Dairy products. Prices for dairy products moved up 5.4 per-
cent in 1995, after falling 2.0 percent in 1994. Price increases
were registered for many manufactured dairy products as a
result of strong demand, despite increased supplies of ingre-
dient raw fluid milk. Prices turned up in 1995 after falling a
year earlier for natural and processed cheese, fluid milk prod-
ucts, and condensed and evaporated milk. Fluid milk prices
ended 1995 8.4 percent higher than a year earlier, following a
5.2-percent decline in 1994.

Energy

After decreasing in both 1993 and 1994, the Producer Price
Index for crude energy materials turned up 3.7 percent in
1995. (See table 4.) The decline in the index for natural gas to
pipelines slowed to 0.3 percent in 1995 from 14.0 percent in
1994. The coal index also fell less than in the previous year.
By contrast, the increase in prices for crude petroleum was
about halved, from 21.1 percent in 1994 to just 10.8 percent
in 1995.

Prices for natural gas to pipelines fluctuated through 1995
as supplies shifted. Prices fell in the first quarter, rose in the
second quarter, fell again in the third quarter, and then turned
up sharply in the last 3 months of the year. Overall, this index
edged down in 1995, reflecting the net effect of the mild
1994-95 winter weather and the continued effects of natural
gas deregulation, which encourages more competition among
sellers. Lower prices for coal continue to mirror the fact that
the industry has been operating at excess production capacity
for the past several years. Coal prices fell more in the first
half of the year, when mild weather in some industrial re-
gions reduced demand. Prices increased sharply in the sec-
ond half on the strength of stronger demand for exports.

Prices for crude petroleum were higher than in 1994, re-
flecting low inventories and increased demand. Although to-
tal consumption for refined petroleum products fell in 1995,
demand for gasoline and heating oil rose. Members of the
Organization of Petroleum Exporting Countries agreed in
1995 to maintain their self-imposed 1993 production ceiling
of 24.52 million barrels per day. Throughout 1995, some
member nations reneged on their agreement.

The index for intermediate energy goods rose 1.1 percent
in 1995, following a 2.9-percent rise in 1994. This decelera-
tion in price increases was led by gasoline prices, which
slowed to 2.4 percent from 11.2 percent in the previous year.
Prices also rose less in 1995 than in 1994 for commercial
power, liquefied petroleum gas, and industrial power. Prices
turned down after rising in 1994 for residual fuel, petroleum
and coal products not elsewhere classified, and natural gas to
electric utilities. By contrast, price increases accelerated in
1995 for no. 2 diesel fuel and jet fuels. Prices for coke oven
products turned up after falling in the previous year.

al REE Annual percent c! in Producer Price Indexes
for selected intermedi and crude materiats
other than foods and energy, 1991-95
Index. 1991 | 1992 1993 | 1994 | 1995
Intermediate goods
other than foods
and energy. 12 | 16] 52] 32
Nondurable
manufacturing

Woodpulp 57 |-140 | 981 | 40.7
Basie orgal :

Durable manufacturing
material

. 12 |-197 | 631 | -1
‘Aluminum 74 | 11.1 | 644 | -73
85 0 | 375 | 94

5.7 10.7 17.3 | 4.2
14.7 | 123
9 | -14.0 70.3

28 | 129 | x49 | 42

The index for residual fuels, a key component in the inter-
mediate energy goods basket, fell 4,7 percent in 1995, after
rising 10.2 percent in the previous year. Warm weather in the
first quarter of 1995 and falling natural gas prices throughout
much of the year contributed greatly to the decline in residual
fuel prices. Consumption of residual fuel declined steeply
over the first 6 months of the year. By yearend, however, de-
mand increased, exacerbated by extreme cold weather in some
parts of the country, as some utilities and industrial users with
fuel-switching capability opted to use less costly residual fuel
rather than natural gas.

Prices for finished energy goods increased 1.1 percent in
1995, following a 3.5-percent rise in 1994. Price increases
slowed for gasoline and residential electricity. The index for
finished lubricants tumed down after rising in 1994. Prices
continued to fall for residential natural gas. By contrast, price
increases accelerated from 1994 to 1995 for home heating
oil.

Although prices for premium gasoline fell slightly in 1995,
unleaded and midgrade unleaded prices increased. Gasoline
inventories were tight throughout the year, with demand for
gasoline rising by 2.5 percent. The year 1995 brought to light
some oddities in the gasoline market. For instance, during the
first quarter, demand for gasoline increased partly in response
to an unseasonably warm winter that made for more pleasant
driving conditions. Then, during the summer, demand reached
a 17-year high, as a weaker U. S. dollar abroad reduced for-
eign vacation travel by Americans. In addition, increases in

Monthly Labor Review July 1996 7



Producer Prices, 1995

(not elsewhere classified) increased 1.6 percent in 1995,
which was the first year of publication of this index. About
75 percent of the index represents janitorial/custodial services
and other building and cleaning and maintenance services.
The remainder of the index covers maid services, window-
cleaning services, and chimney sweep services.

