What Aggregation Strategies Should Be Considered to Include Services?

4.1.1 Industry and Commodity Strategies

With the PPI currently producing numerous individual detailed service indices and its coverage of over 76% of in-scope output of this sector, a natural question arises as to what kinds of economically meaningful aggregations of service based indices can be produced? While the

focus of this section is on the research that is needed to develop a consensus on the publication of broad aggregates, such as a price index for the entire service sector, BLS is pleased to announce that planning is currently underway to begin calculation of additional aggregate indices for service subsectors and selected cross-sector aggregations. A companion paper describing these plans has been prepared for the June 9 FESAC meeting. The goal of adding selected aggregation detail to service industry PPIs is partly the result of the feedback received from the December 2005 FESAC meeting. For additional information, please see the paper, “Plans for New PPI Service Sector Aggregation Indexes” by Maureen Doherty and Roslyn Swick.

What are the various possible aggregations that could be developed to include the greatly expanded coverage of the service sector? One possible aggregation scheme for service industries would be to aggregate together all services. An industry index that nets out the flow of services between the services industries could be developed. A commodity based index based on the gross output of the service sector could also be produced.

In constructing aggregations of service industry indices, one distinction that is often drawn is the division between traditional service providing industries and distributive service industries – the latter including the NAICS sectors for Transportation, Wholesale Trade and Retail Trade. A second possibility would be to produce both net output and commodity indexes for traditional services, distributive services, and an index combining the two aggregates. Yet a third possibility, also consistent with some international practices, is to include transportation in traditional services and define distributive services as wholesale and retail trade.

A total industry index could also be produced that aggregates together services, distribution, manufacturing, agriculture and mining industry indices. This index would be an industry index that represents transactions in these industries which are going to final demand since all intermediate demand is netted out.

Weights for all these industries could be derived or obtained from the Economic Census data or Bureau of Economic Analysis data either in the form of Made-In-Industry weights, Wherever- Made weights or Input-Output data.

4.1.2 Special Aggregate Indices

A variety of special aggregations could be produced using data from all sectors of the economy that are priced in the PPI program.

A series of commodity and industry indices could be produced that are based on the gross fixed investment or the personal consumption expenditures data found in the BEA national accounts input output tables.

A special index could also be developed that measures business services. Most international definitions of business services include service sector industry output that is used for

intermediate demand. Service and transportation indices are generally used for producing these indices. This index would generally be compiled from commodity data since commodity data are the international standard for PPIs as defined by the International Monetary Fund manual on Producer Price Indices.

Other possible aggregations may be used for specific groups of services. An index that

are currently two different PPI banking industries, both of which provide loans and deposit services. These two industries are Commercial Banks and Savings and Loans Institutions. From data in these two industries and any future financial industries that provide loans and/or deposit services, an index for all loans, all home loans, all auto loans, etc. may be developed that aggregates the various loan services together to produce a comprehensive set of indices on loans. The same type of aggregation could be done for deposit services.

Another special aggregation index could be developed for health services based on Major Diagnostic Categories (MDC) that would provide measurement of various treatments based on the MDCs. For example, indices from the hospitals, physicians, and pharmaceutical industries could be used to provide an index that measure the price of the various treatments based on MDCs. These series of indices are frequently requested and would be greatly utilized by both the medical community and the research community.

Another special aggregation would be to produce stage of processing indices that include services. The SOP indices would be produced using commodity indices, industry indices, or a combination of both.

4.1.3 Future Developments

If any of these aggregate indices were to be developed at the current time, they would have to be constructed from the lowest level industry indices, since current PPI systems allow an item to be used in only one lowest level index. However, over the next two years, the PPI program will have new computer and estimation system capabilities, which will allow items to be used in multiple lowest level indices thus permitting greater flexibility in the index construction

techniques that can be employed. In addition, the PPI program has embarked on a research project to evaluate the viability of potential aggregation structures. Research areas may include determining the economic interpretation of the index, examining the index’s relative volatility, and analyzing the usefulness of the index to data users. Once the research is completed and the new computer system is available, the PPI will be able to begin calculating new indexes based on our research results.