Monthly Labor Review July 1998 3

Producer Prices, 1997

Prices received by domestic producers of

finished goods fell 1.2 percent in 1997, following a 2.8-percent rise in 1996 and a 2.3-

percent advance in 1995. The last calendar-year

decline for finished goods was in 1986, when the

index dropped 2.3 percent due to falling energy

prices. The index for finished energy goods

moved down 6.4 percent from December 1996

to December 1997, after an increase of 11.7 percent a year earlier. Prices for foods, such as pork

and fresh fruits and melons, fell 0.8 percent in

1997, following a 3.4-percent increase in 1996.

However, prices for finished goods other than

foods and energy, a category that includes consumer goods such as passenger cars and apparel,

were unchanged in 1997, after a 0.6-percent rise

in 1996. (See table 1.)

At the earlier stages of processing, the directions in price changes for intermediate goods

were the same as those for crude goods. The index for intermediate goods declined 0.8 percent

in 1997, after a 0.7-percent rise in 1996. This index measures the price movements of goods such

as flour, steel, lumber, industrial chemicals, diesel fuel, and paper boxes. Prices for crude goods

fell 11.3 percent in 1997 after rising 14.7 percent

in 1996. Crude goods include wheat, scrap metals, logs, crude petroleum, and cotton. Prices for

food-related materials at the intermediate stage

of processing also fell from 1996 to 1997; at the

crude level, price declines accelerated for foodstuffs and feedstuffs. However, when the effects

of price changes for energy and food-related materials are excluded, the core indexes for both intermediate and crude goods turned up somewhat

in 1997 after decreasing in 1996.

Economic background

The past year saw the Nation’s economy turn in

its best performance in a generation. Over the

course of 1997, output growth and job creation

remained vigorous, while inflation declined. Real

(inflation-adjusted) gross domestic product grew

3.9 percent, and employment rose by 3.4 million,

for an average rate of 284,000 jobs created per

month. The unemployment rate dropped below 5

percent for the first time in 24 years, yet core inflation (as measured by the Consumer Price Index, excluding its volatile food and energy components) averaged only 2.2 percent, its lowest rate

in more than 30 years. A principal force behind

the current expansion has been private fixed investment. One benefit of this burst of investment

has been a rapid expansion of industrial capacity.

Economic growth exceeded expectations in

1997, and the unemployment rate declined to a

24-year low. Households and firms increased

their spending at robust rates as continued low

inflation, low unemployment, declining costs of

Producer price

highlights, 1997

Producer Price Indexes for finished goods,

finished energy goods, and foods all fell during 1997,

the first decline in 11 years for the finished-goods

category; only the index for finished goods other than

foods and energy remained stable throughout the year

W illiam D.Thomas

W illiam D.Thomas is

an economist in the

Office of Prices and

Living Conditions,

Bureau of Labor

Statistics. Joseph

Kow al, an economist in

the same office,

assisted in the

preparation of this

article.
4 Monthly Labor Review July 1998

Producer Prices, 1997

business equipment, and lower long-term interest rates contributed to a favorable economic environment for both consumers and producers. Net exports continued to be a restraining influence on growth.

Strong investment in new productive capacity in the past

few years has helped the economy accommodate higher

spending without rising inflation. Chief among the factors that

have combined to hold back inflation have been the rise in the

value of the dollar on foreign exchange markets (which makes

imports cheaper), unusually steep declines in prices for computers, and continued moderation in employer costs of health

insurance.

Household income, consumer sentiment, and household net

worth were all favorable in 1997: real disposable personal

income grew over the four quarters of the year, and yearend

stock market values were up about 30 percent from a year

earlier. Outlays grew even faster than income, and as a result,

the personal saving rate edged down.

Although consumption was robust over the past year, it

was not smooth. Real consumption grew in excess of a 5-

percent annual rate in the first and third quarters, but at only a

modest yearly rate in the second. Most of the volatility was in

goods consumption; services consumption grew at around a

4- to 5-percent annual rate in each quarter. Durable goods,

which rose at double-digit annual rates in the first and third

quarters, but fell at a 5-percent yearly rate in the second, accounted for much of the quarter-to-quarter fluctuations in

growth. The roughly 15 million units of light motor vehicles

sold in 1997 were about the same number sold in each of the

previous 3 years; over this 4-year period, sales of light motor

vehicles were just shy of the record 4-year pace set in the

mid-1980s.

The signals for the traditional determinants of business investment were strongly favorable throughout 1997. Business

equipment grew 12 percent over the four quarters of the year,

with strong demand for most types of equipment. Industrial

equipment grew a healthy 7 percent over the year, and transportation equipment advanced 10 percent, with particularly

rapid growth in aircraft purchases.

The standout categories of business equipment investment

in 1997 were office and computing equipment and telecommunications equipment. Growth in real computer spending

was fueled in part by price declines that were even sharper

than normal. One factor possibly boosting sales in this industry is the rapidly expanding capacity and availability of cellular telephone and other wireless services.

Investment in nonresidential structures was about flat in

1997, following solid gains in 1996. Construction of new office buildings made substantial gains, as the strength of the

economy allowed the sector to grow out from under an overhang of empty office buildings at the beginning of the decade. These gains were offset by small declines in the construction of industrial, utility, and mining structures.

The demand for inventories was probably a result of strong

final sales, which increased faster than inventories over the

first three quarters of 1997. As a result, stocks remained lean

in relation to sales.

Residential construction increased about 6 percent in 1997,

with much of the growth occurring in the fourth quarter. The

pickup toward the end of the year reflected in part the pattern

of mortgage rates, which, after rising through April, fell more

than 1 percentage point later in the year. Falling mortgage

rates, together with strong real-income growth, resulted in an

increase in the affordability of housing in the second half of

the year. In addition to rising new-home construction, realestate commissions moved up over the year, as sales of existing homes grew by 3 percent during 1997 as a whole, to their

highest level ever.

The impact of the surge of private spending was muted,

however, by an erosion in net exports, a continuing decline in

real Federal Government spending, and slow growth in spending by State and local governments.

Short-term interest rates fluctuated within a narrow range

over the course of the year, whereas long-term rates rose

slightly early in the year, but then declined, finishing the year

roughly 50 basis points (half a percentage point) lower. Longterm interest rates remained very low, largely reflecting both

continued progress in reducing the deficit and market participants’ expectations of low future inflation. (The former lowers nominal interest rates by reducing expected future real

rates, while the latter acts directly to reduce nominal rates.) In

addition, turmoil in foreign asset markets in the second half

of the year helped make U.S. securities more attractive to

investors.

