Prices for intermediate foods and feeds declined 4.5 per-
cent in 1994 after rising 5.5 percent in the previous year.
The index for prepared animal feeds turned down 10.6 per-
cent after increasing 6 percent in 1993. Prices for pork, flour,
natural and processed cheese, condensed and evaporated
milk, and fluid milk products also declined after 1993 ad-
vances. The indexes for crude vegetable oils and confection-
ery materials rose less than they had last year.

Prices received by domestic producers of finished con-
sumer foods rose 1.1 percent in 1994, much less than the
2.4-percent advance from December 1992 to December
1993, Within the consumer foods category in 1994, the slow-
down in price increases was led by an 11.1-percent decline
in pork prices, which had risen 4.3 percent in the previous
year. Prices also turned down over the year after increasing
in 1993 for dairy products, fresh fruits and melons, processed
young chickens and turkeys, milled rice, processed fruits and
vegetables, confectionery end products, and pasta. Price in-
creases slowed for shortening and cooking oils. Prices sky-
rocketed for fresh and dry vegetables at the close of the year
due to inclement weather on both coasts of the United States.
The index for bakery products rose 2.3 percent, about as
much as it had in the previous year. By contrast, prices for
roasted coffee jumped almost 50 percent in 1994 after in-
creasing 5.5 percent in 1993. Prices turned up in 1994 after
falling in 1993 for unprocessed packaged fish and seafood,
and for soft drinks. Prices declined for beef and veal and for
eggs for fresh use, but not as much as they had a year earlier.

Slaughter hogs and pork. Prices for slaughter hogs de-
clined 21.3 percent in 1994 after falling 5 percent in 1993.
Falling slaughter rates pushed prices higher at the start of
the year. At the end of the first quarter, though, slaughter
rates started to pick up, and prices moved sharply lower un-
ti] late autumn. By June, prices were 7.3 percent below their
December 1993 levels, after adjustment for seasonality.

Declining slaughter rates and bad weather that caused
producers to delay marketings forced pork prices higher
throughout most of the first quarter of 1994. Beginning in
March, however, pork prices declined in 8 of the next 9
months as record production ensured ample supplies. Prices
rebounded somewhat in December, when holiday demand
helped reduce oversupplies.

Dairy products. Prices for dairy products declined 2.0 per-
cent in 1994 after rising 3.1 percent in 1993. Prices were
relatively high early in the year, reflecting healthy demand
coupled with production increases that were less than ex-
pected. By the middle of the second quarter and into the
third, however, fluid milk production increased and demand
for cheese slowed, causing prices to decline. After a slight

MT... percent changes in Producer Price

Indexes for selected food items, 1990-94

Index 1990 | 1991 | 1992 | 1993 | 1994
Finished consumer
foods .. 26) -15 16 | 24 14
Pork .. 125 | -169 -3 | 43 | 111
Dairy products 7A 64} 22| 31 | 20
Fresh fruits and
MOIONS oo. seeseeeeeeeeenee 11.0 17.3 15.7 ne 14.2
Fresh and dry

16.3 67.4 | 277 25.6
6.2 +469 55 49.8

~2 -5 | 55 | 45

29 s| 60 | -106

-13.9 54 33 4d

13.4 5) 86 | 141

40 | -84 | 104 22

Refined sugar 3] 476) -12)] -6 8
Crude foodstutts,

42 | 58 ao} 72) 94

- — | 314) 862 | ~22

-8| 22 | -104 | 347 | -224

“82 | -195 76 | 60 | -213

37 | -74 33 | 201 | -18.1

82) 1) -72) 67 | 62

Note: Dash indicates data not available.

upturn late in the summer, prices for fluid milk continued to
decline as supplies increased.

Grains and feeds. Prices for grains declined 18.1 percent
in 1994, after rising 30.5 percent in 1993. The 1994 decline
was broad-based. The Louisiana rough rice index fell 42.2
percent, chiefly because favorable weather conditions resulted
in a better than expected crop. Corn prices declined sharply
due to reduced export demand and a record crop. Wheat prices
fell 5.6 percent as a result of lower export demand and fa-
vorable growing conditions that led to greater yields.

Prices for prepared animal feeds fell in 1994 after increas-
ing in 1993, At the beginning of the year, these prices moved
higher on the strength of reduced soybean yields caused by
harsh weather the previous summer, and of low stockpiles of
and strong export demand for corn (which is a soybean sub-
stitute in animal feeds). Near the end of the first quarter and
through most of the second, prices declined in response to
reduced demand and a favorable growing and planting sea-
son. Prices increased slightly at the start of the summer as
supplies became tighter and export demand increased. Dur-
ing the second half of the year, though, prices for animal
feeds declined in every month as favorable growing condi-
tions produced record harvests.

Monthly Labor Review June 1995 25



Producer Prices

and for refrigerated warehousing and storage. However,
charges for general warehousing and storage were up 1.3
percent over the year as prices rose for self-service storage,
reflecting improved demand for all sizes of storage units
throughout the year.

Price increases for leased space for concessions and for
services rendered to air passenger and cargo carriers caused
the index for airports, flying fields, and airport services to
increase 1.1 percent in 1994; this index moved up 0.6 per-
cent in the previous year. In 1994, concessionaire’s rents,
which are escalated on a percentage of the vendor’s gross
receipts, inched up steadily for most of the year.

