell 2.7 percent in 1998,

while export prices fell 4.5 percent.5 Also, data published by

the Federal Reserve Board indicated that industrial production of paper and allied products fell roughly 1.0 percent in

1998, following increases of 3.3 percent in 1997 and 5.1 percent in 1996.6 In all, ample supplies of material inputs, production overcapacity, soft foreign market demand, and lowpriced imports left pulp and paper products (excluding building

products) in decline almost every month during 1998.

The index for industrial chemicals decreased 5.7 percent in

1998, after registering a modest 1.1-percent decrease a year

earlier. This steepening rate of decline was led by falling prices

for primary basic organic chemicals. Petroleum refinery outputs, such as ethylene and benzene, led the way, dropping 27.3

percent and 19.0 percent, respectively. Both indexes showed

much smaller declines the previous year. Also contributing to

this price deceleration were falling prices for basic inorganic

chemicals. The chlorine index fell 57.0 percent, after a 15.0-

percent rise in 1997.

Within plastic resins and materials, prices for thermoplastic

resins decreased 15.6 percent, after posting a 3.3-percent decrease a year earlier. For comparison, BLS reported declining

import prices in 1998 for organic chemicals, inorganic chemicals, plastic resins and materials, and plastic products. Except

for inorganic chemicals, export prices for each of these products also fell.7 Falling prices for crude petroleum, combined with

economic downturn abroad, have been widely cited as contributing to excess worldwide supplies and falling prices for industrial chemicals and plastic resins and materials, as well as for

plastic products and other synthetics manufactured from these

chemical materials.

Other indexes contributing to the overall downturn in materials for nondurable manufacturing prices include inedible fats and

oils, gray fabrics, and synthetic fibers. By contrast, prices for

Table 6.
10 Monthly Labor Review July 1999

Producer Price Highlights

phosphates, stemmed and redried tobacco, and for cotton

broadwoven fabric rose slightly, after falling modestly in the

prior year.

Durable manufacturing materials. The PPI for durable

manufacturing materials declined 5.5 percent in 1998, after posting no change in 1997. This index, also in publication since 1947,

has never before shown a calendar-year decline of this magnitude. Previously, the steepest rate of decline recorded was 4.3

percent in 1949. Nearly four-fifths of this downturn can be attributed to two related commodity areas—nonferrous metals and

steel mill products.

Within nonferrous metals, prices for aluminum mill shapes fell

8.5 percent in 1998, following a 6.8-percent rise a year earlier.

The indexes for copper and brass mill shapes and for nonferrous

wire and cable fell more in 1998 than in 1997. Prices for

nonprecious primary nonferrous metals decreased 17.4 percent,

after registering a more modest 3.5-percent decrease a year

earlier. This steepening rate of decline was mostly due to falling

aluminum prices. Declines in the indexes for nonferrous metals

were roughly consistent throughout the year, and generally were

attributed to falling prices for nonferrous metal ores and nonferrous scrap (basic industrial materials). Other factors include

soft foreign demand due to economic weakness abroad, excess

worldwide production, and falling prices for competing imports

entering the United States.

Within ferrous metals, prices for steel mill products declined

6.5 percent in 1998, following a 0.5-percent rise in 1997. Most

of this downturn occurred in the latter half of the year, culminating with 1.3-, 1.4-, and 1.4-percent decreases in October, November, and December, respectively. Steel mill products finished

1998 at an index level not seen since mid-1993. Domestic steel

demand remained adequate throughout the year; however, increasing amounts of low-priced imports flooded the United States

at a pace that topped even the record volume of 1997.8

The latter half of 1998 saw Russia, Brazil, Japan, and other

steel-producing nations selling their steel for very low prices.

Domestic steel producers, unhappy with the pricing strategies of

their foreign counterparts, began accusing foreign producers of

dumping. As a result, the U.S. Department of Commerce and

Russia reached an agreement in early 1999, establishing a price

floor on all steel mill products entering the United States and

limiting the amount of steel imported from Russia. Trade cases

covering a number of steel products continue, as do discussions

with other countries.