On October 27, the Dow-Jones Index fell 554 points, the

12th-largest decline in its history, in percentage terms. The

drop was steep enough to cause the New York Stock Exchange’s system of “circuit breakers” to suspend trading temTable 1. Annual percent changes for major categories of

the Producer Price Index, by stage of

processing, 199397

Index 1993 1994 1995 1996 1997

Finished goods ................... 0.2 1.7 2.3 2.8 –1.2

Foods .............................. 2.4 1.1 1.9 3.4 –.8

Energy ............................ –4.1 3.5 1.1 11.7 –6.4

Other ............................... .4 1.6 2.6 .6 .0

Intermediate materials,

supplies, and components 1.0 4.4 3.3 .7 –.8

Foods and feeds ............. 5.5 –4.5 10.3 2.1 –1.7

Energy ............................ –4.2 2.9 1.1 11.2 –7.0

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

Crude materials for

further processing ............. .1 –.5 5.5 14.7 –11.3

Foodstuffs and feedstuffs 7.2 –9.4 12.9 –1.0 –4.0

Energy ............................ –12.3 –.1 3.7 51.2 –23.1

Other ............................... 10.7 17.3 –4.2 –5.5 .0
Monthly Labor Review July 1998 5

porarily for the first time ever. The day after the plunge saw

the volume of shares traded on the exchange reach a record

high of 1.2 billion. (The market made up much of its previous day’s decline that day.) The stock market rebounded

quickly following its October losses. Nonetheless, turmoil in

East Asia apparently continued to be a source of downward

pressure on stock prices for the remainder of the year. The rise

in stock prices in 1997 represents the continuation of a trend

that has seen major indexes more than double over the past 3

years.

Inflation remained remarkably subdued in 1997. Core CPI

inflation slowed over the course of the year, continuing a decline that began in 1995. Surprisingly, this deceleration in price

increases occurred in an economic environment that was characterized by extremely low unemployment.

The pace of job creation was quite swift. Among the service-producing industries, growth was particularly rapid in

computers and data processing and in engineering and management services. These hiring gains were matched by large

increases in industrial capacity. Nevertheless, labor markets

were tight and wages accelerated continuously during the year.

Hourly wages, as measured by the employment cost index,

rose by 3.9 percent in 1997, 0.5 percentage point faster than

in 1996.

Growth in output per hour worked picked up in 1997: over

the year, the official measure of productivity in the nonfarm

business sector rose at an average annual rate of 1.7 percent.

Finished goods other than foods and energy

As mentioned earlier, the index for finished goods other than

foods and energy—the “core” index—was unchanged in 1997,

following a 0.6-percent advance in 1996. This slowdown in

price increases was broadly based. The index for consumer

goods other than foods and energy rose 0.3 percent in 1997,

following a 0.8-percent increase in 1996. Prices for capital

equipment turned down 0.6 percent in 1997 after rising 0.4

percent a year earlier. (See table 2.)

Among consumer goods other than foods and energy, indexes fell in 1997 after moving up in 1996 for sanitary papers,

passenger cars, over-the-counter drugs, tires and tubes, cosmetics, and household appliances. Price increases slowed for

light trucks, prescription drugs, newspapers, alcoholic beverages, periodicals, books, household furniture, tobacco products, mobile homes, sporting goods, soaps and detergents,

girls’ apparel, footwear, floor coverings, toys, and lawn and

garden equipment. Prices continued to rise modestly for men’s

and boys’ apparel. By contrast, the index for women’s apparel

rose after falling the previous year. Price increases accelerated for textile housefurnishings, costume jewelry, gold jewelry, and household glassware. Prices for home electronic

equipment continued to move down.

The Producer Price Index for capital equipment fell 0.6 percent in 1997, following a 0.4-percent advance in 1996. Prices

for light motor trucks turned down 3.6 percent after moving up

0.2 percent the year before. Price increases slowed markedly

for civilian aircraft, commercial furniture, tools and dies, communications equipment, printing trades machinery, railroad

equipment, ships, and metal-cutting machine tools. Prices increases also slowed, but only slightly, for construction machinery, industrial material-handling equipment, and agricultural

machinery. By contrast, prices rose in 1997 after falling in 1996

for heavy motor trucks and for office and store machinery.

Prices fell less than in the previous year for x-ray equipment,

truck trailers, and transformers. Price increases accelerated for

pumps and compressors, oil field machinery, textile machinery, and mining machinery. Prices continued to rise for metalforming machine tools and paper industry machinery.

Transportation equipment. The index for motor vehicles declined significantly in 1997 as prices fell for both passenger

cars and light trucks; however, prices for heavy trucks increased 0.6 percent. Prices for passenger cars decreased

throughout 1997, partly a result of higher incentives offered

by manufacturers to dealers to liquidate inventories. Prices

also were held down by lower increases in the introduction of

the new model-year cars and fewer interim price increases during the year. The market for domestic automobiles struggled

all year and required higher incentives to keep it moving. In

addition, sales of new automobiles in 1997 in the United States

were dampened by large gains made by foreign manufacturers. Several foreign manufacturers even experienced doubledigit gains in sales. Domestic manufacturers of automobiles

also faced stiff competition from the light-truck segment,

Table 2. Annual percent changes in Producer Price

Indexes for selected finished goods other than

foods and energy, 199397

Index 1993 1994 1995 1996 1997

Finished goods other than

foods and energy .............. 0.4 1.6 2.6 0.6 0.0

Consumer goods ............ –.2 1.6 2.3 3.6 –1.4

Passenger cars ............. 3.3 2.1 1.7 –.8 –2.6

Light trucks ................... 4.2 3.3 1.5 .2 –3.6

Prescription drugs ......... 3.2 3.1 4.2 2.0 3.6

Over-the-counter

drugs ........................... 2.7 1.7 1.7 –1.7 .3

Tobacco products .......... –21.4 .4 3.6 2.6 7.7

Books ............................ .6 5.4 6.5 3.2 3.3

Periodicals .................... 2.5 3.6 4.8 2.0 4.0

Newspapers .................. 2.4 3.3 8.8 4.2 .1

Household furniture ...... 3.7 2.7 2.7 1.4 1.1

Capital equipment ............. 1.8 2.0 2.2 .4 –.6

Heavy trucks ................. 3.1 3.0 4.1 –4.5 .6

Truck trailers ................. 3.3 7.7 2.2 –1.4 2.0

Metal-cutting machine

tools ............................ .6 1.8 4.1 3.1 2.1

Metal-forming machine

tools ............................ 1.6 3.5 2.2 2.6 3.2

Computers .................... –12.5 –6.8 –12.7 –22.3 –21.6

Agricultural machinery .. 2.9 2.7 4.7 1.4 1.4

Construction machinery 1.1 2.0 2.5 1.8 1.9
6 Monthly Labor Review July 1998

Producer Prices, 1997

which has grown immensely in market share in recent years.