The index for travel agencies declined 2.7 percent in 1994,
somewhat less than it had risen in 1993. In 1994, domestic
airlines continued ongoing fare wars. This competition has
caused much volatility in the size of commissions received
by travel agents, which were based on airline ticket prices
that fluctuated through the year. The index for tour opera-
tors advanced 1.2 percent in calendar 1994, following a 1.9-
percent rise in 1993,

The hotels and motels index increased 1.4 percent from
December 1993 to December 1994. Prices for guest room
rental, which comprises the largest part of this industry, in-
creased by about 1 percent, while prices of food and bever-
ages increased about 4 percent, Other guest services, mostly
casino gaming receipts, registered a 1.4-percent decline. Ca-
sino gaming in Nevada and New Jersey faced increased com-
petition in 1994 as more States legalize this form of gam-
bling. Slot machine receipts from New Jersey posted the larg-
est decreases over the year.

The index for crude petroleum pipelines increased 13.7
percent in 1994, reflecting sharp increases for all pipeline
categories. During this same period, the index for refined
petroleum pipelines moved up 1.8 percent. In 1993, the crude
and refined petroleum pipelines indexes showed little
change.

The indexes for employment agencies and help supply
services, which were introduced in July 1994, edged up mod-
estly during their first 6 months of publication. This upward
movement reflected strong demand for such placement
services.

Fees for postal service were unchanged in 1994. By
yearend, across-the-board price increases were announced
for domestic postal service, to take effect on January 1, 1995.
This was the first hike in domestic fees since February 1991,
when the index for U. S. postal service increased 4.4 percent.

The cable and other pay television services index inched
down 0.1 percent in 1994, mostly as a 1.3-percent decline in
the index for subscriber services offset a 5.5-percent boost in

30 Monthly Labor Review June 1995

the advertising index. In February of 1994, under the Cable
Television Consumer Protection and Competition Act, the
Federal Communication Commission (FCC) ordered a 7-per-
cent reduction in rates for basic service by July 15, 1994.
This decline, reflected in the August index, was short lived,
as some cable companies readjusted their prices upward to
meet the FCC’s benchmark prices for basic service. The read-
justment continued through October. In late November, the
FCC agreed to allow a cable company to increase charges
over a 2-year period if the company adds six or more new
channels to its basic lineup. Previously, the FCC only permit-
ted rate increases that reflected inflation, but had permitted
companies to tack a 7.5-percent increase on to licensing fees.

The radio broadcasting index increased 6.8 percent from
December 1993 to December 1994, following a 4.3-percent
tise a year earlier. In 1994, much of the increase was due to
higher rates for local station commercial advertising. Prices
were low at the start of the year, then rose from February to
May as demand increased. They fluctuated during the sum-
mer months, then leveled off in September, and by Novem-
ber and December, had slightly exceeded the levels attained
during the summer months.

In 1994, the index for offices and clinics of doctors of
medicine rose 4.1 percent, on the strength of higher fees for
both medicare and nonmedicare treatments. The largest in-
crease was for pediatric treatments, for which prices ad-
vanced by about 11 percent. Prices for medicare treatments
increased in January when the Health Care Financing Ad-
ministration implemented the Resource Base Relative Value
Scale payment mechanism for physician services. The 4.7-
percent increase for medicare services represents the advance
in total physician expenditures under the medicare program
for all services and physicians in the United States.

The hospitals index rose 3.6 percent in calendar 1994,
after advancing 3.9 percent in the previous year. The index
for medicare inpatients moved up 1.3 percent, while its med-
icaid counterpart increased 3.9 percent. Medicare reimburse-
ments are determined by the Department of Health and Hu-
man Services; the rates for fiscal year 1995 were effective
October 1, 1994. Medicaid rates, however, differ by State
and are subject to change throughout the year.

Following a 17.5-percent advance in 1993, prices for
scrap metal collection were up 22.2 percent in 1994, a re-
sponse to robust demand from an improving economy, as
well as soaring prices for metals. By contrast, prices for waste
paper collection declined for the second consecutive year.
Prices fell sharply in the first part of the year but turned up
in October when demand began to increase as prices for
newsprint jumped. oO



early in the year, as expansion of European production ca-
pacity resulted in lower import prices and higher inventory
levels, By the end of the first quarter, prices rebounded some-
what as inventories started to shrink, demand improved, and
prices rose for gasoline and petroleum derivatives — inputs
in the chemical manufacturing process.

In the second quarter, European plant shutdowns helped
boost demand for U.S. exports of organic chemicals. Do-
mestically, strong demand coupled with a dearth of invest-
ment in new capacity helped force both speculative and con-
tract prices higher. By midyear, primary prices were more
than 14 percent above their December 1993 levels.

In the second half of the year, continued strong demand,
higher gasoline prices, a fire in a major production facility,
and low inventories pushed prices of organic chemicals
higher in each succeeding month. The price jump for inter-
mediate organic chemicals was due chiefly to tight supplies

and the lack of new capacity to expand production. At.

yearend, capacity was so constrained, because prices had
been at such depressed levels during the 1980's, that there
was little incentive for firms to try to boost production.

Durable manufacturing materials. In 1994, prices for ma-
terials for durable manufacturing advanced 9.8 percent, up
from 2.5 percent a year earlier. This acceleration was led by
the index for copper and brass mill shapes, which climbed
36 percent after declining 10.6 percent in the previous year.
Prices for aluminum mill shapes, aluminum, copper, and
flat glass also turned up after falling a year earlier. In addi-
tion, the plywood index rose more than in 1993, and lead
prices increased after showing no change in the prior year.
By contrast, prices for hardwood lumber advanced about 2
percent after jumping by over 30 percent from December
1992 to December 1993. Indexes for both hot rolled steel
sheets and bars also rose less than they had in 1993.
Aluminum prices increased 64.4 percent in 1994, after
falling about 11 percent in 1993. Prices started the year at
very low levels due to an excess of inventory. Exports of
aluminum from Russia increased as that country’s domestic
demand declined and her need for hard currency escalated.
By the end of the first quarter, world demand began to pick
up and major producers (the United States, Canada, Austra-
lia, Norway, The European Economic Community, and Rus-
sia) were negotiating a ‘memorandum of understanding’ to
cut production in an effort to boost prices. By the second
quarter, reduced domestic production and fears that the
implementation of the ‘memorandum’ would reduce world
production levels sent aluminum prices higher. By midyear,
prices had risen over 23 percent. In the third quarter, re-
duced inventories translated into higher aluminum prices,
as did greater demand from motor vehicle producers, who
have been increasing the amount of aluminum in their ve-

hicles to reduce weights and boost fuel efficiency. In the
fourth quarter, drought conditions in the Pacific Northwest
forced power companies to ration power to industrial users.
Production was further curtailed because most major alumi-
num producers are located in this region. This caused some
anxiety among both manufacturers and speculators, who
feared that prices would surge even further in the future.
This concern further drove up demand and boosted prices by
more than 16 percent in the fourth quarter alone.