Other indexes contributing to the downturn in materials for

durable manufacturing prices included both softwood lumber and

hardwood lumber.

Materials and components for construction. The PPI for

materials and components for construction advanced 0.1 percent in 1998, after registering a 1.2-percent gain in 1997. Prices

for softwood lumber fell 10.1 percent, following a 3.8-percent

drop in 1997. The index for hardwood lumber declined 1.2 percent in 1998, after increasing 7.4 percent a year earlier. Hardwood lumber prices fell modestly but steadily throughout the

year. The slide in softwood lumber troughed during the spring

and summer months—the peak of the construction season. Observation suggests that both U.S. and Canadian lumber producers overestimated peak-season domestic and export demand.

Reduced exports to Asia weighed heavily on this sector, leaving

the North American producers with excess supply. The active

domestic construction market was unable to completely make

up the difference. Prices for steel mill products, paving asphalt,

wiring devices, and hardwood flooring fell, after rising the year

before. On the other hand, the indexes for ready-mixed concrete, unitary air conditioners, and prepared paint rose more in

1998 than in the previous year. Prices for softwood plywood,

mineral wool for structural insulation, and for asphalt and tar

roofing and siding products all advanced, after declining in 1997.

The index for materials and components for construction was

the only major stage-of-processing category within intermediate

goods to show rising prices in 1998. Low interest rates and low

unemployment rates, as well as continued domestic economic

expansion, have been widely cited as contributing to continued

growth within the construction sector. According to the Bureau

of the Census, the total value of construction put in place rose

10.1 percent in 1998 (based on current dollars, not seasonally

adjusted).9 This advance was led by a 12.2-percent rise in residential building private construction and an 8.1-percent rise in

nonresidential private construction. The value of public construction put in place rose more modestly in 1998—1.9 percent.

Basic industrial materials

The PPI for basic industrial materials—crude nonfood materials other than foods and energy—declined 16.0 percent in

1998, after posting no change in 1997. Leading the way were

falling prices for scrap metal. Also contributing to this price

deceleration were downturns for wastepaper; logs, bolts, timber, and pulpwood; cattle hides; and wool. As with intermediate materials, prices for basic industrial materials in 1998

were dominated by two related factors: weak demand from

foreign economies due to economic stagnation and currency

devaluation, and increased low-priced imports entering the

United States from these same countries.

The index for iron and steel scrap declined 39.9 percent in

1998, following a 14.5-percent rise in 1997. The index for

aluminum base scrap decreased 24.5 percent, after rising 9.6

percent in the prior year. Prices for copper base scrap also

fell more in 1998 than in 1997. Warm weather during the

early part of 1998 resulted in unexpectedly plentiful supplies

of ferrous scrap. (Mild weather permits scrap-metal processing to continue unabated.) In addition, domestic manufactur-
Monthly Labor Review July 1999 11

ing activity was at its strongest during the early portion of the

year, and as a result, the first part of 1998 saw a plentiful supply

of prime industrial-grade scrap generated. As the year progressed, a slowdown in domestic manufacturing and steadily

worsening foreign demand for U.S. scrap pinched prices even

further. Late in the year, domestic markets were overwhelmed

with low-priced imported pig iron, a substitute for iron and steel

scrap. By yearend, the index for iron and steel scrap stood at a

12-year low, while nonferrous scrap prices stood at a 5-year

low.

Also contributing to the price deceleration in basic industrial

materials were downturns for wastepaper and for logs, bolts,

timber, and pulpwood. As with scrap metal, prices for wastepaper spent most of 1998 in retreat. Mild winter weather conditions and lack of demand from foreign buyers left the old corrugated containers index down 55.5 percent, after it had risen 22.3

percent in 1997. Among high-grade and newsprint wastepaper,

price declines were mainly due to oversupply concerns. For much

the same reason, the index for mixed wastepaper rose much

less in 1998 than in 1997. Compounding the situation, current

production in the paper and paperboard industry stands in a state

of overcapacity.