Domestic manufacturers continued to pare down product lines

in 1997 by cutting down on duplication of models within the

company (under different brand names), thereby giving each

line a unique appearance. As in the recent past, motor vehicle

manufacturers relied on the highly profitable light-truck segment to bolster their net profits. The market for light trucks

has undergone numerous changes over the past few years. Consumers have come to expect the same incentives and discounts

offered by automobile manufacturers. In addition, in 1997,

competition heated up from foreign manufacturers who entered

the light-truck market, offering luxury sports utility models. By

yearend, much discussion and debate had taken place over emissions and fuel economy for the sports utility segment, whose

vehicles generally have larger and more powerful engines than

cars. The combination of marketing programs and a strong

economy boosted the market for heavy trucks in 1997.

The index for aircraft and aircraft parts inched up slightly

in 1997. Aircraft demand was fairly high; however, prices were

held down due to competition. The aircraft parts industry also

experienced growth over the year; however, lower costs for

materials and fierce competition among manufacturers kept

prices down. The index for ships increased 3.0 percent in

1997, reflecting increased production costs, especially for labor. The industry continued to be plagued by a shortage of

highly skilled workers. The index for railroad equipment fell

1.5 percent in 1997, with prices for locomotive parts moving

down as a result of burdensome inventories accumulated in

late 1996 in anticipation of a boost in demand for these products that never materialized.

Paper products. Prices declined again in 1997 for a wide

variety of paper goods, particularly sanitary household paper

products. Prices for both tissue and towel stock were 6.4 percent lower than they had been in 1996. Declines for paper

products reflected earlier decreases in prices for woodpulp

and wastepaper. In 1997, two major producers of sanitary paper products merged and were able to take the lead in pricing.

Drugs and pharmaceuticals. Price increases for drugs and

pharmaceuticals accelerated somewhat from 1996 to 1997.

The index for prescription drugs rose 3.6 percent after increasing 2.0 percent the year before. Prices for over-the-counter

drugs turned up 0.3 percent in 1997, following a 1.7-percent

decline in the previous year. Price changes were not confined

to any particular class of drug or buyer; small increases were

registered for most categories of products. As in earlier years,

health insurance providers, as well as managed care providers, used their purchasing power to induce pharmaceutical

manufacturers to negotiate lower prices and limit increases.

In contradistinction to prices for prescription drugs, prices for

over-the-counter drugs behave more like those of other consumer finished goods: manufacturers compete directly for consumer dollars using coupons and other special promotions.

Computers. The index for electronic computers fell more

than 20 percent for the second straight year. Prices declined

sharply in 1997 for personal computers and workstations (30.7

percent), portable computers (35.1 percent), and midrange

computers (25.4 percent). The multiplicity of different types

of microprocessors and disk drives in the marketplace contributed greatly to these declines. The economic crisis in Asia

also drove computer prices lower, by guaranteeing a flow of

cheap components. As in other recent years, fierce price competition was prevalent throughout the industry.

Tobacco products and alcohol. Increases for tobacco products accelerated from 2.6 percent in 1996 to 7.7 percent in

1997. Most of the acceleration was due to the index for cigarettes, which advanced 10.0 percent in 1997, following an increase of 3.4 percent in 1996. In 1997, prices for cigars rose

almost 6 percent, about the same as the year before. Cigarette

manufacturers engaged in fierce competition for market share

as the domestic market for cigarettes continued to shrink. As

in recent times, the manufacturers expanded their presence

abroad, with foreign markets having fewer age and advertising restrictions. Producers continued to increase exports

through joint ventures abroad. By yearend, the possibility of

multibillion-dollar settlements in class-action liability suits

loomed over the cigarette-manufacturing industry. The previous year’s upsurge in demand for cigars continued into 1997;

in evidence of this trend were the proliferation of cigar manufacturers, more bars and restaurants catering to cigar smokers,

and Web sites on the Internet devoted exclusively to cigar aficionados. The index for alcoholic beverages turned down 0.5

percent in 1997 after increasing 3.8 percent in 1996. In 1997,

beermakers benefited from lower costs for grain and aluminum cans. Stiff competition among breweries for market share

resulted in aggressive price discounting.

Energy

Following a rise of more than 50 percent in 1996, the index

for crude energy materials fell 23.1 percent in 1997. Prices

declined markedly for both natural gas and crude petroleum

after advancing sharply in 1996. By contrast, the index for

coal increased (4.9 percent) after decreasing (1.1 percent) the

year before. (See table 3.)

Prices for intermediate energy goods dropped 7.0 percent

in 1997, following an increase of 11.2 percent in 1996. After

rising a year earlier, prices decreased in 1997 for liquefied

petroleum gas, number 2 diesel fuel, jet fuels, and residual

fuel. Price increases slowed markedly over the same period

for utility, commercial, and industrial natural gas. By contrast,

prices turned up after showing no change a year earlier for

electric power. Price increases accelerated for natural gas sold

to electric utilities.
Monthly Labor Review July 1998 7

The Producer Price Index for finished energy materials declined 6.4 percent in 1997, following an 11.7-percent rise in

1996. Gasoline prices fell 15 percent in 1997 after advancing

27.1 percent a year earlier. The index for home heating oil

dropped 21.7 percent after advancing 25.0 percent in 1996.

Price increases for residential gas slowed to 2.4 percent from

11.2 percent in the previous year. By contrast, the index for

residential power fell in 1997 after increasing in 1996.

Foods and related products

Farm prices, as measured by the Producer Price Index for

crude foodstuffs and feedstuffs, declined 4.0 percent in 1997,

following a 1.0-percent drop in 1996. (See table 4.) After advancing substantially in 1996, prices moved down markedly

in 1997 for slaughter hogs, slaughter broilers and fryers,

wheat, fresh fruits and melons, and unprocessed finfish. Price

increases slowed from 1996 to 1997 for alfalfa hay and unprocessed shellfish. Prices fell even more in 1997 than in the

previous year for slaughter turkeys and raw cane sugar. By

contrast, indexes rose after falling a year earlier for corn,

slaughter cattle, fresh and dry vegetables, Irish potatoes for

processing, soybeans, and vegetables (except potatoes). Price

increases accelerated somewhat for fluid milk.

The index for intermediate foods and feeds fell 1.7 percent,

following a 2.1-percent advance a year earlier. Prices dropped

after increasing in 1996 for prepared animal feed, pork, confectionery materials, beef and veal, refined sugar, liquid milk

products, and condensed and evaporated milk. Price increases

slowed somewhat for fluid milk products and liquid beverage

base. By contrast, prices increased in 1997, following declines

in 1996, for crude vegetable oils and natural and processed

cheese. Price increases accelerated for butter and dry mix

preparations. Prices fell less in 1997 than they had fallen in

the previous year for flour and dry milk products.