Prices for copper rose 68.2 percent in 1994 after declin-
ing almost 20 percent in 1993. In the first quarter, demand
was recovering in the aftermath of the most recent reces-
sion, and the resurgence in construction activity further re-
duced copper stockpiles, which were at only 8-week levels.
By March, copper prices were almost 14 percent higher than
they had been the previous December. Prices began to fall at
midyear, reflecting fears that rising interest rates would slow
the construction market, but then rebounded strongly
through the second and third quarters. The upturn resulted
from reduced capacity as plants shut down for scheduled
maintenance. This further drew down inventories at a time
when demand from overseas customers and automotive
manufacturers was strong. After another brief lull at the be-
ginning of the fourth quarter, prices again surged higher as
European stockpiles fell and domestic mills were running at
near full capacity. Even at their high rate of capacity, they
were unable to keep up with the continued strong construc-
tion demand. A mine cave-in in Zaire and an Australian
smelter strike further worsened shortage fears near the end
of the year.

Prices for lead rose 37.5 percent in 1994 after remaining
unchanged in 1993. Eighty percent of the lead on the do-
mestic market is used in the manufacture of motor vehicle
batteries. With the cold winter of 1993-94, demand for re-
placement car batteries surged in the beginning of the year.
As a result, lead prices rose by more than 6 percent in Janu-
ary 1994 alone. By midyear, demand for new batteries from
automobile manufacturers, gearing up for the new model
year, helped push lead prices higher. In the fourth quarter,
demand for replacement batteries jumped again, as some
consumers anticipated another harsh winter.

Construction materials. Mortgage rates remained rela-
tively low in 1994, and many consumers took advantage of
this by either refinancing existing mortgages or purchasing
new homes. The low rates boosted housing starts to 1.5 mil-
lion units, up 12.9 percent over 1993 levels, and the greatest
number of starts in any year since 1988. Spending for new
market-rate apartment buildings, a favorite among private
investors, was up 27.8 percent compared to 1993. Private
nonresidential construction spending was 8.6 percent higher
than in the prior year, reflecting the plentiful supply of bank

Monthly Labor Review June 1995 27



Producer Prices

fst | Annual percent changes in Producer Price
Indexes for selected intermediate and crude
materials other than foods and energy, 1990-94

Index 1990 1991 1992 | 1993 1994
Intermediate goods
‘other than foods

08 12 1.6 52

48 3 8 10.5

63] 160} -61 48.0

23.3 57 | -14.0 98.1

8.7 o “7 15.7

37 12 25 9.8

66) -12 | -19.7 68.1

25.8 74 | 114 644

67) 85 0 97.5

a 27 5.0 39

62 44 | 128 308

-2.8 -8 | 34 13.8

1.7! 23.1 | 308 06

76 57} 107 17.3
-174| 147 | 123 | 1796
7} -16.9 9 | -14.0 70.3

124} -2a7| -28¢| 29 | 340

Intermediate industrial materials

The Producer Price Index for Intermediate Materials, Sup-
plies, and Components rose 4.4 percent in 1994 after in-
creasing | percent over the preceding year. The indexes for
nondurable manufacturing materials turned up after falling
in 1993. Prices for durable manufacturing materials rose
more in 1994 than they had in the previous year. By con-
trast, prices for construction materials rose less in 1994 than
in 1993. (See table 5.)

Nondurable manufacturing materials. The index for ma-
terials for nondurable manufacturing rose 10.4 percent in
1994, following a decrease of 0.6 percent in 1993. Prices
rebounded in 1994 for many petroleum-derived materials,
driven by a combination of higher oil prices and stronger
demand for petroleum derivatives. The basic organic chemi-
cals index rose 15.7 percent in 1994, after falling 0.7 per-
cent in 1993. Price upturns were also registered for plastic
resins and materials, paperboard, woodpulp, processed yarns
and threads, and for inedible fats and oils. In addition, in-
dexes for paper and nitrogenates rose more in 1994 than in
the preceding year.

Prices for pulp and paper products increased 13.8 percent
in 1994, after falling 1.5 percent in 1993. Price increases in
this category were broad-based.

26 Monthly Labor Review June 1995

Woodpulp prices surged 38.1 percent, following a 14-per-
cent decline in 1993. As the year began, many woodpulp
mills took downtime in an effort to reduce supplies, pushing
Prices upward. When users of woodpulp realized what was
happening in the industry, many started replenishing their
inventories, fearing further shortages. The resulting increase
in demand forced prices even higher.

During the second quarter, Russia closed several of her
pulp producing mills, which put a further strain in supplies.
By midyear, prices were more than 14 percent higher than
they had been 6 months earlier, and mills were running near
full capacity. As summer wore on, labor troubles in the Ca-
nadian Pacific Northwest and an increase in demand from
Europe and the Far East for inventory replenishment further
exacerbated the already tight supply situation. Consequently,
prices rose at an even quicker pace than they had earlier in
the year. During the second half of 1994, woodpulp prices
increased 25.5 percent. Over the year, prices rose in every
month.