After advancing 22.2 percent in 1994, prices for scrap metal
collection turned down 6.5 percent in 1995 in response to a
drop in demand for scrap metals. Prices for wastepaper col-
lection plummeted almost 50 percent in 1995 from near-
record prices at the end of 1994. Prices increased in the first
half of 1995, but declined sharply thereafter. qa

“Fax-on-demand” available

Users of data from the Bureau of Labor Statistics can request a fax of news
releases, historical data, and technical information 24 hours a day, 7 days a week
from FAXSTAT, the Bureau’s new fax-on-demand system. FAXSTAT users can re-
ceive news releases of major economic indicators (see schedule on back cover of
this issue) at 8:45 a.m. on the morning the data are released. The number to obtain

data from the national office is:

(202) 606-6325

Use a touch-tone telephone and follow the voice instructions for entering docu-
ment codes and your fax telephone number. The FAXSTAT catalog, containing a list
of available documents and codes, can be obtained by entering code 1000. You
may request up to four documents with each call. Faxes are sent immediately fol-
Jowing the request. If your fax line is busy, the system attempts to send the re-
quested material four times before disconnecting.

FAXSTAT numbers for BLS regions are listed on cover 2.

12 Monthly Labor Review July 1996



that occurred in 1994, During the first 3 months of 1995, alu-
minum prices rose, and London Metal Exchange (LME) in-
ventories were relatively low. However, after peaking in
March, prices began to slide in the third quarter. Traders
largely discounted the dwindling inventory situation and ap-
peared more concerned that domestic demand was declining
and that much idled capacity would be restarted. Prices con-
tinued to decline in the second half of the year as Lme inven-
tories turned up sharply. The uptum in inventories, combined
with persistent rumors of restarts of idled equipment at smelt-
ers, sent prices down. Concerns about returning to a supply
glut, similar to the one that existed prior to the formalization
of a productin pact among aluminum-producing countries in
1994, were so pervasive that a strike at several smelters in
Quebec near yearend was insufficient to turn prices around in
the fourth quarter.

Copper prices decreased 0.1 percent in 1995 after skyrock-
eting in 1994. Demand was fairly strong throughout 1995,
reflecting steady drawdowns in world inventories. Worldwide
demand increased from the electronic and telecommunica-
tion industries in emerging markets. Domestically, copper
prices mirrored the demand of the construction industry, the
largest consumer of copper. Prices for domestic copper cath-
odes ran up briefly in November; however, the market showed.
signs of a slowdown at the close of the year, and there were
indications that inventories were up at yearend.

Lead prices rose 9.1 percent in 1995 after increasing 37.5
percent in 1994. Most domestically produced lead is used in
the manufacture of motor vehicle batteries. The bitter cold
weather at the beginning of 1995 boosted demand for replace-
ment batteries. By midyear, demand rose sharply again, this
time from automobile manufacturers gearing up for new-
model-year production. Prices for zinc slab decreased in 1995,
with zinc inventories remaining fairly high by historical stand-
ards throughout the year.

Construction materials. A decline in residential investment
during the first half of the year was a major factor in slowing
the rate of economic growth. The rise in mortgage interest
fates in 1994 had a lagged effect on the housing market, which
began to lose its footing early in 1995 as housing starts and
home sales both fell during the first quarter. Residential
investment, which had shown hints of weakness toward the
end of 1994, declined abruptly during the first half of 1995.
By June, however, declining mortgage rates had revived the
housing sector, as both starts and sales regained some ground.
The improvement held firm over the summer and was
reflected in a bounce back in residential investment during
the third quarter.

The Producer Price Index for construction materials rose
1.9 percent in 1995, after increasing 3.9 percent in 1994. Price
increases slowed for plastic construction products, nonfer-

rous wire and cable, gypsum products, millwork, concrete
products, fabricated ferrous wire products, and cement. After
advancing 10.6 percent in the year before, plywood prices
tumed down 8.5 percent. By contrast, prices rose more rap-
idly in 1995 than in 1994 for air conditioning and refrigera-
tion, heating equipment, wiring devices, metal valves except
fluid power, plumbing fixtures and brass fittings, and steel
wire. The index for asphalt felts and coatings moved up in
1995 after showing no change in 1994. Prices continued to
rise for fabricated structural metal products and for switchgear
and switchboard equipment.

The index for softwood lumber fell 10.3 percent in 1995,
after decreasing 9.6 percent in the previous year. Prices fluc-
tuated throughout the year, falling when weather conditions
and higher interest rates hampered housing starts, and rising
briefly when demand improved. The index registered a de-
cline in 8 months out of the year. This index is closely watched
when one assesses changes in prices of homes, because the
cost of softwood lumber used as framing is about $8,000 in a
typical new home.

The slump in residential construction had a moderating
effect on prices for gypsum products, even though there were
signs of steady demand from the home improvement market.
The Producer Price Index for gypsum products increased 1.0
percent in 1995, after surging more than 30 percent in 1994.
Most (uncalcined) gypsum is used to manufacture prefabri-
cated products such as wallboard. Prices for insulation mate-
rials, including mineral wool batts, as well as for gaskets and
sealing devices, moved up modestly, buoyed by energy con-
servation efforts.

Prices for cement increased 6.0 percent in 1995 after rising
7.0 percent in 1994. These price changes translated rather
rapidly into higher prices for concrete and concrete products.
Much of the 1995 increase in cement prices was due to the
imposition of an antidumping duty on imports from Mexico,
which led domestic producers to raise prices to close the sup-
ply shortfall.

Basic industrial materials

From December 1994 to December 1995, the Producer Price
Index for crude nonfood materials other than energy turned
down 4.2 percent, following a 17.3-percent advance a year
earlier. This index is usually considered an indicator of the
future strength of the economy. In the first half of 1995, it
moved up at an 11.9-percent annual rate; it then fell at an
18.0-percent annual rate during the second half.