In the timber sector, prices for softwood logs fell 6.5 percent,

after dropping 1.0 percent a year earlier. The index for hardwood logs declined 11.6 percent, following an 8.4-percent advance in 1997. A surge in Canadian exports—partly fueled by

increased felling and partly fueled by Canadian currency devaluation relative to the U.S. dollar—amplified domestic price

weakness caused by the Asian economic downturn. Pulpwood

prices also fell after rising the previous year. The pulpwood index retreated mostly out of competition with wastepaper and

woodpulp—substitutes with declining prices in 1998.

The index for cattle hides also contributed to the downturn in

basic industrial materials, falling 22.5 percent in 1998, following

a drop of 9.7 percent in 1997. Exports of hides and skins declined 25.0 percent over the year. Wool prices decreased 51.1

percent, after rising 27.9 percent in the previous year. Prices for

gold ores stabilized, rising 2.1 percent, following a 21.3-percent

decline in 1997. Construction-related demand helped the index

for construction sand, gravel, and crushed stone rise 3.5 percent,

after registering a 1.8-percent rise a year earlier. A poor-quality

cotton crop in 1997 resulted in textile producers turning away

from U.S.-grown cotton in favor of foreign cotton. As a result,

raw cotton prices decreased 8.0 percent in 1998, although less

than the 11.2-percent drop observed in 1997.

Mining and manufacturing industries

Mining. The PPI for the net output of total domestic mining

industries decreased by 19.7 percent in 1998, after falling 20.2

percent the previous year. (See table 7.) This decline was

mainly due to falling prices in the oil and gas extraction industry—its index decreased by 25.6 percent in 1998, following a

24.6-percent decline in 1997. The index for the metal mining

industry group decreased 7.1 percent, its third consecutive

yearly decline. Prices received by the coal mining industry

group fell 1.9 percent. However, the index for the nonmetalAnnual percent changes in Producer Price

Indexes for the net output of major industry

groups, 1994–98

Index 1994 1995 1996 1997 1998

Mining industries .................. –1.0 2.9 40.6 –20.2 –19.7

Metal mining ...................... 35.5 6.2 –12.7 –14.3 –7.1

Coal mining ...................... –2.1 –.8 –.7 2.8 –1.9

Oil and gas extraction ....... –3.2 3.5 57.9 –24.6 –25.6

Mining and quarrying of

nonmetallic minerals,

except fuels .................. 1.4 2.9 2.2 2.2 2.2

Manufacturing industries ....... 2.4 3.0 2.2 –.8 –.9

Food and kindred products .. –.3 4.0 3.2 –.9 –.8

Tobacco manufactures ....... .3 3.8 3.2 9.0 44.1

Textile mill products ............. .7 2.6 1.1 .5 –1.3

Apparel and other finished

products made from

fabrics and similar

materials ....................... .4 .8 2.0 .9 .6

Lumber and wood products,

except furniture ............. 1.3 –2.6 3.0 1.3 –1.4

Furniture and fixtures .......... 3.0 3.0 1.9 1.1 .9

Paper and allied products .... 10.7 13.1 –10.3 1.9 –2.8

Printing, publishing, and

allied industries .............. 3.8 7.0 2.4 2.6 2.3

Chemicals and allied

products ........................ 7.4 6.0 1.5 .6 .4

Petroleum refining and

related products ............. 8.9 2.6 22.7 –14.5 –28.8

Rubber and miscellaneous

plastic products ............. 3.6 2.6 .1 –.4 –.8

Leather and leather

products ........................ 2.5 1.5 1.1 1.0 –.5

Stone, clay, glass, and

concrete products .......... 4.3 2.7 1.3 .9 2.0

Primary metal industries ...... 9.3 3.2 –3.0 .7 –5.6

Fabricated metal products,

except machinery and

transportation equipment 2.4 3.4 .6 1.2 .5

Machinery, except

electrical ........................ .9 1.4 –.6 –.6 –.6

Electrical and electronic

machinery, equipment,

and supplies .................. .3 .7 –.7 –1.7 –.7

Transportation equipment .... 2.4 2.1 .5 –1.0 .9

Measuring and controlling

instruments;