Paperboard prices rose 20.1 percent in 1994, following a
small decline in 1993. Prices for paperboard remained de-
pressed through most of the first quarter of 1994, as buyers
resisted manufacturers’ attempts to pass along cost increases.
As the economic recovery started to pick up steam in the
second quarter, paperboard prices followed suit—an increase
in industrial production usually means greater demand for
boxes and the paperboard used to produce them. During the
second half of the year, rising material costs and increased
demand pushed paperboard prices higher in each successive
month.

After posting a 0.2-percent increase in 1993, paper prices
rose 11.3 percent in 1994. Price advances during the second
half of 1994 accounted for the full yearly increase. The first
quarter of 1994 remained slow for paper producers as they
discounted away the price increases they had implemented
in 1993 in order to cope with increased imports and higher
inventories. By the end of the second quarter, producers
started taking some operations out of production in an effort
to curb paper supplies. In the third quarter, reduced invento-
ties led to greater demand and price increases started to take
hold. By the fourth quarter, demand was so strong, both do-
mestically and internationally, that producers were not only
seeking immediate price increases, but were announcing fur-
ther increases into the new year. As mill inventories became
depleted, production increased, but manufacturers were still
unable to keep up with the increased demand and avoid a
backlog of orders.

Prices for basic organic chemicals surged 15.7 percent in
1994 after showing virtually no change in the previous 3
years. The main forces driving the 1994 advance were the
prices of primary and intermediate components, which were
up 42 and 32.6 percent, respectively. Primary prices sagged



most 11 percent higher than in December 1993. In the sec-
ond half of the year, prices of inedible fats and oils contin-
ued to rise in each month. Much of the pressure on these
prices stemmed from higher prices for tallow, which is the
major component of this index. Tallow is used as a substi-
tute for palm oil in the manufacture of soap. Palm oil costs
Tose substantially as supplies from the Far East fell off

sharply.

Net output of industries

Manufacturing. The Producer Price Index for the net out-
put of the domestic manufacturing sector increased 2.4 per-
cent from December 1993 to December 1994, following a
0.8-percent rise a year earlier. Prices for the tobacco manu-
factures industry index inched up just 0.3 percent after de-
clining 22.8 percent in 1993. The petroleum refining indus-
try group index also turned up (8.9 percent) after falling
(12.8 percent) in the previous year. Prices for the paper prod-
ucts industry group increased significantly after decreasing
in the previous year. In 1994, price increases accelerated for
most of the other industry groups in the manufacturing sec-
tor. Prices for the lumber and wood products industry group,
however, advanced much less in 1994 than in 1993.

Mining. The index for the net output of all mining indus-
tries fell 1.0 percent in calendar 1994 following a 9.4-per-
cent decrease a year earlier. Price declines slowed dramati-
cally for the oil and gas extraction industry group index,
from 12.8 percent in 1993 to 3.2 percent in 1994. Prices
continued to rise for the nonmetallic minerals mining in-
dustry group. By contrast, prices skyrocketed by 36 percent
for the metal mining industry group in 1994 after falling 7.2
percent in the previous year. The index declined much more
than in the previous year for the bituminous coal and lignite
mining industry group.

Services. Among other industries, prices for railroad line
haul operations increased 0.4 percent in 1994 after rising
0.7 percent the year before. Demand for rail transportation
was good in 1994 despite the horrible winter weather at the
beginning of the year. The poor weather sorely tested the
industry’s ability to handle an unexpected increase in traffic
during the first months of the year. The unforeseen demand
put pressure on a fairly depleted industry capacity, and re-
sulted in rate hikes. The surge in railroad traffic in 1994 can
be attributed to a variety of factors including: the passage of
NAFTA; high demand for low-sulfur coal from Wyoming’s
Power River Basin; record corn and soybean production; an
effective cost control system implemented by the railroad
industry; and greater success in tailoring services to meet
shippers’ needs.

In 1994, prices for deep sea foreign transportation de-
clined, while those for deep sea domestic transportation of
freight increased. There are few U.S. carriers left in the for-
eign transportation category and those that remain continue
to lobby Congress for increased subsidies to remain com-
petitive with their foreign counterparts, Domestic industry
Operators have threatened to reflag their vessels in foreign
countries that have less stringent requirements than those
imposed by the U. S. Coast Guard.

For the domestic deep sea transportation category, indus-
try rates increased in 1994 as several private carriers opted
to have independent carriers transport the crude petroleum
of their parent companies. This trend represents a departure
from typical industry behavior, as private carriers have his-
torically transported for some of the larger industry partici-
pants. Private carriers have not replaced aging vessels in
their fleets, opting instead to hire less costly independent
carriers.

The water transportation of freight (not elsewhere classi-
fied) index increased by about 16 percent in 1994 after de-
clining 3.1 percent in 1993. Most of the 1994 increase was
due to charges for Mississippi River transportation of farm
products, which more than doubled. With 1994’s bumper
harvest, and the resultant decrease in available barge space,
significant rate increases were registered during the year.
These rate increases allowed some operators to recoup losses
from the disastrous 1993 floods that kept part of the Upper
Mississippi River closed for weeks. The tugging and towing
services index also increased in 1994 on the strength of
higher charges for vessel docking services and auxiliary har-
bor services.

The index for the trucking and courier service industries
moved up 2.7 percent in 1994, led by increases for long dis-
tance trucking. In 1994, this industry experienced a 23-day
Teamsters’ strike, one of the longest and costliest in truck-
ing history. As a result of the strike, there was a shift in
market share from unionized to nonunionized trucking
operations.