Prices received by domestic producers of finished consumer foods moved down 0.8 percent in 1997 after rising 3.4

percent in 1996. This reversal was led by a downturn in prices

for pork, fresh fruits and melons, beef and veal, processed

young chickens, processed fruits and vegetables, eggs for

fresh use, soft drinks, and pasta. Price increases slowed for

bakery products, confectionery end products, dairy products,

and fish. By contrast, the index for fresh and dry vegetables turned up sharply in 1997 after a marked decline in

1996. Similarly, prices rose after falling a year earlier for

roasted coffee, shortening and cooking oils, and milled rice.

Price declines for processed turkeys slowed over the same

period.

Grains and feeds. From December 1996 to December 1997,

grain prices fell 2.0 percent, following a 20.3-percent drop

over the previous 12 months. Contributing to the 1997 decline was lackluster growth in U.S. exports, due to large world

crops and the Asian crisis. Wheat prices decreased 11.3 percent in 1997 after declining 19.3 percent in 1996, continuing

the fall from their historically high levels reached in the summer of 1996. High wheat prices induced both domestic and

foreign growers to plant more wheat. In addition, the U.S.

Department of Agriculture’s Conservation Reserve Program

policy, which for years had eliminated millions of acres of

wheat production, was replaced with a new policy in 1996

that gave growers much broader latitude in deciding which

crops to plant. Corn prices rose 2.2 percent in 1997 after declining 21.0 percent in 1996. Like wheat prices, corn prices

had reached historically high levels in the summer of 1996,

causing more worldwide acreage to be planted. Generally favorable weather in growing areas resulted in record harvests.

Soybean prices increased 1.8 percent in 1997 after falling

3.7 percent in 1996. Adverse weather that delayed planting or

ruined crops in many growing areas resulted in higher prices.

During the summer, prices generally fell, as considerably more

soybean acreage had been planted, leading to a worldwide

glut in supplies. In the latter part of the year, high crop harvests were balanced by even higher domestic and foreign demand, and prices fluctuated somewhat as users replenished

their stocks.

Slaughter livestock and meats. The year 1996 was very profitable for hog farmers; the bubble burst, however, in the third

quarter of 1997. Export demand dropped due to a strong dollar after economic woes began to plague Asian markets and

also partly because of Asian preference for Asian rather than

North American varieties of pork. Together with increased

pork production at home and cheaper chicken prices, the lackluster export demand pushed hog prices lower in 1997. Lower

Table 3. Annual percent changes in Producer Price

Indexes for selected energy items, 199397

Index 1993 1994 1995 1996 1997

Finished energy goods ........ –4.1 3.5 1.1 11.7 –6.4

Gasoline ............................ –16.8 11.2 2.4 27.1 –15.0

Home heating oil ............... –10.1 6.9 11.9 25.0 –21.7

Residential electric power . .8 1.5 .9 .6 –.2

Residential natural gas ...... 5.4 –2.6 –2.4 11.2 2.4

Intermediate energy goods .. –4.2 2.9 1.1 11.2 –7.0

Residual fuels .................... –17.8 10.2 –4.7 32.8 –7.6

Natural gas to electric

utilities ............................. –13.0 3.4 –1.4 6.1 9.3

Diesel fuels ........................ –15.9 5.9 11.1 26.2 –22.5

Jet fuels ............................. –11.7 4.3 6.1 26.1 –22.3

Commercial power ............. 3.2 2.3 .6 –.1 .0

Liquefied petroleum gas .... –15.4 13.0 3.9 71.4 –29.3

Crude energy materials ....... –12.3 –.1 3.7 51.2 –23.1

Natural gas ........................ –3.8 –14.0 –.3 92.0 –27.9

Crude petroleum ................ –27.7 21.1 10.8 35.8 –28.3

Coal ................................... 1.0 –2.1 –.8 –1.1 4.9
8 Monthly Labor Review July 1998

Producer Prices, 1997

prices for both barrows and gilts, as well as for slaughter sows,

contributed to the aggregate decrease. Barrows and gilts are

sources of the highly promoted lean pork products, and sows

are the source for pork bellies and bacon.

The index for slaughter cattle turned up in 1997 after moving down in 1996. Drought resulted in sharply reduced grazing prospects, and higher hay prices forced cattle ranchers to

cull herds sharply and retain fewer stocker cattle. Most of the

impetus behind this reversal in the direction of price change

came from the slaughter cows and bulls component. Slaughter cows and bulls are either excess animals culled from the

dairy herd or excess mature breeding stock culled from the

beef-type cattle herd. Prices dropped significantly in 1996 due

to supply pressure as producers culled their herds of these

types of animals. To some extent, culling of the herds continued on into early 1997, but prices did rebound from the 1996

level as the remaining stocks of the mature cattle herd began

to enable ranchers to recoup the previous year’s losses.

As with pork producers, producers of slaughter broilers

and fryers had enjoyed positive returns a year earlier, despite

feed costs. In 1997, production of such poultry began to outstrip demand, and at the same time, competing meats became

cheaper. During the fourth quarter of 1997, producer prices

for broilers plummeted as production increased.

Dairy products. Prices for dairy products rose almost 5 percent in 1997, about twice as much as they had risen in 1996.

At yearend, fluid milk prices were higher due to seasonally

higher prices during the colder winter months and an increase

in demand from butter and cheese manufacturers. Skyrocketing demand for butter during the holiday season also helped

to drive prices higher. Creamery butter prices increased 82.2

percent in 1997. Higher prices for fluid milk and butter caused

prices for many manufactured dairy products, such as ice

cream and cheese, to increase throughout much of the year.

Intermediate industrial materials

Prices for intermediate materials other than foods and energy

increased 0.3 percent in 1997 after falling 0.9 percent in 1996.

Prices for nondurable manufacturing materials moved up after declining the previous year. Prices for durable manufacturing materials were unchanged in 1997 after falling the year

before. However, price increases slowed from 1996 to 1997

for construction materials.

Nondurable manufacturing materials. The index for nondurable manufacturing materials increased 0.3 percent in 1997,

following a 3.3-percent decline in 1996. (See table 5.) Much

of the 1997 reversal was due to an upturn in prices for paper

and paperboard. Prices also rose after falling a year before

for woodpulp, alkalies and chlorine, paint materials, and

leather. Prices fell less than in the previous year for intermediate basic organic chemicals, phosphates, and synthetic rubber. Price increases accelerated for medicinal and botanical

chemicals, inedible fats and oils, and gray fabrics. By contrast, prices turned down in 1997 after rising in 1996 for primary basic organic chemicals, plastic resins, nitrogenates,

processed yarns and threads, and synthetic fibers.

Following 2 years of declines, prices for pulp and paper

products turned up in 1997, as an improved economy and

dwindling customer inventories gave rise to price hikes for

most grades of paper. Woodpulp prices rose 4.1 percent in

1997, catapulted by sharp increases in the third quarter.