Prices turned down sharply in 1995 after rising signifi-
cantly in 1994 for wastepaper, aluminum base scrap, and
cattle hides. Prices also turned down after increasing in the
previous year, although not as dramatically, for iron and steel
scrap and for softwood logs. Price increases slowed from

Monthly Labor Review July 1996 9



Producer Prices, 1995

crude petroleum costs and concerns over the possibility of
spot shortages, due to low gasoline inventories, combined to
boost gasoline prices from April to September. Home heating
oil prices fluctuated throughout the year; however, much of

as a result of harsh winter weather in the latter months of the
year, particularly December, when demand for home heating
oil surged 17.8 percent.

Intermediate industrial materials

Price increases for intermediate materials other than foods
and energy slowed to 3.2 percent in 1995 from 5.2 percent in
1994. The indexes for construction materials, durable and
nondurable manufacturing materials, and components for
manufacturing all increased less than in 1994, In contrast,
Price increases accelerated from 1994 to 1995 for supplies
and containers for manufacturing.

Nondurable manufacturing materials. The index for non-
durable manufacturing materials increased 5.9 percent in
1995, following a 10.4-percent advance in 1994, (See table
5.) This slowdown in price increases was led by industrial
chemical prices, which rose just 1.1 percent, compared with
an increase of 13.2 percent in the previous year. Price in-
creases also slowed in 1995 for paperboard, fertilizer materi-
als, and botanical chemicals. Prices turned down in 1995 af-
ter rising in 1994 for plastic resins and materials, inedible
fats and oils, and leather. By contrast, price increases acceler-
ated for paper, synthetic fibers, finished fibers, gray fabrics,
woodpulp, paint materials, processed yarns and threads, and
synthetic rubber.

In 1995, prices for basic organic chemicals, which are de-
Tivatives of gasoline and petroleum, moved up 0.4 percent,
following a 15.7-percent advance in 1994. Benzene prices
fell about as much in 1995 (23.9 percent) as they had risen in
1994. Benzene prices declined for much of 1995 due to world-
wide overcapacity and lackluster demand from users at later
stages of processing. By yearend, producers had begun to cut
back on production. Prices for toluene, which generally
shadow those for benzene, though with less volatility, ended
the year 10.1 percent lower than in 1994, Prices for ethylene
decreased about 31 percent in 1995, following a 42.9-percent
surge in 1994. Ethylene prices were driven down by a num-
ber of factors, including high inventory as a result of increased
production and a dearth of plant outages, and increased for-
eign investment in basic-chemical capacity, which closed off
some lucrative markets for domestic producers. Increases in
Prices for petroleum and petroleum derivatives had an up-
ward impact on prices for some other nondurable manufac-
turing materials, such as fertilizer materials, synthetic fibers
and fabrics, and paint materials.

8 Monthly Labor Review July 1996

Prices for basic inorganic chemicals moved up 3.3 percent
from 1994 to 1995. Significant increases occurred for alka-
lies and chlorine, on the strength of higher prices for liquid
sodium hydroxide. Prices for the latter rose in the early
months of 1995, continuing the 1994 recovery; prices peaked
in April and remained steady for the rest of the year. Chlorine
prices tured down in 1995 after rising in 1994 and nearly
tripling in 1993. The reason was an adverse market, probably
affected by the imposition of environmental regulations with
stringent disposal requirements. As with sodium hydroxide,
prices for chlorine were more volatile early in the year and
then stayed fairly constant thereafter.

Prices for pulp and paper products generally rose sharply
along a broad front in 1995. Prices for woodpulp jumped 40.7
percent, slightly more than in 1994, Woodpulp prices were
bolstered by continued domestic and foreign demand. In spite
of the price hikes for woodpulp in much of 1995, prices for
wastepaper slumped. Stringent recycling efforts in most re-
gions of the country led to a glut of wastepaper; demand from
paper manufacturers for virgin woodpulp outpaced that for
wastepaper. Paperboard prices rose somewhat less rapidly in
1995 (16.3 percent) than in 1994 (20.1 percent). Price in-
creases throughout 1995 were a function of rising costs for
materials and greater demand. Increases in industrial produc-
tion resulted in more demand for boxes and the paperboard
used to produce them. Price increases for paper accelerated
from 11.3 percent in 1994 to 20.5 percent in 1995. Prices rose.
steadily in the first 10 months of the year and then dipped in
November and December. For most of the year demand was
strong, both domestically and internationally, for coated and
uncoated stock, as well as for newsprint. At the end of 1995,
Prices for newsprint were 46.3 percent higher than in the pre-
vious year; prices had risen 14.7 percent in 1994. Domestic
producers of newsprint benefited greatly from reduced Cana-
dian production as a result of labor upheaval.

Durable manufacturing materials. In 1995, prices for du-
rable manufacturing materials increased 1.1 percent, follow-
ing a 9.8-percent advance in 1994. The slower rate of increase
was widespread. Price increases decelerated for several ma-
terials: copper and brass mill shapes; steel mil! products; alu-
minum mill shapes; cement; and gold, lead, and platinum. In
addition, prices for several materials—plywood, building
paper and board, flat glass, hardwood lumber, and silver—
tumed downward after rising substantially the year before.
By contrast, price increases accelerated from 1994 to 1995
for prepared paint, unalloyed aluminum ingots, domestic cop-
per cathodes, other miscellaneous metal products, and zinc
slab.