The index for truck rental and leasing increased 2.2 per-
cent in 1994, slightly more than it had fallen in 1993. In
1994, truck rental prices increased sharply as the result of a
substantial increase in demand. Truck lease rates, which are
negotiated for much longer terms than rentals, moved up by
about | percent. The index for passenger car rental, without
drivers, advanced 2.5 percent from December 1993 to De-
cember 1994, after falling as much in the previous year. This
index rose during peak travel and vacation periods and fell
during off-travel periods. Much of the increase in the index
for passenger car rentals in the latter months of the year
reflected increased costs for 1995 fleet purchases.

Very modest upward movement was registered in 1994
for the indexes for farm product warehousing and storage

Monthly Labor Review June 1995 29



Producer Prices

William D. Thomas
and
Scott Sager

William D, Thornes and
Scott Sager are
economists in the
Division of Industrial
Prices and Price
Indexes, Bureau of
Labor Statistics.

Producer price
highlights, 1994

Price increases at the producer level
were generally moderate, as the Nation completed
another year of sustained economic growth

finished goods rose 1.7 percent between
December 1993 and December 1994, fol-
lowing increases of 0.2 percent in 1993 and 1.6
percent in 1992. The index for energy goods
turned up 3.5 percent in 1994 after declining in
each of the previous 3 years,while prices for
foods advanced 1.1 percent following somewhat
larger increases in both 1993 (2.4 percent) and
1992 (1.6 percent). Price increases for finished
goods other than foods and energy accelerated
to 1.6 percent in 1994 from 0.4 percent in 1993;
these prices had risen 2 percent in 1992.
Developments at earlier stages of processing
were mixed. The Intermediate Goods price in-
dex advanced 4.4 percent in 1994 after increas-
ing 1 percent in each of the preceding 2 years.
In contrast, the Crude Goods price index de-
clined 0.5 percent last year after rising by 0.1
percent in 1993 and 3.3 percent in 1992. At both
the intermediate and crude stages of processing,
prices for food-related materials tumed down in
1994 after advancing a year earlier, while price
increases for nonfood nonenergy materials
slowed significantly. Prices for energy goods
rose at the intermediate stage after falling a year
earlier, but declined much fess at the crude stage,
following a steep decline in 1993. (See table 1.)

Pr received by domestic producers of

Economic background

The U.S. economy gained strength throughout
1994, continuing much the same pace of growth
experienced toward the end of 1993. A key fac-
tor driving this expansion was the increase in
outlays for fixed investments by business, par-

ticularly spending on capital goods such as com-
puters and peripheral equipment, and also for
cars and trucks. (For the past 3 years, the rate of
increase in spending for computer equipment
has been more than 4 times that for expendi-
tures on other types of capital equipment.) In-
vestment in nonresidential structures also picked
up, despite the raising of short-term interest
rates several times during the year.

In 1994, the growth of the economy was also
evident in the Federal Reserve Board’s capacity
utilization index for mining, manufacturing,
and utilities. This index stood at 84.9 in Decem-
ber 1994, its highest level in any month since
March 1989, In addition, personal consumption
spending rose 3.4 percent in 1994, fueled by an
8.1-percent advance in purchases of consumer
durables. Growth in consumer expenditures for
durables reflected increased purchases of furni-
ture and household durables, such as video, au-
dio, and computer equipment, as well as outlays
for cars and light trucks. By the end of 1994,
consumer spending had surged to a 5-year high,
reflecting the ready availability of credit— in-
cluding the proliferation of credit card programs
that offered cardholders rewards, such as direct
rebates on purchases or frequent-flyer miles
based on the amounts charged.

Some vigor was evident in the interest-sensi-
tive residential housing market, which was
buoyed by growth in incomes and employment
over the year. Housing starts attained their high-
est level since 1988, and both single-family
home starts and sales of existing single-family
homes registered their largest annual gains in
over 15 years. Despite a slowdown in residen-

Monthly Labor Review June 1995 21



Producer Prices

credit and reduced vacancy rates. The value of public con-
struction projects in 1994 was 3.1 percent higher than it had
been a year earlier, mostly as a result of the reconstruction
initiatives in the aftermath of the Los Angeles earthquake
early in the year.

After advancing 5 percent in 1993, the Producer Price
Index for construction materials rose more slowly, by 3.9
percent, in 1994. The softwood lumber index fell 9.6 per-
cent in 1994 after rising over 30 percent a year earlier. This
1994 decline was the largest since 1981. Prices for millwork
and for air conditioning and refrigeration equipment rose
less from December 1993 to December 1994 than they had
in the previous 12 months. The nonferrous wire and cable
index, however, moved up 13.8 percent in 1994 after declin-
ing 3.1 percent in the previous year. Prices for asphalt felts
and coatings also turned up in 1994 after falling a year ear-
lier. Indexes for fabricated structural metal products, gyp-
sum products, plastic construction products, plywood, and
concrete products all rose more than they had in 1993,

Prices for softwood lumber declined 9.6 percent in 1994
after rising 30.8 percent in 1993. After a slight rise early in
the year, prices declined from the middle of the winter
through the middle of the second quarter because the weather
was poor and also because higher interest rates dampened
demand, Prices turned up at the end of the second quarter
and continued to rise into the middle of the third as demand
increased. At the end of the third quarter and throughout the
remainder of the year, prices declined as weather improved
in timber harvesting areas, demand slackened with the ap-
proach of the holiday season, and interest rates continued to
rise.

Prices for gypsum products rose 30.8 percent in 1994 hav-
ing increased 12.8 percent in the previous year. After de-
clining in January, the index increased for the next 11
months, reflecting robust demand created by construction
activity, tight input supplies that resulted from the 1993
Midwest floods, and decreased production capacity. By the
end of the year, with the economic turnaround in full gear,
demand was at an 8-year high and production was taking up
over 90 percent of existing capacity.