Woodpulp prices moved down in the first 4 months of the

year, only to rise when demand increased as customers rebuilt

depleted inventories. Export demand to Asia—particularly,

South Korea—dropped off significantly as a result of upheaval

in financial markets in that country. Demand for woodpulp

was dampened somewhat by the rapid rate of recovered paper consumption.

Paper prices increased 3.8 percent in 1997, following a

14.2-percent decline in 1996. After beginning 1997 with 3

straight months of price declines, the paper market rebounded,

finishing the year with nine consecutive modest increases. The

two driving forces behind this recovery were uncoated

groundwood (up 24.5 percent) and newsprint (up 16.0 percent). Despite some pockets of discounting, especially in cutsize stock, prices for uncoated free-sheet were relatively stable

at yearend. Mills were successful in holding transaction pricTable 4. Annual percent changes in Producer Price

Indexes for selected food items, 199397

Index 1993 1994 1995 1996 1997

Finished consumer foods .... 2.4 1.1 1.9 3.4 –0.8

Pork ................................. 4.3 –11.1 15.3 21.9 –13.6

Dairy products ................. 3.1 –2.0 5.4 2.4 4.7

Fresh fruits and melons ... 11.8 –11.2 2.5 37.2 –8.2

Fresh and dry vegetables 27.7 25.6 –36.0 –24.3 21.6

Roasted coffee ................. 5.5 49.8 –8.2 –8.4 18.1

Beef and veal ................... –6.0 –4.8 –1.4 7.4 –5.4

Processed poultry ............ 4.0 –3.7 8.4 2.6 –6.3

Intermediate foods

and feeds ........................... 5.5 –4.5 10.3 2.1 –1.7

Prepared animal feeds ..... 6.0 –10.6 20.6 5.4 –3.1

Crude vegetable oils ........ 34.3 4.1 –14.1 –9.3 13.9

Flour ................................ 8.6 –1.1 20.1 –9.0 –8.2

Confectionery materials ... 10.4 2.2 1.5 2.2 –15.8

Refined sugar .................. –.6 .8 .8 4.2 –4.5

Crude foodstuffs

and feedstuffs .................... 7.2 –9.4 12.9 –1.0 –4.0

Slaughter hogs ................ –5.0 –21.3 40.6 23.2 –21.7

Soybeans ......................... 20.1 –18.1 26.7 –3.7 1.8

 Wheat ............................. 18.6 –5.6 29.9 –19.3 –11.3

Corn ................................ 34.7 –22.4 49.4 –21.0 2.2

Fluid milk ......................... 6.7 –5.2 8.4 1.1 2.8

Slaughter cattle ................ –7.1 –5.3 –5.2 –2.5 2.0
Monthly Labor Review July 1998 9

Table 5. Annual percent changes in Producer Price

Indexes for selected inetermediate and crude

materials other than foods and energy, 199397

Index 1993 1994 1995 1996 1997

Intermediate goods other

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

Nondurable manufacturing

materials ........................... –.6 10.4 5.9 –3.3 .3

Inedible fats and oils ........ –6.1 48.0 –3.9 2.1 3.8

Woodpulp ........................ –14.0 38.1 40.7 –33.0 4.1

Basic organic chemicals .. –.7 15.7 .4 3.6 –1.7

Durable manufacturing ........

materials ........................... 2.5 9.8 1.1 –1.4 .0

Copper ............................ –19.7 68.2 –.1 –22.9 –22.8

Aluminum ........................ –11.1 64.4 –7.3 –12.8 12.4

Lead ................................ .0 37.5 9.1 4.2 –4.0

Zinc ................................. –3.8 13.1 –5.7 –1.4 2.7

Construction materials ........ 5.0 3.9 1.9 1.8 1.2

Gypsum products ............ 12.8 30.8 1.0 6.6 7.1

Nonferrous wire

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

Softwood lumber ............. 30.8 –9.6 –10.3 19.6 –3.8

Crude nonfood materials

 less energy ...................... 10.7 17.3 –4.2 –5.5 .0

Wastepaper ..................... –12.3 179.6 –50.9 –1.3 11.6

Nonferrous scrap ............. –14.0 70.3 –10.3 –7.9 –.6

Raw cotton ...................... 12.9 34.9 4.2 –13.0 –11.2

 Sand and gravel .............. 3.1 2.2 3.6 1.9 1.8

ing in the last months of this year and did not have to resort

to discounting. Overall U.S. demand growth for uncoated freesheet averaged slightly more than 5 percent for 1997, buoyed

by a booming economy and increased sales of computers and

printers. Future expansion of capacity was expected to come

from productivity gains on existing papermaking machines.

Newsprint consumption in 1997 by U.S. dailies outpaced the

level of a year ago. At yearend, there was much concern about

the effect on supply of the 5-month old work stoppage at a

major Canadian newsprint mill. North American producers

also were concerned about the dropoff in newsprint demand

to Asia, which accounts for 42 percent of offshore exports.

As usual, price changes for paperboard mirrored those for

paper. In 1997, paperboard prices rose 5.8 percent after falling 19.0 percent in 1996. All grades of paperboard showed

increases in 1997, led by the unbleached linerboard category,

which rose 8.0 percent. Paperboard capacity, which includes

linerboard and corrugating medium made from virgin and recovered fiber, grew by 2.9 percent in 1997, compared with

5.8 percent in 1996. The increased capacity in 1996 and 1997

reflected the startup of seven new recycled linerboard machines and one recycled medium machine.

Prices for basic organic chemicals dropped 1.7 percent in

1997 after rising 3.6 percent in 1996. Primary basic organic

chemicals, which are petrochemically derived and which include such products as ethylene, fell 3.9 percent in 1997. Earlier declines in prices for crude petroleum and gasoline, along

with record imports, combined to increase inventories of primary basic organic chemicals and to lower prices. Demand

for these chemicals was fairly strong in 1997 despite excess

supplies. The domestic producing sector for such chemicals

continues to grapple with lower prices due to expanded European production, a phenomenon that has greatly increased

world supplies.

Construction materials. The Producer Price Index for construction materials increased 1.2 percent in 1997 after rising

1.8 percent in 1996. The slowdown in price increases was led

by a downturn in prices for softwood lumber. Prices also

turned down in 1997 after increasing in 1996 for air-conditioning and refrigeration. Price increases slowed for millwork,

gypsum products, plumbing fixtures, heating equipment, cement, other metal products, metal valves, and switchgear. By

contrast, price increases accelerated for fabricated structural

metal products, wiring devices, and fabricated ferrous wire

products. Prices declined, but less than a year earlier, for nonferrous wire and cable, plastic construction products, asphalt

felts and coatings, and plywood. The index for steel wire advanced 1.3 percent, the same as its decline in 1996.