Prices for aluminum decreased 7.3 percent in 1995 after
increasing 64.4 percent in 1994. Prices were fairly robust
during the first quarter of 1995, continuing the steep runup


After rising almost 16 percent in 1994, the index for water
transportation of freight (not elsewhere classified) moved up
9.7 percent in 1995, mostly on the strength of a 21.8-percent
advance in charges for the shipment of farm products along the
Mississippi River. Barge operators reported a banner year, as
both shipping rates and tonnage increased. The rise in shipments
of farm products reflected a significant increase in demand for
exported foods, as well as pent-up demand for shipping ser-
vices as a result of flooding during early spring in parts of the
Midwest. Widespread increases were registered within the tug-
ging and towing services index in 1995. Charges for marine
cargo handling, on the other hand, moved down 0.9 percent in
1995, about twice as much as a year earlier. Fierce competition
among ports continued in this buyer’s market.

'he index for the trucking and courier services (except by

air) industries increased 1.8 percent in 1995. Slow, steady
increases have been registered throughout this grouping in
recent years. Fierce intraindustry competition limited rate
hikes so that they did not fully cover increased costs for
wages, worker benefits, and fuel. The index for local truck-
ing with storage rose 1.9 percent, and that for courier services
(except by air) was up 3.3 percent.

The index for scheduled air transportation advanced 8.7
percent in 1995. Practically all of this rise was a result of a
9.8-percent jump in prices for scheduled passenger transpor-
tation. After a 3-year slump, major domestic carriers returned
to profitability, as strong demand resulted in more seats being
filled. Unlike what occurred in recent years, the 1995 increase
held, allowing airlines to recoup rising costs, particularly for
jet fuel. As in recent years, widespread discounting of fares
continued; however, reductions are calculated from much
higher base prices. The air courier services index moved up
1.9 percent in 1995, slightly more than a year earlier. During
the holiday season in the fourth quarter of 1995, the industry
experienced a major work slowdown that sent unaffected cou-
riers scrambling to pick up business from affected ones, as
well as handle the usual increased holiday traffic.

The index for airports, flying fields, and airport services
increased 2.2 percent in 1995, after rising 1.1 percent in 1994.
The 1995 rise mostly reflected increases for leased space for
concessions and for services rendered to air passenger and
cargo carriers. The U.S. Congress has effectively limited the
passenger facility charge as a source of revenue by enacting a
cap of $3.00 per person. This has caused airports to rely more
on concessionaire’s rents, which are escalated on a percent-
age of the vendor’s gross receipts.

A 13.5-percent decline in commissions for airline arrange-
ments caused the index for travel agents to drop in 1995, The
decrease resulted from the decision by airlines to cap com-
missions at $50.00 for all domestic flights. The airlines con-
tinue to pay a 10-percent commission (with the cap) for do-

mestics tickets and an 8-percent commission (with no cap)
for international tickets.

The index for truck rental and leasing increased 3.6 per-
cent in 1995, after rising 2.2 percent in 1994. In 1995, truck
rental prices rose by dint of strong demand. Truck leasing
rates, which are negotiated for much longer terms than rental
rates, also increased in 1995. The index for passenger car rent-
als, without drivers, rose 7.4 percent in 1995, following a 2.4-
percent increase in 1994. In 1995, the index rose during peak
travel and vacation periods and fell during offpeak periods.
The index for passenger car rentals did not drop much after
the summer driving season, because car rental companies
experienced higher costs for 1996 fleet purchases.

The hotels and motels index advanced 4.0 percent in 1995,
after rising 1.4 percent in 1994. Prices for guestroom rental,
which makes up the largest part of the industry, increased 5.3
percent in 1995. Prices for food and beverages moved up 2.7
percent, and prices for other guestroom rentals, including ca-
sino hotels, increased 1.4 percent. This segment of the indus-
try experienced strong growth, and there was much optimism
about adding more casinos, particularly in the East.

The radio broadcasting index advanced 5.8 percent in 1995,
after rising 6.8 percent in 1994. The largest increase was for
commercials sold in package plans. The index for cable and
other pay television services increased 3.2 percent in 1995. In-
tense negotiations on telecommunications legislation led cable
companies to defer large capital outlays, such as technological
upgrades and joint ventures with telephone companies. Slow,
steady increases were implemented during the last quarter of
the year, and legislation was enacted that preserved controls on
large cable companies while abolishing them on smaller ones.

M increase of more than 5 percent in both the index for
skilled and intermediate care facilities and the index
for medical laboratories caused much of the 3.5-percent over-
all increase in the health services index in 1995. Most of the
change in prices for skilled and intermediate care facilities
occurred in July, when annual per diem rates are updated.
Much of the yearly advance in the index for medical labora-
tories was attributable to higher reimbursement rates for uri-
nalysis and hematology. The index for offices and clinics of
doctors also moved up in 1995; as in 1994, the largest in-
crease was in the pediatrics index. The medicare treatments
category moved up in January, when the Health Care Financ-
ing Administration effected the 1995 Resource Based Rela-
tive Value Scale payment mechanism for physician services.

The indexes for help supply services increased 3.8 percent in
1995, The increases were widespread, with the largest for office
and clerical occupations. These occupations are in competition
with employment agencies. The temporary help supply service
industry was characterized by robust growth throughout 1995.

