BLS Research on Capital Service Lives Michael D. Giandrea, Brian D. Chansky, Corby A. Garner, Randy M. Kinoshita, Peter B. Meyer, Susan G. Powers, and Steven Rosenthal Office of Productivity & Technology U.S. Bureau of Labor Statistics July 24, 2015

Outline Role of capital service lives Sources of capital service lives Comparisons Future

What are capital service lives? 3 Expected productive lifetime of a productive asset  Equipment and structures In practice: the average expected lifetime of a class of heterogeneous assets  Level of aggregation determines the degree of similarity of the assets within a class

How are capital service lives used? Capital stock is measured using the Perpetual Inventory Method (PIM) This requires 1)Historical data on investment 2)Age-efficiency function 3)Asset service lives Important input to calculation of multifactor productivity Also used for calculation of wealth stock

Sources of BLS capital service lives 5 Bureau of Economic Analysis produces service life and depreciation values for asset classes Data sources include  U.S. Treasury Bulletin F (1942)  Hulten and Wykoff (1979, 1981a, 1981b)  Office of Industrial Economics  Office of Tax Analysis (Treasury)

Sources of BLS capital service lives (2) BEA Rates of Depreciation and Service Lives Type of Asset Rate of Depreciation Service Life Hulten-Wykoff Category Software Prepackaged C Custom C Nonmedical instruments C Photocopy & related equipment C Office & accounting equipment B Metalworking machinery Nonmanufacturing industries A Durable manufacturing: Wood products A Fabricated metal products A Motor vehicles, bodies & trailers, and parts A

Sources of BLS capital service lives (3) Hyperbolic asset depreciation is assumed Depreciation rate – service life pairs are calculated based on this assumption BEA’s depreciation rate for an asset is compared to these pairs Closest depreciation rate is selected and associated service life is assigned

Models of efficiency decline 8 For structures: For equipment: Effectiveness assumed to decline by 30% per year (e is effectiveness or efficiency, a is age of the asset):

Source of BLS capital service lives (4) Household Furniture and Fixtures BEA depreciation rate is BLS compares this to hyperbolic depreciation rate and service life pairs Closest BLS depreciation rate is This rate is associated with 15 years compared to 12 years at BEA

BLS – BEA service life comparison

Accuracy of service lives Source data for service lives is, in many cases, very dated Lives of many assets are not based on asset data  No specific data were available for Special industry machinery, for example Part of general review of capital service measures, BLS has begun study of whether and how to update service life data

Effect of service lives on capital stock YearService Life = 6Service Life = 5Service Life =

Small service life change has small effect on stock

Other sources of asset service lives Expect service lives to be similar across countries Data from other countries  National statistical agencies of Netherlands, Italy, Canada But comparisons can be difficult, primarily due to differing classification systems and levels of aggregation  Asset classes, industries

Statistics Netherlands Disinvestment Survey  Direct observation of capital discards  Establishment level survey   55 industries and 16 asset types

BLS – Stats Netherlands comparison BLS  light trucks (post 1992) = 10 years  autos = 9 years Statistics Netherlands  passenger cars and other road transport equipment = 5 to 9 years depending on industry

BLS – Stats Netherlands comparison (2) BLS  Metal working machinery in Fabricated metal industry = 25 years Stats Netherlands  Machinery and equipment in Manufacture of fabricated metal products industry = 33 years

Italian National Institute of Statistics Survey of assets classified under Other Machinery and Equipment 359 using firms 78 producing firms Recently conducted: 2011

Istat Using firms asked  Useful service life of their capital goods  Expected service life of newly purchased capital goods Producing firms asked  Expected service life of capital goods produced in last 5 years

BLS – Istat comparison BLS  Communications equipment = 19 years (13 years in Broadcasting & communications) Italy  Communications equipment = 7 years (9 years in manufacturing)

BLS – Istat comparison (2) BLS  Personal computers = 5 years  Household furniture and fixtures = 15 years  Other furniture = 17 years Italy  Computers and peripheral equip. = 6 years  Furniture = 13 years

Statistics Canada Capital Repair and Expenditure Survey  25 years of observations  155 asset types  Asks about used asset sales and discards  Calculates service lives and depreciation rates from large sample

BLS – Canada comparison BLS  Software, pre-packaged = 3 years  Household furniture & fixtures = 15 years Canada  Software, standard and on the shelf = 3 years  Other furniture, furnishings, and fixtures = 7.9 years

BLS – Canada comparison (2) BLS  Mining and oil field machinery = 13 years Canada  Oil and gas exploration drilling = 31 years  Mining sites exploration = 14.2 years

Service life survey Establishment level Focus on equipment Limit the questions to promote ease of response

Service life survey (2) Acquisitions  Equipment code?  New or used?  Year of manufacture?  Expected years in service?

Service life survey (3) Discards  Equipment code?  Year of acquisition?  Year of manufacture?  Was equipment sold, destroyed, or some other action?

Usefulness New data could confirm or complement existing service life values If new data are of high enough quality they would replace existing service life values This may be largely dependent on sample size

Conclusion Already have used excellent international service life efforts to assess current BLS service life values For many assets, improved service life data will have small impact on estimated capital stocks and growth rates Some larger changes could have substantial effects

Depreciation – Service Life Pairs EquipmentStructures Service LifeDepreciation RateService LifeDepreciation Rate