Prices for nonferrous wire and cable increased 13.8 per-
cent in 1994 after declining 3.1 percent in 1993. Price in-
creases occurred in every month except April. Prices rose on
the strength of higher costs for primary copper, a major
input in the manufacturing process, and on strong de-
mand from both the construction industry and power utility
companies.

Basic industrial materials

The Producer Price Index for crude nonfood materials less
energy climbed 17.3 percent from December 1993 to De-

28 Monthly Labor Review June 1995

cember 1994, well more than its 10.7-percent advance in
1993, Prices for aluminum base scrap rose by about 85 per-
cent after falling about 6 percent a year earlier. Indexes for
wastepaper, copper base scrap, and copper ores also advanced
sharply after substantial declines in 1993. Prices for raw cot-
ton and cattle hides rose more than in the preceding year. By
contrast, the iron and steel scrap index remained unchanged
in 1994 after rising almost 45 percent in 1993. Prices for
softwood logs, bolts, and timber moved up far less than they
had over the previous year.

Prices for wastepaper surged 179.6 percent in 1994 after
declining 17.6 percent in 1993. Prices had been at such low
levels over the past 2 years that even small dollar amount
increases translated into large percentage changes. Prices
increased in 10 out of 12 months in 1994. The opening of
new recycling mills created extra demand. Supplies were
teduced early in the year as the result of harsh winter
weather. Throughout the rest of the year, new mills upset
traditional supply channels, the usage rate of recovered pa-
per was expanded, and exports increased. With pulp prices
rising throughout the year, wastepaper was seen as a viable
substitute, with the result that its price nearly tripled.

Nonferrous scrap prices increased 70.3 percent in 1994
following a 14-percent decline a year earlier. Prices rose in
each month during 1994, The year’s increase was led by the
upturn in aluminum base scrap prices, although copper base
scrap prices, which advanced 52.3 percent after falling more
than 20 percent in 1993, were also a factor. Early in the year,
aluminum prices rose on increased demand from sheet can
producers. Demand from secondary smelters for both alumi-
num and copper, as well as increases in aluminum ingot and
copper cathode prices (scrap and primary metals are substi-
tutes in many cases) also pushed the nonferrous scrap index
higher in the first half of the year. By midyear, prices were
over 31 percent higher than they had been in December 1993.
Throughout the second half of the year, rising export de-
mand tightened supplies and continued increases in primary
metal prices pushed scrap prices higher each month.

The increase in prices for raw cotton accelerated to 34.9
percent in 1994 from 12.9 percent in 1993, While the do-
mestic harvest was near record levels, domestic consump-
tion was at a 50-year high, and cotton’s share of fiber use
was nearly 80 percent, its highest level in over 25 years. A
poor Asian crop—the result of insect infestation—and de-
pleted world stocks increased export demand. This fueled
tumors that export orders would be larger in the first quarter
of 1995.

Prices for inedible fats and oils rose 48.0 percent in 1994
after declining 6.1 percent in the prior year. Prices rose mod-
erately in the beginning of the year, before easing downward
at the end of the first quarter. After a sluggish start in the
second quarter, prices again rose. By midyear, they were al-



Producer Prices

Energy

The decline in the index for crude energy materials slowed
to 0.1 percent in 1994; the index had fallen 12.3 percent in
1993. Crude petroleum prices rose 21.1 percent in 1994, af-
ter decreasing 27.7 percent in the previous year and 2.4 per-
cent in 1992, The decline in the natural gas to pipelines
index, however, accelerated to 14 percent in 1994 from just
under 4 percent the year before. The coal index turned down
2.1 percent in 1994, after edging up 1 percent the year be-
fore. (See table 3.)

The continued decline in the natural gas to pipelines in-
dex in the first half of the year resulted from both higher
domestic supplies and increased imports. Late in the year,
supplies were at very high levels because of moderate tem-
peratures—the summer had been cool and the autumn
warm—and the forecast of unseasonably high temperatures
for the winter. As a result, pipline owners asked some pro-
ducers to remove their gas from their storage facilities, in
effect forcing them to burn some of it.

Crude petroleum prices were pushed higher in the first
half of the year by lower production, reduced imports, and
higher demand. This state of affairs was due, at least in part
to supply disruptions caused by leaks on platforms in the
North Sea and leaks in pipelines near Los Angeles after the
earthquake, an OPEC agreement to freeze production, and
fears of tighter supplies due to a strike by Nigerian oil work-
ers. By July, prices were 43 percent higher than in Decem-
ber 1993. Throughout most of the second half of the year,
though, prices declined as OPEC production levels rose above
the organization’s self-imposed ceiling, imports from non-
OPEC countries increased, and demand was curbed by unsea-
sonably warm weather in most parts of the Nation.

The index for intermediate energy goods rose 2.9 percent
in 1994 after falling 4.2 percent in 1993. Among the catego-
ries within intermediate energy goods, gasoline posted a
sharp price increase in 1994, following a large decline in the
previous year. Indexes for diesel fuel, jet fuels, liquefied pe-
troleum gas, residual fuel, and industrial power also turned
up in 1994, while prices for commercial natural gas fell af-
ter rising in 1993.