photographic, medical,

and optical goods;

watches and clocks ....... 1.2 1.5 .6 .5 .1

Miscellaneous

manufacturing

industries ....................... 1.6 2.0 1.4 .6 .5

Service industries

Railroad transportation ........ .4 –.3 .0 1.0 .5

Motor freight transportation

 and warehousing ........... 2.7 1.7 2.4 2.1 3.0

U. S. postal service ............. .0 10.4 .0 .0 .0

Water transportation ........... 2.5 2.4 .2 –.9 2.3

Transportation by air ........... –.3 7.4 5.9 .5 2.6

Pipelines, except

 natural gas ................... 10.2 3.4 –8.8 –2.2 .5

Health services .................. – 3.5 1.7 1.0 1.9

Legal services .................... – – – 4.1 2.5

NOTE: Dash indicates that index is not included in estimation.

Table 7.
12 Monthly Labor Review July 1999

Producer Price Highlights

lic minerals mining industry group increased 2.2 percent, the

same rate of increase observed in 1996 and 1997.

Manufacturing. The PPI for the net output of the domestic

manufacturing sector moved down 0.9 percent in 1998, after

posting a 0.8-percent decline in 1997. Among manufacturing industries, prices increased in the following industry groups: tobacco manufactures; printing, publishing, and allied industries;

transportation equipment; nonmetallic mineral products; and furniture and fixtures. By contrast, prices declined for petroleum

refining and related products, food and kindred products, paper

and allied products, primary metal industries, textile mill products,

and electrical and electronic machinery and equipment.

Selected services industries

Health care. Among selected services industries for which

the PPI publishes data, prices for health care services rose 1.9

percent in 1998, after increasing 1.0 percent in 1997. (See

table 8.) The index for offices and clinics of doctors of medicine led the way with a 2.6-percent rise, after registering a

1.2-percent gain a year earlier. Physicians continue to consolidate into larger group practices and provider networks,

hoping to compete more effectively for managed-care dollars

while at the same time enhancing their bargaining position.

Prices received by general medical and surgical hospitals and

by specialty hospitals (except psychiatric) also rose at a faster

rate. Within physician services and general medical and surgical

hospitals, the most noticeable shift was an upturn in the medicare

payment indexes. In general medical and surgical hospitals, price

changes for the medicaid-patients indexes and for the all-otherpatients indexes were much more subdued. As has been the case

since 1994, when the index for skilled and intermediate care facilities first became available, its prices increased more rapidly than

any other health-services index in 1998. By contrast, price increases slowed for home health care services and for medical

laboratories.

Distribution. The solid U.S. economy, growing at nearly 4.0

percent annually for the second consecutive year, permitted

the majority of service providers belonging to the distribution

sector to receive higher prices in 1998. Of the 20 distributionservices industries for which PPI publishes price indexes, all

but 4 increased prices in 1998. In 1997, 13 of 20 industries

raised prices. From December 1997 to December 1998, the

index for trucking, except local, rose 3.4 percent, following a

2.6-percent rise in 1997. Factors helping to firm up prices in

the industry included continued consolidation in the long-haul

trucking industry (which led to fewer providers) and customer

demand for improved inventory control through just-in-time

delivery procedures. Rising prices for household-goods carriage

and general-freight trucking were most notable. In addition, although prices for diesel fuel fell 33.8 percent over the course of

the year, the effect on increasing prices the distribution industry

was minimal. Prices in 1998 also increased in local trucking without storage.

The index for railroad line-haul operations rose 0.5 percent

in 1998, after rising 1.0 percent in 1997. This modest advance

reflected increased charges for trailer-on-flatcar freight shipments and passenger transportation services. Prices for nontrailer-on-flatcar freight shipments fell 0.1 percent for the

year. Freight-sector performance improved markedly in 1998,

after the previous year had been filled with delays and disruptions in the face of strong demand. Analysts attributed the

problems to consolidations and mergers in the industry that

took place in the mid-1990s. By 1998, however, intermodal

volume totaled more than 8.7 million trailers and containers, a

0.9-percent increase from the previous year. In addition, total

freight volume reached a record-level 1.376 trillion ton-miles,

a 1.8-percent increase over the year. (Ton-miles are equal to

the total shipment weight multiplied by total travel distance.)

