1 Globalization and Price Measurement Challenges and Options Prepared for The 2008 World Congress on National Accounts and Economic Performance Measures for Nations May 15 Session 2: Outsourcing, Economic Growth, and Productivity Measurement 11:10am-11:30am Bill Alterman (U.S. Bureau of Labor Statistics)

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3 I “Effects of Terms of Trade Gains and Tariffs Changes on the Measurement of U.S. Productivity Growth” by R.C. Feenstra, M.B. Reinsdorf, and M.J. Slaughter

4 The Basic Argument (from BW) Import Price Index ONLY Measures Price Changes of Imports Producer Price Index ONLY Measures Prices Changes of Domestic Production BLS Industrial Price Indexes Do NOT Measure price shifts as goods (and services) move from domestic sourcing to foreign sourcing (and vice versa)

5 Why Historically This was NOT an Issue Shifts tend to happen Slowly Operationally, Neither PPI nor IPP Designed to pick this up Only ‘overlap’ area which did receive any attention was overlap between PPI and Exports.

6 Why A BIG Issue Now Perception That More and More Jobs are Going Overseas –Once Viewed As Primarily a Problem for low wage industries –More and More High End Industries Are being viewed as Susceptible

7 Potential Evidence of Shift in Sourcing From Article Furniture Prices (Dec April 2007) –CPI went down 0.5 percent –PPI went up 9.0 percent. –Imports went up 6.7 percent. –Value of Imported Furniture soared 76 percent. –Official BLS measure of productivity indicated that productivity in the furniture industry went up 23 percent between 2000 and –Output in Furniture Industry up 3 percent.

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9 Evidence of Shift in Sourcing Not From Article Department of Commerce Recently revised Estimate of Size of US Wood Furniture Industry Value of Production in 2006 –As originally Reported: $13.5 bil. –As recently Revised:$8.6 bil.

10 Shift in Computer Sourcing Calendar 2002, imports accounted for 31 Percent of U.S. Consumption Third Quarter 2007 (Most recent data) Imports Accounted for 58 percent of U.S. Consumption

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12 Implications Increases in ‘Real’ Imports are Underestimated. Increase in Domestic Production has been Overestimated. Increase in GDP has been Overestimated. Gains as a result of ‘Terms of Trade’ are being incorrectly Measured as Productivity Gains.

13 Mitigating Factors Some Shifting may be in the reverse direction –Goods that were formerly imported are now being sourced in the U.S. Some outsourcing may actually be shifts to domestic suppliers These would lead to underestimating GDP and productivity

14 Worth Mentioning CPI does account for shift in sourcing PPI may be measuring this shift in sourcing in cases where respondent continues to price output even when sourcing shifts

15 Congressional Response As included in FY 2008 Omnibus: Accurately Reflecting Economic Conditions. - Within funds provided the BEA is directed to enter into an agreement with the National Academy of Sciences to conduct a study on methods for collecting data regarding the status of the U. S. economy and determine whether the current data results in an overstatement of economic growth, domestic manufacturing output, and productivity.

16 Possible Options Continue with Current Methodology Combine MPI and PPI into a Composite Wherever made price index Sample and Develop a true input Price Index

17 Jan-08Feb-08Mar-08Apr-08 May- 08Jun-08 Chair ADomestic 10 Chair BDomestic 10 Chair BImported 55 Chair CDomestic 10 Chair CImported 5555 Chair DImported

18 Possible Options Continue with Current Methodology Combine MPI and PPI into a Wherever made price index Develop a true Input Price Index

19 BLS Had Proposed Input Price Index “Improving the Measurement of producer price change” Monthly Labor Review, April 1978 Described comprehensive changes to the concepts and structure of the then Wholesale Price Index, subsequently renamed the Producer Price Index Included segment for Industry input price indexes (which resulted in net materials input indexes Also addressed issue of collecting buyer’s prices Viewed it as ‘either/or” issue

20 Composite Input Price Index BLS actually produced an “Input Price Index” between 1988 and Based on PPI Output Price indexes only Imports NOT included PPI’s indexes for nonresidential construction are based on input costs

21 Net Material Input Price Index

22 True Input Price Index How Feasible? Do not know Three Key Questions –Can we Draw a Sample? –Can we Get the Appropriate Data? –What is Aggregation Structure

23 Sample Current PPI uses comparatively ‘rough’ sample, with employment serving as a proxy in determining relative weights. Respondent responsible for determining actual products (based on revenue data) Data from Census of Manufactures used to determine weights for detailed product cells.

24 Sample Sample for Input Price index (in theory could use methodology similar to current PPI output index. A better frame would come from BLS accessing the raw data from the Census of Manufactures or Economic Census. Census of Manufactures has detailed information on cost of specific inputs to the establishment. Economic Census (which covers service industries) does NOT have same level of detail for inputs.

25 Pricing Would item be repriceable? –Is information from buyers as readily available as information form Sellers? –Is data more sporadic? Are we burdening same companies? Is data considered more sensitive? Every company may have same input (e.g. business services). Do we ask every establishment to reprice same inputs?

26 Aggregation Structure Product Based –Cost of Steel to all buyers of steel Industry Based –Costs of inputs to steel industry

27 Next Steps Develop a Proposal outlining a conceptual framework of products for the BLS industrial price programs Access the feasibility of producing a common sample for the PPI and IPP outputs. Review work of other countries in constructing input price indexes –According to OECD website: Australia, Japan, Ireland, Netherlands, Spain, United Kingdom

28 Next Steps Any additional work will require a commitment of resources –Attempt to draw a sample of respondents using data on input costs –Field a sample of companies (most likely in one industry) in order to test feasibility of data collection and index calculation of an input price index