Residual fuel prices were among the big movers in the
intermediate energy goods category in 1994, rising 10.2 per-
cent following a 17.8-percent decline in 1993. After increas-
ing early in the year, supplies fell below their year-earlier
levels by the end of the first quarter, a situation that was to
continue throughout the remainder of the year. In the sum-
mer, a drought in the Far East, which depends heavily on
hydroelectric power, caused an increase in demand for re-
sidual fuel to generate electricity. At about the same time,
the construction of a fuel processing plant in Alaska was
completed; this plant turns residual fuel into more expen-

24 Monthly Labor Review June 1995

Annual percent changes in Producer Price
Indexes for selected energy items, 1990-94
Index 1990 1991 1992 | 1993 | 1994
6 | 03 | 41 35
25.1 | 42 |-168 | 11.2
30.5 | 464 |-101 69
51 12 8 15
7 | 46 54 | 26
11.6 a | -42 29
Residual fuels -39.0 243 |-178 10.2
Natural gas to
electric utilities. — | 22 | 27 |-130 34
-904 | -38 |-159 59
32.7 | 54 |-11.7 43
3 | 18 | 32 23
-166 | 23 |-123 =A
Ag 75 38 14.0
90.5 | -24 |-277 | 214
16 2 10 | -24
Note: Dash indicates data not available.

sive, refined fuels. In the face of these developments, de-
mand for residual fuel was strong both domestically and in-
ternationally in the second half of 1994.

Prices for finished energy goods turned up 3.5 percent
from December 1993 to December 1994, following a 4.1-
percent decline over the preceding 12 months. Gasoline prices
advanced 11.2 percent in 1994 after falling almost 17 per-
cent in the previous year. In addition, prices for home heat-
ing oil rose 6.9 percent, after falling 10.1 percent in 1993.

Gasoline prices fluctuated throughout the year—increas-
ing during the summer driving season as labor turmoil in
Nigeria reduced crude supplies and also during the autumn
months, when ruptured pipelines hampered deliveries of both
gasoline and home heating oil on the East Coast. Prices for
residential electricity rose somewhat faster in 1994 (1.5 per-
cent) than in 1993 (0.8 percent). By contrast, prices for resi-
dential natural gas fell 2.6 percent in calendar 1994, follow-
ing a 5.4-percent increase in the previous year.

Foods and related products

At the farm level, prices for crude foodstuffs and feedstuffs
fell 9.4 percent in 1994 after rising 7.2 percent in 1993. The
index for corn declined 22.4 percent after increasing 34.7
percent a year earlier. Prices for soybeans, hay, Louisiana
rough rice, fluid milk, and slaughter broilers also turned
down after rising in 1993. In addition, the slaughter hog
index fell at a faster rate in 1994 than in the previous year.
(See table 4.)



in the prior year. Indexes for passenger cars and light trucks
rose somewhat less in 1994 than in 1993, while prices for
heavy trucks rose about the same as in the preceding 12
months. Reflected in these figures are the net effects of sta-
tistical adjustment for quality changes in 1995 model ve-
hicles. For passenger cars, 35 percent of the originally
reported price increase was deemed to be attributable to qual-
ity adjustment and is therefore not reflected in the price in-
dex; the corresponding figure for light trucks was 40 per-
cent. The tires and tubes index was almost unchanged from
December 1993 to December 1994 after decreasing 1.7 per-
cent in the previous year.

The motor vehicle industry experienced one of its best
years in terms of sales, production, and profits for major
manufacturers since 1988. Most plants operated above ca-
pacity in 1994 as the availability of new, higher-quality prod-
ucts helped to fuel demand. Despite several hikes in short-
term interest rates and small boosts in vehicle prices over
the year, sales climbed. Sales for passenger cars and light
trucks stood at record levels from January 1994 through mid-
summer, falling only slightly thereafter. Despite labor strikes
at several plants and recalls on newly launched vehicles,
sales were back to record levels by the fourth quarter,

Automobile sales reached their first-quarter peak despite
another round of price increases on 1994 models, heavy win-
ter storms in much of the country, and an earthquake in Cali-
fornia. Sales of light trucks also reached a record level in
1994, Many consumers switched from autos to light trucks
during the year, as auto features, such as airbags and anti-
jock brakes, along with popular convenience features began
appearing on light truck models. The market for light trucks
comprised about 44 percent of all domestic manufactured
light vehicle sales in 1994, up 1.5 percent over 1993.

As in 1993, heavy truck prices advanced about 3 percent
in 1994, Demand was very strong from trucking firms. Or-
ders were on a 6-month backlog with very few cancellations
being seen. By yearend, some manufacturers juggled dis-
counts to maintain or increase market share.

Drugs and pharmaceuticals. Following a rise of 3.2 per-
cent in 1993, prices for drugs and pharmaceuticals increased
2.5 percent in 1994, the smallest yearly advance in 15 years.

The prescription drug industry continued to undertake
several modifications in marketing practices during 1994,
Producers have voluntarily continued to reign in price in-
creases in the face of pressure from HMO's (health mainte-
nance organizations) and other large purchasers. Manufac-
turers are combining product lines in a marketing effort to
offer one-stop shopping to large customers such as HMO’s
and PBM's (pharmacy benefit managers). Some have created
their own separate divisions to market generic equivalents
of their brand name drugs. And some producers also have

begun a strategy of bundling a brand name drug with the
generic equivalent, offering the package at a discount over
the sum of the individual prices.

It should be noted that the method for selecting the sample
of prescription drugs used in calculating the index was
changed in 1994, and that this could materially affect the
estimates. The new methodology gives each drug a chance
to be selected for the sample based not on its relative impor-
tance within a company, but on its importance relative to
other drugs of its therapeutic class. Also in 1994, broad-
based increases were registered for over-the-counter drugs.

Tobacco products. Following the 1993 decrease of 21.4
percent, prices for tobacco products showed a net increase of
just 0.4 percent last yeas. Domestic consumption of ciga-
Tettes continued to drop in 1994, in the face of concerns about
the health hazards of smoking and the skyrocketing costs of
health care attributable to the consumption of tobacco prod-
ucts. Some increased strength was noted again in 1994 for
foreign demand for American-made cigarettes. Although
domestic prices for cigarettes were rather flat in 1994, prices
were up moderately across-the-board for other tobacco prod-
ucts, particularly cigars and loose leaf chewing tobacco.