By these measures, 1998 was the most active years on record

for freight transportation.

Other distribution services industries with increasing price indexes in 1998 include general warehousing and storage, foreign

deep sea freight transportation, tugging and towing services, courier services (land and air), airports and airport services, and crude

petroleum pipelines.

Real estate. The index for real estate agents and managers

rose 2.6 percent in 1998, after rising 1.4 percent in 1997. Housing

demand remained solid throughout the year, as many current owners and first-time buyers entered the market. The rate of home

ownership in 1998 ended the year at 66.4 percent, its highest

level since this data entered publication in 1965. Plentiful employment, rising real income, mortgage rates hovering near 6.5 to 7.0

percent, and higher limits on Federal Housing Administration

loans, all helped lead to increasing home sales, as well as increasing fees for appraisals and commissions on sales.

The index for operators and lessors of nonresidential buildings rose 1.2 percent, following a 2.2-percent advance the

year before. The strong economy also helped keep retail and

industrial vacancies low, and these markets readily absorbed

space as it became available, allowing these indexes to rise.

However, the index for the operators and lessors of office

property showed no change in 1998, after increasing 3.7 percent a year earlier. Expanded suburban construction led to

supply concerns that vacancy rates would increase in the future. Operators and lessors responded by stabilizing commercial rental rates in an attempt to fill new and existing buildings.

Professional, scientific, and technical. The functions performed by advertising, legal, and accounting firms are required in the day-to-day operations of most companies, and
Monthly Labor Review July 1999 13

Annual percent changes in Producer Price Indexes for the net output of selected service industries, 1994–98

 Industry 1994 1995 1996 1997 1998

 Distribution

4011 Railroads, line-haul operating .................................. .4 –.3 0.0 1.0 .5

4212 Local trucking without storage ................................. 1.7 1.9 .0 2 1.7

4213 Trucking, except local ............................................... 3.1 .9 3.5 2.6 3.4

4214 Local trucking with storage ....................................... .7 10.9 .1 .6 .5

4215 Courier services, except by air ................................. 3.8 3.3 3.0 3.8 4.2

4221 Farm product warehousing and storage .................. .6 2.2 –1.5 2.0 .6

4222 Refrigerated warehousing and storage ................... .6 1.7 .5 .1 .5

4225 General warehousing and storage .......................... 1.3 1.3 1.4 .7 2.9

4311 United States Postal Service ................................... .0 10.4 .0 .0 .0

4412 Deep sea foreign transportation of freight ............... –3.9 .8 .7 –3.7 4.7

4424 Deep sea domestic transportation of freight ............ 7.6 –.6 1.9 –.6 .2

4432 Freight transportation on the Great LakesSt. Lawrence Seaway ........................................... –1.4 3.0 1.8 1.4 .8