The index for building cleaning and maintenance services

Monthly Labor Review July 1996-11



Producer Prices, 1995

William D. Thomas

William D. Thomas is an
economist in the
Division of Industrial
Prices and Price
Indexes, Bureau of
Labor Statistics.

Producer price
highlights, 1995

The Producer Price Index for finished goods

posted a 2.3-percent increase in 1995; the index

for finished goods other than foods and energy

rose faster than each of the separate indexes

for finished consumer foods and finished energy goods

tices received by domestic producers of
Pp finished goods rose 2.3 percent in 1995,

following a 1.7-percent increase in 1994
and a 0.2-percent rise in 1993. After increasing
1.1 percent in 1994, the index for finished con-
sumer foods moved up 1.9 percent in 1995, Price
increases for finished energy goods slowed to 1.1
percent in 1995 from 3.5 percent in 1994. The
“core” index for finished goods—those other
than foods and energy, which include consumer
goods such as passenger cars and apparel, as well
as capital equipment such as trucks and machine
tools—advanced 2.6 percent in 1995 after rising
1.6 percent in 1994. (See table 1.)

At the earlier stages of processing, the results
were mixed in 1995. The price index for inter-
mediate goods increased 3.3 percent in 1995, fol-
lowing a 4.4-percent advance in 1994 and a 1.0-
percent rise in the year before that. This index
measures the movement in prices of goods such
as flour, steel, lumber, industrial chemicals, die-
sel fuel, and paper boxes. The index for crude
goods turned up 5.5 percent, after edging down
slightly in 1994, Items in this index include
wheat, scrap metals, logs, crude petroleum, and
cotton. Prices for food-related materials at both
the intermediate and crude stages of processing
rose sharply in 1995, after falling in the previous
year. Prices for crude energy goods turned up in
1995, after showing little change in 1994; price
increases for intermediate energy goods, how-
ever, slowed to 1.1 percent in 1995 from 2.9 per-
cent in 1994. When the more volatile food and

energy components are excluded, price increases
slowed from 1994 to 1995 at the intermediate
level, while prices for the corresponding category
for crude goods turned down following 2 years
of double-digit increases.

Economic background

Higher interest rates, along with the effects of the
economic crisis in Mexico, dampened economic
growth in the first quarter of 1995. A slackening
economy was evident as housing starts dropped
in the first 2 months of the year. Although hous-
ing activity stabilized and then moved slightly
higher over the balance of 1995, the fall in starts
translated into declines in residential investment
during the early months of the year. Motor ve-
hicle sales also weakened from 1994 levels, re-
sulting in a buildup of inventory that reached
burdensome proportions by the end of the first
quarter, In response, automakers cut production
sharply in the second quarter, thereby restraining
growth in the gross domestic product. Auto pro-
duction picked up in the ensuing months, but stil]
did not reach the 1994 level at yearend.

At the beginning of 1995, personal consump-
tion expenditures grew, but at a pace much less than
during the last quarter of 1994. The drop in spend-
ing growth was concentrated in durable goods, as
a result of slackened demand for automobiles.
Spending on durables recovered markedly in the
other 9 months of the year. However, spending on
nondurable goods waned. By yearend, the pace of

Monthly Labor Review July 1996 3.



Producer Prices, 1995

1994 to 1995 for copper base scrap, raw cotton, gold ores,
hardwood logs, and leaf tobacco. By contrast, price increases
accelerated in 1995 for copper ores, iron ores, sand and gravel,
and pulpwood logs. Prices continued to rise markedly for
phosphates.

‘Wastepaper prices were more than halved in 1995, follow-
ing a rise of almost 180 percent in the preceding year. Suc-
cessful mandatory campaigns in various parts of the country
to recycle paper have caused imbalances from time to time in
the supply and demand of wastepaper. Shortages result in
Pptices skyrocketing and make virgin woodpulp a viable sub-
stitute, while oversupplies, though often temporary, send
Prices plummeting. The wastepaper industry continues to reap
the benefits of improved rates of usage of recovered paper at
new mills, as well as high demand from foreign markets,

Prices. for aluminum base scrap dropped 20.8 percent in
1995, after surging 86.4 percent in the previous year. Con-
cerns about the size of LME inventories and weakening prices
for primary aluminum along with slackened demand in ex-
port markets for aluminum scrap dampened prices. Overall
nonferrous exports sank to their lowest level in 9 months dur-
ing October. Near yearend, LMe warehouses were bulging with
31,000 tons of aluminal alloy, after starting the year with only
1,100 tons. In contrast, demand for exports pushed prices for
copper base scrap up moderately in 1995. Like prices for alu-
minum base scrap, those for copper base scrap had risen
sharply in 1994, In 1995, prices for copper base scrap peaked
in August. A downturn in exports during the third and fourth
quarters, coupled with sluggish domestic demand and an over-
supply of certain grades of the metal, contributed to lower
prices.

Prices for raw cotton moved up 4.2 percent in 1995, Prices
were up more than 30 percent in the first 6 months of the year
due to heavy use of domestic mills and an anticipated high
demand for exports. However, prices fell sharply in the latter
half of the year because of the combined effects of slacken-
ing domestic demand and resistance to higher prices. In addi-
tion, foreign demand fell notably when China brought its boll
weevil infestation problem under control. Similarly, raw wool
prices fell in 1995 as domestic mill consumption and world
demand dropped. Sustained increases in demand for leaf to-
bacco exports outweighed the effects of decreased domestic
tobacco consumption. Leaf tobacco prices fluctuated mildly
throughout the year, ending 1 percent higher than in 1994.