Softwood lumber prices fell in 1997. Prices fluctuated

throughout the year in response to construction activity,

weather, and demand. During 1997, railcar shortages and a

slowdown in rail service hampered shipments from many

wood products operations in western states. Several logistical

problems resulted from the highly touted merger of the Union

Pacific and Southern Pacific railroads. Prices also moved

down in 1997 for softwood plywood. However, the year ended

with much optimism by plywood producers, particularly

manufacturers of treated plywood. Uses for such products

increased substantially as demand expanded for applications

such as home subflooring encased with fiberglass, roofing

sheathing, flooring in portable buildings, and siding for beach

homes. Prices increased again in 1997 for hardwood lumber,

which is used mostly for furniture manufacturing; however,

some is used for construction, particularly flooring. In 1997,

prices also advanced somewhat for general millwork, such as

cabinets, vanities, doorframes, and sashes. The market for

millwork is one of the most stable for the various lumber products. Strong demand from the home improvement market

helps to hold down price increases, even when there are

swings in new-home construction.

Prices for gypsum products increased 7.1 percent in 1997

after rising 6.6 percent in 1996. Much of the increase was on

the strength of robust activity in the home improvement sector. Most (uncalcined) gypsum is used to manufacture prefabricated products such as gypsum board. Price increases for

insulation materials, such as building batts, accelerated in

1997 after rising modestly in 1996. Cement prices increased
10 Monthly Labor Review July 1998

Producer Prices, 1997

3.5 percent, following a 5.0-percent rise the year before.

Prices also advanced for concrete and concrete products, on

the strength of increases for their chief ingredient, cement.

Durable manufacturing materials. In 1997, the index for

durable manufacturing materials showed no change, following a 1.4-percent decline the year before. Prices rose after

falling in 1996 for aluminum mill shapes, semifinished steel

mill products, hot rolled bars, building paper and building

board mill products, silver, zinc, and platinum. Prices fell,

but less than in the previous year, for primary nonferrous metals, copper and brass mill shapes, cold finished bars, cold

rolled sheets, flat glass, copper, and plywood. By contrast,

prices turned down after rising the year before for hot rolled

sheets and lead. Price increases slowed for prepared paint,

cement, other metal products, and other miscellaneous metal.

Prices for gold fell much more in 1997 than in 1996.

Copper prices declined 22.8 percent in 1997, about the

same as in 1996. In 1997, prices declined steadily in the second half of the year. As in 1996, there was much concern that

projected increases in capacity would have a dampening effect on prices. Warehouse stocks built up during the year,

and supplies, coming to market from new mines, greatly

exceeded demand. There were hopes in the marketplace that

new demand from Japan or China would materialize. The index

for copper last increased from May to June 1997, when London

Metal Exchange warehouse stocks declined about 10 percent.

Declines were restrained by threats of a work stoppage at

Chilean mines and production snarls at a major domestic

smelter.

The index for aluminum increased 12.4 percent in 1997

after falling 12.8 percent in 1996. Prices fluctuated throughout the year, nosediving in the fourth quarter. Consistent rises

in London Metal Exchange inventories and periodic reports

of increased production dampened prices for primary aluminum. Throughout the year, there were supply-demand imbalances that also helped to erode prices. Prices did rebound

somewhat at yearend as producers worked down excessive

inventories and warehouse inventories dropped at the metal

exchange. Demand for primary aluminum was favorable in

1997; stock levels moved down consistently, almost without

interruption. Prices were expected to respond more propitiously to what had been viewed as favorable market fundamentals. Although Southeast Asia is not a major consumer of

primary aluminum, the region was blamed for some of the

pricing predicament.

Domestic prices for gold fell 21.9 percent in 1997 as a

robust stock market made the metal less attractive as an investment. However, prices for silver and platinum, which are

both used in specialty manufacturing, increased in 1997 on

the strength of steady demand.

Basic industrial materials

The Producer Price Index for basic industrial materials—

crude nonfood materials other than energy—showed no

change in 1997 after falling 5.5 percent in 1996. Prices turned

up after falling the year before for iron and steel scrap, aluminum base scrap, wastepaper, pulpwood logs, and hardwood

logs. Prices fell less in 1997 than in 1996 for copper base

scrap, raw cotton, and phosphates. By contrast, price declines

were steeper than in the previous year for gold ores, nonferrous metal ores, and softwood logs. The indexes for cattle

hides and leaf tobacco both declined after advancing in 1996.

Price increases slowed for other roundwood products. Sand

and gravel prices rose 1.8 percent in 1997, only slightly less

than they had risen the year before. (See table 5.)

Price movements for wastepaper, generally considered an

early barometer of future manufacturing activity in the

economy, were volatile in 1997. Wastepaper prices rose in

the first quarter of the year, only to dip in the second quarter.

Prices then advanced sharply in the third quarter and finally

plummeted in the last quarter of the year. At its high marks,

export prices rose 31.0 percent in May and 25.7 percent in

August. Exports took a tumble in the latter part of the year,

ending the fourth quarter 26.1 percent lower in price. At

yearend, recovered-paper consumption continued to grow

modestly; demand for old corrugated containers was steady

to strong, with most mills using up all the product they bought.

Demand for mixed papers was mostly in a holding pattern at

the end of 1997, and paper stock dealers were optimistic that

prices would strengthen in the near future. Demand for old

newsprint dropped in the latter months of the year after showing improvement earlier in the fall. Demand softened, in particular, for standard newsprint, due to a steep drop in shipments to South Korea. By contrast, the strength of the Mexican

market was a factor that bolstered prices of high-grade newsprint in the Southwest.

Prices for iron and steel scrap increased 14.5 percent in

1997, after falling 11.1 percent in 1996. Prices surged moderately at the start of 1997, lost some of that gain in March and

April, and then steadily moved up for the rest of the year.

Domestic steel mills operated at very high capacity, which

bode well for scrap metal demand. Startups and ram-ups (restarts of idle plants) at various new scrap-fed minimills and

the resumption of production at a major steel mill all supported demand. Export shipments were relatively low during

1997, not only largely because the domestic market was so

vibrant, but also because the world market was a bit more

sluggish than the U.S. market. High-grade scrap is now being

purchased more on a contract basis, and this new phenomenon has led to more stable pricing than in years past. The

year 1997 was also one in which the industry experienced

considerable consolidation. This industry, once composed of
Monthly Labor Review July 1998 11

old family-owned businesses that usually operated three or

four yards has evolved into one of giant publicly traded corporations. Scrap substitutes such as pig iron, iron carbide, and

direct-reduced iron were increasingly available in 1997. A

ready supply of pig iron from Russia and Brazil and the possibility of increased domestic pig iron output combined to

keep prices in check. After falling in 1996, prices for aluminum base scrap increased 9.7 percent in 1997, as inventories

of stock were drawn down and supplies became more balanced with demand.