4449 Water transportation of freight, n.e.c. ...................... 15.4 9.7 –10.1 –.4 –2.2

4491 Marine cargo handling .............................................. –.5 –-.9 1.0 1.2 1.8

4492 Tugging and towing services .................................... 3.5 5.3 2.4 2.2 2.8

4513 Air courier services ................................................... 1.6 1.9 4.6 –3.9 3.1

4581 Airports, flying fields, and airport services ................ 1.1 2.2 3.8 3.0 3.0

4612 Crude petroleum pipelines ....................................... 13.7 4.6 –12.4 –3.7 1.4

4613 Refined petroleum pipelines..................................... 1.8 .1 .4 1.2 –1.1

4731 Freight transportation arrangement ......................... – –.7 2.7 –1.4 –.6

 Communications

4813 Telephone communications, except radiotelephone ... – – –.1 –.4 –1.7

4832 Radio broadcasting ................................................... 6.8 5.8 10.8 3.1 .8

4841 Cable and other pay television services .................. –.4 3.2 5.1 4.7 3.7

 Real estate

6512 Operators and lessors of nonresidential buildings .... – – –.6 2.2 1.2

6531 Real estate agents and managers .......................... – – –.5 1.4 2.6

 Professional, scientific, and technical

7311 Advertising agencies ................................................ – – 1.7 2.5 1.3

8111 Legal services .......................................................... – – – 4.1 2.5

8711 Engineering design, analysis, and consulting

 services ............................................................... – – – 3.1 2.9

8712 Architectural design, analysis, and consulting

services................................................................. – – – 3.0 5.3

8721 Accounting, auditing, and bookkeeping services .... – – 2.8 2.1 3.0

 Health care

8011 Offices and clinics of doctors of medicine .................. 4.1 2.9 .7 1.2 2.6

8053 Skilled and intermediate care facilities ..................... – 5.9 5.4 4.2 4.4

8062 General medical and surgical hospitals .................... 3.4 3.7 1.5 .5 1.3

8063 Psychiatric hospitals ................................................ 4.2 .1 5.0 –6.7 .5

8069 Specialty hospitals, except psychiatric .................... 5.2 1.8 2.9 .6 2.3

8071 Medical laboratories .................................................. – 5.2 .2 .9 .2

8082 Home health care services ....................................... – – – 6.2 .5

 Other

4512 Air transportation, scheduled .................................... –.7 8.7 6.5 .9 2.5

4522 Air transportation, nonscheduled .............................. .7 1.8 2.2 –1.6 2.6

4724 Travel agencies ......................................................... –2.7 –6.9 2.6 1.5 –2.3

7011 Hotels and motels ..................................................... 1.4 4.0 4.8 4.1 4.2

7349 Building cleaning and maintenance services, n.e.c. . – 1.6 2.0 1.4 1.1

7361 Employment agencies ............................................... – .8 1.8 1.0 2.9

7363 Help supply services ................................................ – 3.8 1.4 1.8 2.2

7372 Prepackaged software .............................................. – – – – .9

7513 Truck rental and leasing, without drivers .................. 2.2 3.6 –.8 .5 –.9

7514 Passenger car rental, without drivers ....................... 2.4 7.4 –5.0 13.7 –4.0

NOTE: Dashes indicate that index is not included in estimation.

Table 8.

SIC

code

professional, scientific, and technical firms from the United

States maintain a worldwide client base. Domestic economic

strength has served to further increase demand for activities such as

advertisement creation and placement; corporate, real estate, banking and commercial-type legal counsel; as well as auditing and tax

preparation and consulting. The indexes for all of these service lines

increased in 1998. Prices received by establishments engaged in

engineering and architecture also advanced in 1998, with strength in
14 Monthly Labor Review July 1999

Producer Price Highlights

the residential and commercial construction sectors contributing to this broad-based increase.

Communications. The index for cable and other pay television services rose 3.7 percent in 1998, following a 4.7-percent

increase in 1997. Price increases were observed for both subscriber services and cable advertising. Subscriber cable rates,

deregulated when the Telecommunications Act of 1996 was

signed into law, have been on the rise. Cable systems also are

permitted to pass through increased costs of programming and

new capital equipment. All remaining regulation of the industry

is scheduled to end in 1999. Furthermore, cable advertising rates

have benefited from increased viewership—often at the expense

of network broadcast television.

By contrast, the index for telephone communication (except

radiotelephone) fell 1.7 percent in 1998, after posting a much

smaller drop of 0.4 percent in 1997. Competition among longdistance carriers forced public-switched toll prices down a full

3.2 percent. However, the index for local service (except private lines) fell only 0.1 percent. Portions of the Telecommunications Act of 1996 were meant to increase competition and reduce prices for local telephone service, outcomes not yet realized to any substantial degree. The index for radio broadcasting

increased just 0.8 percent, following a 3.1-percent rise in 1997.