Selected industries

Mining. Following a decrease of 0.7 percent in 1994, the
index for the net output of total mining industries fell 3.1 per-
cent in 1995. As in 1994, prices for the oil and gas extraction
industry group dropped more than 6 percent. The index for
the bituminous and lignite mining industry group declined

10 Monthly Labor Review July 1996

1.8 percent in 1995, after inching down 0.1 percent in 1994,
Prices for the anthracite mining industry group turned down
1.1 percent after increasing 0.9 percent in 1994. By contrast,
price increases for the metal mining industry group acceler-
ated from 16.8 percent in 1994 to 24.6 percent in 1995. Prices
also rose somewhat faster than in the previous year for the
industry group designated mining and quarrying of nonme-
tallic minerals.

Manufacturing. The Producer Price Index for the net out-
put of the domestic manufacturing sector increased 2.9 per-
cent from December 1994 to December 1995, following a
1.4-percent rise a year earlier. Much of the acceleration in
Price increases in 1995 was due to the industry groups for
petroleum refining and tobacco manufactures, both of whose.
prices turned up significantly after declining in the previous
year. In addition, prices rose more rapidly in 1995 than in
1994 for the industry groups for textile mill products, apparel,
paper and allied products, printing and publishing, chemicals
and allied products, rubber and plastic products, leather prod-
‘ucts, primary metal industries, fabricated metal products, and
measuring instruments. Prices continued to increase for food
and kindred products, nonmetallic mineral products, and the
electrical machinery industry groups. By contrast, prices
turned down after rising a year earlier for the lumber and wood
products industry group. Prices rose less rapidly in 1995 than
in 1994 for the industry groups for furniture and fixtures and
for transportation equipment.

Services. The index for railroad line haul operations inched
down 0.2 percent in 1995, after rising 0.4 percent in 1994.
Declines were registered for coal, wood or lumber products,
petroleum or coal products, nonmetallic minerals, food prod-
ucts, and transportation equipment operations. These de-
creases offset increases for farm products, metallic ores, pulp
paper products, chemical products, and primary metal prod-
ucts operations. Although the overall decrease in charges for
railroad line haul operations in 1995 was marginal, there were
several significant developments in the industry. After a lull
of several years, merger activity surged during 1995, Merg-
ers have increased productivity in some areas by eliminating
parallel lines, creating long-haul corridors, reducing high la-
bor costs, and lowering freight rates. In 1995, there were also
signs of increased use of innovative technology and the imple-
mentation of new marketing and pricing strategies.

As in 1994, the industries that provide domestic deep-sea
transportation of freight experienced increased use of inde-
pendent or for-hire operators, rather than private carriers, to
transport the crude petroleum of their parent companies. Pri-
vate carriers opted to defer the costly replacement of aging
fleets, particularly in light of skyrocketing premiums for re-
quired liability insurance coverage.



Producer Prices, 1995

computers and work stations and for portable computers.
Lower prices for components, including memory chips, com-
bined with the increased availability of interchangeable parts
from different manufacturers, as well as economies of scale
from mass production, have continually dampened prices.
More substantial decreases were evident in 1995 for periph-
eral equipment, particularly printers.

Foods and related products

Farm prices, as measured by the Producer Price Index for
crude foodstuffs and feedstuffs, advanced 12.9 percent in
1995, after falling 9.4 percent in 1994. (See table 3.) The 1995
upturn was led by prices for slaughter hogs and soybeans.
Sharp upturns in prices were also noted for slaughter broilers,
fresh fruits and melons, Irish potatoes for processing, and
unprocessed finfish and shellfish. Prices for slaughter cattle
fell slightly more than 5 percent for the second consecutive
year. However, prices for fresh vegetables except potatoes
fell almost 49 percent in 1995, after rising about as much in
1994,

Prices for intermediate foods and feeds increased 10.3 per-
cent in 1995, after declining 4.5 percent in 1994. The index for
prepared animal feeds turned up 20.6 percent, after falling 10.6
percent in the previous year. Prices for meats, flour, and dairy
products also increased after declining in 1994. Price increases
accelerated for malt and malt byproducts and for dry-mix prepa-
rations. Prices continued to rise modestly for refined sugar. By
contrast, prices for crude vegetable oils turned down in 1995,
after rising a year earlier. Price increases slowed from 1994 to
1995 for confectionery materials, soft drink bases, and potato
chips, as well as for mayonnaise and dressings.

BSED crcsar percont changes in Price indexes |
for tologied. items, 1997-95
Index 1991 1992 | 1993 1994 | 1995
0.3 44 3.5 11

42 |-168 | 11.2 24
5.4 (-10.1 69 | 119

46 54 | -26 | -2.4

7 42 29 1
243 |-17.8 | 102 | -~47
27 j-130 | 34 | 1.
38 |-159 | 59 | 11.
6.

64 |-11.7 | 43
18 32 | 23

-123 | -1 | 37

3
5 .