Prices for raw cotton declined 11.2 percent in 1997, following a 13.0-percent decline the previous year. An excellent

harvest kept supplies of cotton abundant in 1997. However,

competition from foreign cotton farmers continued to be

fierce, and U.S. farmers were still not able to be competitive

with the lower foreign prices. In spite of this situation, certain

grades of high-quality specialty cotton held their own. The

index for leaf tobacco inched down 0.5 percent in 1997. With

strong demand for exports of tobacco products, the outlook

for increased tobacco production was optimistic. Prices for

flue-cured leaf at auction were 11.3 cents per pound below

those of the previous season. At yearend, during the first few

weeks of the burley auctions, prices were slightly less than in

the previous season. The 1997 flue-cured auction sales averaged $1.724 per pound, compared with $1.837 the year

before.

Selected industries

Mining. The Producer Price Index for the net output of total

mining industries declined 20.2 percent in 1997 after advancing 40.6 percent in 1996. Prices for the oil- and gas-extracting industry group decreased about 25 percent, following a

57.9-percent advance the year before. Prices for the metalmining industry group fell 14.3 percent in 1997 after declining 12.7 percent in 1996. Prices increased 2 percent for nonmetallic minerals mining, the same as in 1996. However, the

index for the coal-mining industry group rose 2.8 percent after moving down 0.7 percent the year before. (See table 6.)

Manufacturing. The Producer Price Index for the net output

of the domestic manufacturing sector moved down 0.8 percent in 1997 after increasing 2.2 percent in 1996. Prices fell

after rising a year earlier for the industry groups of food and

kindred products, petroleum refining and related products,

rubber and plastic products, and transportation equipment.

Price increases slowed from 1996 to 1997 for textile mill

products, apparel, lumber and wood products, furniture and

fixtures, chemicals and allied products, and nonmetallic mineral products. Prices fell more in 1997 than in 1996 for electrical and electronic machinery. As in 1996, the index for nonelectrical machinery continued to fall. By contrast, prices

increased after falling in the previous year for paper products

and primary metal industries. Price increases accelerated for

tobacco manufactures and fabricated metal products. The indexes for the industry groups of printing and publishing,

leather and leather products, and measuring and controlling

instruments, etc., continued to rise.

Table 6. Annual percent changes in Producer Price

Indexes for the net output of major industry

groups, 199397

Index 1993 1994 1995 1996 1997

Mining industries ................... –7.9 –1.0 2.9 40.6 –20.2

Metal mining ....................... –6.8 35.5 6.2 –12.7 –14.3

Coal mining ......................... –.1 –2.1 –.8 –.7 2.8

Oil and gas extraction ......... –10.7 –3.2 3.5 57.9 –24.6

Mining and quarrying of

nonmettalic minerals,

except fuels ....................... 1.0 1.4 2.9 2.2 2.2

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

Food and kindred products . 2.2 –.3 4.0 3.2 –.9

Tobacco manufacturers ....... –21.7 .3 3.8 3.2 9.0

Textile mill products ............. –.1 .7 2.6 1.1 .5

Apparel and other finished 

products made from

fabrics and similar

materials ........................... .5 .4 .8 2.0 .9

Lumber and wood products,

except furniture ............... 13.6 1.3 –2.6 3.0 1.3

Furniture and fixtures .......... 2.9 3.0 3.0 1.9 1.1

Paper and allied products ... –.9 10.7 13.1 –10.3 1.9

Printing, publishing,

and allied industries .......... 3.1 3.8 7.0 2.4 2.6

Chemicals and allied

products ............................ .1 7.4 6.0 1.5 .6

Petroleum refining and ........

related products ................ –12.9 8.9 2.6 22.7 –14.5

Rubber and miscellaneous .

plastic products ................. 1.0 3.6 2.6 .1 –.4

Leather and leather products 1.3 2.5 1.5 1.1 1.0

Stone, clay, glass, and

concrete products ............. 2.9 4.3 2.7 1.3 .9

Primary metal industries ..... 1.6 9.3 3.2 –3.0 .7

Fabricated metal products,

except machinery and

transportation equipment .. 1.1 2.4 3.4 .6 1.2

Machinery, except electrical .1 .9 1.4 –.6 –.6

Electrical and electronic

machinery, equipment, and

supplies ............................. 1.2 .3 .7 –.7 –1.7

Transportation equipment ... 3.0 2.4 2.1 .5 –1.0

 Measuring and controlling

 instruments; photographic,

medical, and optical goods;

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

Miscellaneous

manufacturing industries ... 1.8 1.6 2.0 1.4 .6

Service industries:

Railroad transportation ....... .9 .4 –.3 .0 1.0

Motor freight transportation

and warehousing ............... – 2.7 1.7 2.4 2.1

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

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

Transportation by air ........... 8.2 –.3 7.4 5.9 .5

Pipelines, except

natural gas ........................ .6 10.2 3.4 –8.8 –2.2

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

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

NOTE: Dash indicates data not available.
12 Monthly Labor Review July 1998

Producer Prices, 1997

Services. The index for railroad line haul operations increased 1.0 percent in 1997 after showing no change in 1996.

The modest price rise resulted from increased charges for

some of the industry’s lucrative commodities, such as coal,

chemicals, and petroleum. 1997 was a mixed year for the railroad industry. Both passenger and freight operations experienced declining capacity and capability in meeting demand

during the year. However, the two key measures of freight

traffic–-intermodal volume and total freight volume–-both set

records in 1997. Intermodal volume totaled 8.7 million trailers and containers, an increase of 6.8 percent over the previous year. Total freight volume reached nearly 1,375 billion

ton-miles (shipment weight times travel distance), an increase

of 0.9 percent from the 1996 figure. Overall, price movements

for the index for line haul operations resulted from several

factors: weather, the continued concentration of the rail freight

industry, fuel prices, competitive market forces, and a robust

economy. Inflationary pressures, such as rising fuel costs, the

imposition of mandatory rail safety measures, and expanded

services, were all held in check by increased operating efficiencies, wage concessions, increased productivity, industry

restructuring, low interest rates, and competitive market

forces.

From December 1996 to December 1997, the index for

trucking (except local) rose 1.9 percent, following a 3.6-percent rise in 1996. During 1997, strong demand allowed the

trucking industry to remain relatively stable, with steady, but

small, price increases throughout the year. Less-than-truckload carriers, the category that showed the largest increase

over the year, benefited from the rise in demand and posted

profits during each of the four calendar quarters of 1997. Fuel

prices remained stable at relatively low levels. Wages for drivers rose in response to driver shortages; however, carriers

showed restraint and did not pass along all increased labor

costs.