This slower rate of increase resulted partly from falling prices

for network time sales, as well as slowing rates of increase in

prices of local-station time sales.

Other service industries. The index for scheduled air transportation accelerated from 0.9 percent in 1997 to 2.5 percent in

1998. This faster rate of increase was the result of rising prices

for scheduled passenger transport, which increased 2.7 percent.

By contrast, the scheduled air cargo transportation index rose a

modest 0.4 percent. Prices for the nonscheduled air transportation industry also rose, on the strength of an 8.3-percent jump in

prices for charter services. The major factors influencing prices

for air transportation services in 1998 were a robust economy—

which led to increased demand and potentially higher prices—

versus declining jet-fuel costs and increased competition among

producers helping to keep prices in check.

A 24.7-percent drop in the index for the arrangement of international flights led to a 2.3 percent decline in the index for

travel agents. This precipitous drop was fueled by announcements by major airlines that commissions on international flights

would be capped at $100, effective November 1998. By contrast, the domestic flight portion of the airline arrangements index increased 2.8 percent.

The index for hotels and motels advanced 4.2 percent in 1998,

in line with recent yearly advances. Charges for guest-room

rentals rose 4.7 percent, while prices for food and beverages

increased 3.3 percent. Casino gaming receipts advanced more

modestly—1.0 percent. Although the supply of rooms continued to grow steadily, occupancy rates remained high. This period of economic prosperity has resulted in increased business

and leisure travel, permitting the hotel and motel industry to

charge higher prices.

The newly introduced index for prepackaged software increased 0.9 percent in its first year of publication. Prices

rose for computer games and other prepackaged software,

as well as for maintenance, documentation, training, and other

software services. Falling prices were registered for applications software. Introduced in June of 1998, the index for

property and casualty insurance advanced 0.1 percent during

its first 6 months of publication. Advancing prices for

homeowner’s insurance, medical malpractice insurance, and

commercial auto insurance slightly outweighed declining indexes for product liability insurance and workers’ compensation insurance. In an effort to further expand PPI coverage

of the service-producing sector of the economy, indexes for

life insurance carriers were introduced in December 1998.

In the upcoming year, BLS plans to further expand its serviceproducing sector coverage to include indexes for wholesale

trade, retail trade, wireless telephone services, and securities

brokers and dealers. 

Notes

1

 The data in this table are derived from a count of the six-digit

commodity indexes contributing to each stage-of-processing category

except crude energy materials, which uses the three-digit codes for

coal, natural gas, and crude petroleum. Data for 1998 are preliminary,

first-published values. 2 U.S. import and export price indexes, December 1998, USDL–99–13

(U.S. Department of Labor), Jan. 15, 1999. 3 Crop Production, 1998 Summary, January 1999, USDA–Cr–Pr–2–

1–99 (U.S. Department of Agriculture, National Agricultural Statistics),

Feb. 1, 1999. 4

 The figures on domestic coal production and imports and undergound

natural gas storage levels were obtained from the Energy Information

Administration’s website at http://www.eia.doe.gov/ (visited July 15,

1999). For coal production and import figures, see Frederick L. Freme

and B.D. Hong, “U.S. Coal Supply and Demand: 1998 Review,” at

http://www.eia.doe.gov/cneaf/coal/cia/new_yr_revu/

coalfeat.html (visited July 15, 1999). For natural gas figures, see

Natural Gas Monthly, June 1998 at http://www.eia.doe.gov/

natural_gas/nat_frame.html (visited July 15, 1999). 5 U.S. import and export prices, December 1998. 6

 Federal Reserve Board statistical database, on the Internet at http:/

/www.bog.frb.fed.us/releases/ (visited July 15, 1999). 7 U.S. import and export prices, December 1998. 8 1998 Annual Statistics (Bureau of the Census), exhibit 1, on the

Internet at http://www.census.gov/foreign-trade/www/ (visited July 15,

1999). 9

 Value of Construction Put in Place, December 1998, C30/98–12

(Bureau of the Census), February 1999.