24 |-27.7 | 211 | 108
2 10 | -21 ] -8

6 Monthly Labor Review July 1996

Prices received by domestic producers of finished con-
sumer foods rose 1.9 percent from December 1994 to De-
cember 1995, compared with an increase of 1.1 percent for
all of 1994. The slight acceleration was led by a 15.3-percent
advance in pork prices, which had fallen 11.1 percent in the
previous year. Prices also turned up in 1995 after declining a
year earlier for dairy products, processed young chickens,
chicken eggs for fresh use, processed fruits and vegetables,
fresh fruits and melons, confectionery end products, and.
milled rice. Price increases accelerated for soft drinks. Beef
and veal prices fell 1.4 percent in 1995, after declining 4.8
percent in 1994. Prices for pasta products also fell less than
they had fallen a year earlier. By contrast, prices for fresh and
dry vegetables turned down 36.0 percent in 1995, following a
25.6-percent rise in 1994, Prices also decreased after moving
up a year earlier for roasted coffee and for shortening and
cooking oils. The index for finfish and shellfish increased in
1995, but less than in 1994.

Grains and feeds. Food prices in 1995, particularly in the
latter half, were driven up by soaring feed grain prices. These
higher prices were a mixed blessing for grain farmers, who
experienced an unexpected robust demand for exports and, at
the same time, weather-induced harvest shortfalls. Ending
stock for most grains, particularly wheat, were expected to be
down sharply in 1995 from a year earlier as a result of below-
average crop yields. Harvests were lowered by late frost and
rain in some growing areas, as well as by delayed planting,
disease and insect problems, and extreme summer heat. In
1995, sharp increases were registered for wheat (29.9 per-
cent), barley (42.1 percent), corn (49.4 percent), and oats (81.5
percent). The index for prepared animal feeds, which includes
formula feeds, turned up 20.6 percent, after falling 10.6 per-
cent in the previous year. Prices for soybeans turned up 26.7
percent in 1995 following an 18.1-percent decline in 1994.
The increases in prices for grains and oilseeds affected 1995
and later prices at other stages of processing for a wide vari-
ety of food and food-related products, such as meats, poultry,
eggs, and vegetable oils.

Slaughter hogs and pork. The index for slaughter hogs
jumped 40.6 percent in 1995, after decreasing 21.3 percent
the previous year. Strong domestic demand for exports forced
this index higher, despite slightly elevated production levels
in 1995, Pork production was up, on average, in 1995, as hog
farmers, buoyed by larger-than-expected foreign demand,
managed to earn favorable returns most of the year, despite
experiencing higher feed costs. The United States is now a
net exporter of pork, exporting 108 million pounds more than
it imported on a carcass weight basis in 1995. Japan remains
the largest export market for U.S. pork, accounting for 47
percent of total exports, up from 45 percent in 1994.



rapidly than in the previous year for tobacco products, news-
paper circulation, prescription drugs, periodicals, books, floor
coverings, textile housefurnishings, footwear, toys, and sport-
ing goods; prices for tires and tubes moved up after showing
no change a year earlier. Following declines in 1994, prices
turned up for alcoholic beverages, soaps and detergents, girls’
apparel, cosmetics, and household appliances. By contrast,
price increases slowed markedly from 1994 to 1995 for mo-
tor vehicles: Light trucks were up 1.5 percent in 1995, com-
pared with a 3.3-percent advance in 1994, and the passenger
car index moved up 1.7 percent after increasing 2.1 percent a
year earlier. Prices also rose significantly, but somewhat less
than in the previous year, for mobile homes, household glass-
ware, lawn and garden equipment, and household flatware.
The index for women’s apparel turned down in 1995 after
rising in 1994. Prices for home electronic equipment fell even
more than they had fallen a year earlier.

The Producer Price Index for capital equipment increased
about 2 percent in both 1994 and 1995. The largest increases
in 1995 were for truck trailers, railroad equipment, heavy
motor trucks, civilian aircraft, agricultural machinery, pumps
and compressors, metalcutting machine tools, commercial
furniture, and oil and gas field machinery. Decreases were
registered for electronic computers (-12.7 percent) and x-ray
equipment.

Motor vehicles. The Producer Price Index for motor ve-
hicles increased 1.9 percent in 1995, after advancing 2.5 per-
cent a year earlier. Price increases slowed from 1994 to 1995
for both passenger cars and light trucks; however, prices for
heavy trucks increased somewhat more rapidly than a year
earlier. Indexes for 1995 reflect the net effects of quality ad-
justment in 1996-model vehicles. For passenger cars, 39 per-
cent of the originally reported price increase was deemed to
be attributable to quality adjustment and is therefore not re-
flected in the price index; the corresponding figure for light
trucks was 40.5 percent.

Tobacco products and alcohol. The index for tobacco prod-
ucts moved up 3.6 percent in 1995, following a 0.4-percent
increase the year before. Strong demand for exports and mod-
est increases in prices for leaf tobacco helped to ease the ef-
fects of reduced domestic consumption of tobacco products,
particularly cigarettes. Cigarette prices were up in 1995 after
dipping slightly in 1994, Cigar prices were up about twice as
much as in the previous year. Prices for alcoholic beverages
tumed up 4.2 percent in 1995, after moving down 0.6 percent
in 1994. In 1995, price increases were registered for malt bev-
erages and distilled spirits; wine prices were unchanged, on
average.