Paik 2, Annuol percent changes in Producer Price
Indexes for selected finished goods other than

foods and energy, 1990-94
Index 1990 | 1991 | 1992 | 1993 | 1994
Finished goods
other than foods
and energy ..... 35 | 31 | 20 | o4 | 16

Consumer goods ... es |-9 | 16 | -2 | 16
Passenger cars ... 43 | 34 6 | 33 | 21
Light trucks .. 4 | 54 | 48 | 42 ] 33
Prescription

UGS -arecenene | BA 7e | 64 | 32 | 34
‘Over-the-counter
drugs - | 42 | 54 | 52 | a7 | 17

126 | 132 67 |-214 4
6.5 23 5.2 6 5.4

75 | 59 | 52 | 48 | 39

25 18 16 37 27
34 25 17 18 20
36 37 34 34 3.0

‘Truck tratters ..
Metal cutting

47 29 32 6 18
98 26 15 35

— |19.4 |-149 67
-5 18 12 -7 FAA
38 28 341 Ww 2.0

— tt
Note: Dash indicates data not available.
Monthly Labor Review June i995 23



Producer Prices

PRB Arcot percent changes for major categories of
the Producer Price Index by stage of processing,

1990-94,
Index 1990 | 1991 1992 | 1993 | 1994
67 | O04 16 02 17
26 | -1.5 16 24 1
9.7 | 96 | -3 44 35
35 34 2.0 4 1.6
43 26 1.0 1.0 44
13 | -2 | -5 56 45
218 | -11.6 7 42 29
19 -8 1.2 16 52
60 | -116 33 A -5
42 | 58 3.0 72 04
19.1 | -16.6 23 | -123 oa)
6 | -7.6 5.7 10.7 17.3

tial investment evident during the latter half of 1994, fig-
ures for the year as a whole surpassed those posted in 1993.
A major factor in the strength of the housing sector in 1994
was the availability of adjustable-rate mortgages, which per-
mitted borrowers to structure their monthly payments in in-
novative ways.

In 1994, much of the increased spending for computer
equipment mentioned earlier reflected the strategy by many
firms to increase productivity and efficiency while down-
sizing their work forces to reduce labor costs. Despite this
general restructuring throughout the economy, construction
employment registered its largest yearly advance in a de-
cade, while manufacturing employment recorded its largest
gain since 1987. However, almost 85 percent of the advance
in payroll employment was in the services sector.

Among other indicators of economic health, manufactur-
ing productivity increased 4.9 percent in 1994, compared
with 3.2 percent a year earlier. The Employment Cost Index
of total compensation for workers in private industry rose
3.0 percent, after increasing 3.6 percent in 1993. Real dis-
posable income advanced 4.3 percent over the year. Busi-
ness spending on inventories increased in the second, third,
and fourth quarters of 1994, particularly in the wholesale
and retail trade sectors, reflecting in part an optimistic out-
look for continued growth in demand.

The commercial construction market, although not very
robust in most regions of the country, was considerably more
vibrant than in recent years, during which there was a wide
surplus from overbuilding. Overall, public construction
spending on infrastructure and other projects outpaced that
of 1993.

A surge in export sales resulted from a combination of
factors, including the strengthening recovery in foreign in-
dustrial countries; continued robust growth in developing

22 Monthly Labor Review June 1995

countries; the decline in the dollar’s exchange value; the
implementation of the North American Free Trade Agree-
ment; and the ongoing improvement in America’s underly-
ing competitiveness. However, the rise in exports was out-
stripped by the increase in imports that accompanied
domestic investment and consumption demand. The value
of the dollar declined about 8 percent last year (on a trade
weighted basis) against the currencies of the nine major for-
eign industrial countries. However, the dollar fluctuated more
substantially against some individual currencies, particularly
those of Japan and Germany.

Finished goods, fess foods and energy

The index for finished goods other than foods and energy
increased 1.6 percent from December 1993 to December
1994, following a rise of 0.4 percent a year earlier. Much of
the acceleration in price increases was due to a reversal in
prices for tobacco products, which had fallen sharply in 1993
before rising last year. The index for consumer goods other
than foods and energy turned up 1.4 percent in calendar 1994
after declining 0.4 percent in 1993. Prices for capital equip-
ment rose slightly more in 1994 (2 percent) than in either
1993 (1.8 percent) or 1992 (1.7 percent). (See table 2.)

Within the category of consumer goods other than foods
and energy, the tobacco products index moved up somewhat
in 1994 after falling sharply in 1993. Prices also increased,
after falling a year earlier, for tires and tubes and household
flatware. Prices rose faster in 1994 than in 1993 for books,
periodicals, men’s and boys’ apparel, mobile homes, news-
Paper circulation, household glassware, and costume jew-
elry. The index for women’s apparel was virtually unchanged
from December 1993 to December 1994 after falling a year
earlier, Prices fell less in calendar 1994 than in the previous
year for sanitary papers. Prices continued to rise rapidly for
prescription drugs, lawn and garden equipment, and toys.
By contrast, price increases slowed in 1994 for passenger
cars, light trucks, household furniture, gold jewelry, textile
housefurnishings, over-the-counter drugs, floor coverings,
and leather footwear. Prices turned down in 1994 after ris-
ing in 1993 for alcoholic beverages, cosmetics, household
appliances, and for soaps and detergents.

The Producer Price Index for capital equipment increased
2 percent in 1994, slightly more than in 1993 and 1992. In
1994, price decreases for electronic computers and x-ray
equipment were more than offset by advances for most other
types of capital goods. The largest increases occurred for
truck trailers, heavy motor trucks, light trucks, machine
tools, commercial furniture, and mining machinery.

Motor vehicles. The Producer Price Index for motor ve-
hicles increased 2.5 percent in 1994 after rising 3.5 percent