The index for air transportation moved up 0.5 percent in

1997 after advancing 5.9 percent the year before. In 1997, an

increase in the index for scheduled air passenger transportation more than offset a decrease for scheduled air cargo transportation. Airlines were generally profitable in 1997, on the

strength of a robust economy and high load factors (the percentages of seats filled on a plane). The elimination of the

Federal excise tax on January 1 caused the index for scheduled air transportation to rise in the first quarter. The increase

occurred because the airlines failed to pass on this tax savings

to consumers. Since the Producer Price Index captures price

changes excluding taxes, eliminating the tax resulted in an

increase in the index when the airlines failed to lower ticket

prices. After the airlines experienced strong profits and 2

months of a tax-free windfall, the 10-percent Federal excise

tax was reinstated on March 7; the airlines passed along only

a portion of the tax to consumers, thereby causing the index

to decline for March. The Federal excise ticket tax was restructured again on October 1. The new tax became 9 percent, with the addition of a fee of $1 per segment. (A segment

begins with a takeoff and ends with a landing.) The year also

was characterized by labor unrest, particularly from pilots,

and airlines were faced with making concessions to avoid

shutdowns.

The index for airports, flying fields, and airport services

rose 4.2 percent in 1997, following a 5.3-percent increase in

1996. Leased space for concessions moved up 13.7 percent

over the year. This index is subject to large swings; leases for

concessions are often based on a percentage of gross revenue

and are highly indicative of passenger traffic and the spending habits of passengers. As in 1996, airport managers chose

to raise prices for services rendered to air passenger and air

cargo carriers during 1997 in order to fund airport improvements. The index for other commercial airport services decreased 2.6 percent in 1997; unlike other operations, the aviation side of the airport is not expected to generate a profit.

Airports used passenger facility charges, as well as airline

ticket taxes, to help fund costly improvements.

Although the index for commissions for airline arrangements declined 4.7 percent in 1997, a 19.0-percent advance

in the index for nonairline arrangements caused the overall

index for travel agencies to rise 0.9 percent from December

1996 to December 1997. The system of capping commissions

to travel agencies has greatly restricted compensation to

agents since 1995. Among nonairline arrangements, bookings

for cruises showed the largest increase (35 percent).

The radio broadcasting index moved up 4.9 percent in 1997

after increasing 8.7 percent in 1996. The higher rise in 1996

resulted from two stellar events: the summer Olympics in Atlanta and the presidential election in November. The increased

demand associated with these events permitted radio broadcasters to raise their rates more quickly than usual; previously,

these companies could increase their rates only in response to

changes in programming costs. In addition, the Telecommunications Act of 1996 ignited a merger frenzy within the industry. The consolidation of radio-broadcasting stations allowed broadcasters to pass along higher rates to advertisers at

all levels. Radio broadcasters benefited from three market advantages. First was the greater ease of purchasing advertising, compared with the other media. Second, there arose a

greater awareness of radio’s cost-effectiveness. Finally, the

medium benefited from a greater awareness of its ability to

target key demographic groups.

From 1996 to 1997, the index for cable and other pay television services rose 4.3 percent. This hike resulted primarily

from rising cable rates, reflected in a 4.1-percent increase in

the price of subscriber services. In addition, charges for advertising services increased 8.2 percent, and charges for network affiliate services advanced 2.7 percent. Throughout

1997, there was much concern across the country over rapidly rising cable rates. Many consumer groups complained
Monthly Labor Review July 1998 13

that rates were rising at the fastest pace ever, with some even

increasing at twice the rate of inflation in the overall economy.

As the year drew to a close, these same groups demanded that

the Federal Communications Commission put a freeze on

cable rates.

From December 1996 to December 1997, the index for

operators and lessors of nonresidential buildings increased

1.9 percent, compared with a decrease of 0.9 percent a year

earlier. The index for operators and lessors of office property

rose 2.9 percent in 1997, mostly due to the lack of new office

property development, which palls in the 1990s in comparison to the excess buildup in the 1980s. In the 1990s, nationwide vacancies were in the 8- to 10-percent range. The index

for operators and lessors of retail property rose 1.3 percent in

1997, and the index for operators and lessors of industrial

property increased 0.9 percent.

The hotel and motel index advanced 4.2 percent from

December 1996 to December 1997, compared with an increase

of 4.5 percent over the previous 12 months. In 1997, charges

for guest room rentals moved up 5.7 percent; prices for food

and beverages rose 2.9 percent; rates for other guest room rentals, including casino hotels, increased 11.4 percent; and the

index for limited-service hotels and motels advanced 7.8 percent. The industry as a whole experienced a year of high occupancy rates as a result of a booming economy, with robust demand from both the business travel and leisure travel sectors.

As in 1996, revenues for help supply services were robust

in 1997. The index for the industry increased 1.7 percent in

1997. The unemployment rate was relatively low for most of

the year, and fierce competition among agencies prevented

charges from rising higher.

The index for passenger car rentals, without drivers, advanced 15.0 percent in 1997 after falling 9.3 percent in 1996.

The 1997 increase was largely the result of a 17.3-percent rise

in the index for passenger car rental, except replacement. During 1997, the passenger car rental industry was plagued with

legislative proposals to increase taxes at both the State and

local level, ongoing class-action discrimination suits, industry restructuring, and increased competition for market share.

Price increases for health care services slowed from 1.7

percent in 1996 to 1.0 percent in 1997. The index for general

medical and surgical hospitals mirrored this slowdown;

however, the index for offices and clinics of doctors rose

somewhat more in 1997 than in 1996. Prices for home health

care services moved up 7.9 percent in 1997, with charges for

home health aides increasing the most of all types of payors.

In 1997, pressures by managed care companies on the health

care industry continued to help lower prices and keep inflation at a minimum. There was a growing trend of physicians

consolidating into larger organizations. Doctors increasingly

had to compete for managed care dollars in this new environment by creating their own networks, which enhanced their

bargaining power. Physician networks bring together partners

with management skills, managed care expertise, information

systems, and capital. With the increasing presence of health

maintenance organizations in the health care industry, physicians have continually moved away from traditional fee-forservice arrangements into capitation arrangements, or fixed

periodic prepayments per member. While the Producer Price

Index does not capture changes in capitation rates, this type

of payment is becoming increasingly popular and contributes

to the reasons physicians experienced smaller increases in

revenue.

The newly introduced index for legal services increased

4.1 percent in 1997. This index was rather stable throughout

the year, except in January, when most law firms make changes

in their fee schedules that become effective with the new calendar year. Also introduced in 1997 were indexes for engineering and architectural services. The index for engineering

design, analysis, and consulting services moved up 3.2 percent in 1997; the index for architectural design, analysis, and

consulting services increased 3.0 percent from December

1996 to December 1997.

The index for accounting, auditing, and bookkeeping services increased 2.3 percent in 1997, reflecting semiannual adjustments in January and July to such firms’ billing rates and

pricing strategies. In addition to being affected by a strong

economy, 1997 prices changed because the proposed mergers of the big six accounting firms in the industry resulted in

intense competition among these top firms, which were willing to grant deep discounts to clients in order to land big

accounts.