Drugs and pharmaceuticals. Prices for drugs and pharma-

selected food items, 1991-95
x 1991 | 1992 | 1993 | 1994 | 1995

EISEN Act percent changes Prosucer ice indexes
inde:

Fresh fruits and melons

ceuticals increased 3.1 percent in 1995, after a 2.5-percent
rise in 1994. The upturn in 1995 was primarily driven by a
boost in prices for prescription drugs; the increase for over-
the-counter drugs (1.7 percent) was the same as a year earlier.
Much effort in the industry in 1995 was focused on cost con-
tainment, largely through reengineering of research and de-
velopment functions, refocusing on smaller segments of the
market, and achieving better relations with the managed care
industry. Several pharmaceutical firms merged with managed
care organizations to gain better market placement and dis-
ease management, in which drug therapy is used in combina-
tion with other regimens. Many firms have increased their
sales forces, and some have invested heavily in upgraded elec-
tronic equipment for their sales personnel. There is also a
proliferation of “me, too” drugs that perform the same func-
tion as existing drugs, but use different active ingredients.
Drug manufacturers, saddled with shrinking profit margins
as a result of cost containment policies by health care provid-
ers, are increasingly looking to foreign markets for expan-
sion. The year 1995 also saw stepped-up efforts to streamline
the drug approval process.

Paper products. Prices increased significantly along a broad
front for a variety of household paper goods in 1995, including
Paper towels (26.7 percent), facial tissue (22.1 percent), toilet
tissue (17.0 percent), and paper napkins (15.6 percent). Price
changes for these consumer goods mirrored increases at earlier
stages of processing for woodpulp and semifinished paper.

Computers. As in 1994, price declines for computers were
widespread in 1995. The largest decreases were for personal

Monthly Labor Review July 1996 5



Producer Prices, 1995

‘ai eecee sewiree Sr tr Ct

index, by stage
processing,
992 | 1993 | 1994 | 1995
16} 02) 17] 28
16 | 24] 141 19
-3 | 44) 35] 14
20 4| 16] 26

33 4
3.0 72
23 | -123

57 10.7

growth in consumption expenditures was vigorous once again.
Real disposable income increased at an annual rate of 5.8 per-
cent in 1995, about the same as in 1994. Hourly compensation
in the private sector, as measured by the Employment Cost In-
dex, increased 2.8 percent in the year ending December 1995,
compared to a 3.1-percent increase during the previous year. In
1995, payroll employment advanced 1.9 percent; most of the
increase was attributable to the services sector, which rose 4.1
percent,

As 1995 unfolded, households continued to take on debt at
a rapid rate, raising concerns that they might soon have to
reduce their spending in order to meet obligations. House-
hold debt (consumer and mortgage debt) grew faster than dis-
posable personal income, continuing the pattern of the past
several years, The burden for this debt, as measured by debt
service as a share of disposable personal income, also rose
during the year, although it remained below the figure reached
during the late 1980s. The 1995 rise in the debt service rates
Teflected both the sharp rise in interest rates over the year and
a sharp rise in the overall debt level.

Business fixed investment grew steadily, but moderately,
in 1995. The growth rate of business equipment investment,
although not as rapid as in 1994, was sustained by robust
investment in computers, which grew much faster in 1995
than in 1994, Investment in structures continued its recovery
from the recession of 1990-91 and, like equipment invest-
ment, grew about 10 percent in 1995. The extremely slow
recovery of investment in structures following the recession
appears to have been due in part to an oversupply of office
buildings and retail space that characterized the runup and
subsequent collapse of the commercial real estate market dur-
ing the late 1980s and early 1990s. As in the previous 2 years,
the vacancy rate for office space continued to decline.

The buildup of excess inventories during the first quarter
Of 1995 led some producers to cut back output in the second
quarter, so as to reduce inventories relative to sales. Produc-

4 Monthly Labor Review July 1996

ers continued to pare inventories, especially in the automo-
tive sector, during the third and fourth quarters. By late year,
much of the earlier overhang had been worked off. At
yearend, however, automobile industry data showed the in-
ventory-to-sale ratio moving back up, although it remained
below the levels reached earlier in the year.

Corporate profits increased in 1995 at about the same pace
as in 1994. The pattern over the year followed that of overall
economic growth, with profits softening during the first half
and rebounding strongly during the third quarter. Other com-
ponents of national income likewise increased at more mod-
erate rates during 1995, with the exception of rental income,
which declined through the third quarter.

Finished goods, less food and energy

The index for finished goods other than foods and energy,
familiarly called the “core” index, advanced 2.6 percent in
1995, following a 1.6-percent increase in 1994, This modest
acceleration in price increases was due in part to an upturn in
prices for alcoholic beverages and a more rapid rise in prices
for tobacco products and newspapers. The index for consumer
goods other than foods and energy climbed 2.8 percent in
1995 after rising 1.4 percent in 1994. Prices for capital equip-
ment moved up about the same in 1995 (2.2 percent) as in
1994 (2.0 percent). (See table 2.)

Among consumer goods other than foods and energy, price
increases for sanitary papers accelerated from 0.4 percent in
1994 to 14.3 percent in 1995. Prices also rose much more

Table 2 Annual Percent changes In Producer Price Indexes
for selected finished goods other than foods and

energy, 1991-95

index 1991 | 1992 | 1993 | 1994 | 1995

Finished goods
other than foods
and energy

31 | 20 04) 16

‘| 33] 21
48 42 33

52 27] 47] 417

67 | -214 4] 36

. 52 6| 54] 65

5. 49 31 20 36

. 5.2 48] 39] 85

F 16 37 | 27 | 27

Capital equipment .. 25 | 17 18 | 20] 22
Heavy trucks ; 31] 30 | 41
3.3 77 22

26 35 22

~12.5 | -6.8 |-12.7
29 27 47
11} 20] 25