Coverage of Services in BLS Price Programs Presentation to the Department of Commerce / International Trade Administration / Department of Labor sponsored conference: Measuring and Enhancing Services trade Data and Information September 14, 2010 Mike Horrigan Associate Commissioner Office of Prices and Living Conditions 1

2 Outline of Talk Why data on services are so important Data produced by BLS Expansion of service coverage in PPI IPP coverage of services Measurement Challenges: Globalization Health Care reform

Why data on services are so important U.S. economy increasingly driven by the service sector 1/3 rd of U.S. exports 78% of U.S. private sector GDP 82% of U.S. private sector employment Critically important for calculating real GDP 3

Price data on services from BLS PPI indexes By detailed industry By line of service wherever provided By line of service within industry Stage of Processing* All Economy PPI* 4

Price data on services from BLS Import and Export Price indexes End use classification from BEA NAICS classification Harmonized classification system 5

6 PPI Services Historical Perspective today Research begins

7 PPI Services Through the Years: 1980s Development of the service sector industry indices began in the mid 1980s with the publication of several industries in the transportation sector. Railroad, Line Haul Operations Scheduled Passenger Air Transportation Scheduled Freight Air Transportation Deep Sea Freight Transportation Pipeline Transportation of Crude Oil

8 PPI Services Through the Years: 1990s In the early 1990s research began on more complex industries. Some examples include: Information service - Telephone Communication - Prepackaged Software - Broadcasting Professional services - Lawyers - Architects - Accountants - Real Estate Services Health care - Hospitals - Physicians Administrative services - Employment agencies - Temporary help

9 PPI Services Through the Years: 2000s In 2000 the PPI achieved another milestone with the publication of the first Retail Trade Industry indices, Grocery Stores. By 2001 the PPI introduced price indices for industries that represented 50% coverage of the in-scope services sectors as measured by 1992 GDP. FY 2001 the PPI received funding to continue the services sector expansion. Banking Wholesale Trade Information Technology industries – Internet Service Providers – Web Search Portals

Where are we now? Over 77.4% of in-scope service industries. Over digit industries. Over 1000 indexes within service industries representing different lines of service. Over 350 where-ever provided indexes representing lines of services regardless of the industry providing the service.

Selected high revenue export industries Covered by PPI 4811 Scheduled air transportation 4812 Non-scheduled air transportation Deep sea freight transportation Software publishers Investment banking and securities dealing Management consulting Not covered by PPI Motion picture and video production Reinsurance carriers 5417 Scientific Research and Development services 11

IPP coverage of services Coverage Export Air Freight and Air Passenger 7% Import Air Freight and Air Passenger 10% Discontinued series Export travel and tourism 21% Export Post secondary education 3% Import Crude Oil Tanker Freight 3% Import Ocean Liner Freight 8% 12

IPP Coverage Discontinued planned expansion Export Ocean Port 3% Import Travel and Tourism 22% Import Reinsurance 9% 13

Measurement Challenges Globalization Health care reform 14

Do BLS import/export price indexes overstate U.S. real GDP growth? Mike Mandel

Measuring price change in the era of globalization As producers switch from internal or domestic sourced supply to foreign sourced suppliers for inputs, BLS fail to capture the associated price drops. If we dont account for these falling prices, then we are overestimating the rate of price inflation for imports, and underestimating the value of real imports. Real GDP = C + I + G + (X-M) If we underestimate real M, we are overestimating real domestic GDP, and by default the productivity of the U.S. economy.

Measuring price change in the era of globalization The PPI is an output based price index. We measure the payments received by producers for the production of output or the provision of services. To the extent that falling input prices are reflected in falling domestic output prices, then we do capture that impact in domestic inflation – both for PPI finished goods and CPIs.

Measuring price change in the era of globalization In terms of deflators for imports, our import indexes do not reflect price drops as the sourcing of imports switches from domestic to foreign based. When the sourcing of an input switches from one foreign country to another, however, we do capture this price drop The prices paid for an input is not part of our current methodological approach.

Measuring price change in the era of globalization One way to capture these price drops is to develop an input price index. Such indexes would reflect price drops for inputs regardless of source. These indexes would provide more direct measures of input inflation for the BEA input- output tables.

Measuring price change in the era of globalization Challenges still remain: The distinction between manufacturing and wholesale trade Classification of goods and services is not seamless between PPI and IPP Prices at the border do not capture global supply or value chains

Is BLS overstating the rate of inflation in medical care? A perspective on health care reform Goal of reducing out of pocket costs. Role of CPIs and PPIs. Pricing medical care services by provider does not track the treatment of an episode of illness or disease. Protocol shifts such as replacing ulcer surgery with a pharmaceutical agent are not captured. The magnitude of this impact is unknown, although preliminary research at BLS suggests it may not be very large.

Is BLS overstating the rate of inflation in medical care? A perspective on health care reform The 2007 Census of Establishments for the medical care industry included the collection of revenue by Disease category. Doctors office (ICD-9), Hospitals (DRG) and MRI Centers (ICD-9), and Pharmaceutical agents can be aggregated up to a disease based classification system BLS / PPI plans to produce disease based price indexes that capture the effect of changing revenue weights across provider classes as disease protocols change

Contact Information Mike Horrigan Associate Commissioner Office of Prices and Living Conditions