1 EPA included only manufacturing SIC codes in this calculation because value of shipments for non manufacturing SIC codes are available only every five years. Memorandum Date May 14, 2002 To MP& M Public Record From Riley Newbert, Elena Besedin, and Nancy Hammett, Abt Associates Inc.

Subject Calculation of Sector Specific Producer Price Indices This memo describes the methodology used to derive sector specific producer price indices ( PPIs) to inflate survey data to 1996 dollars. The first section of this memo describes the methodology used to calculate sector specific values. The second section summarizes the methods used to fill in missing PPI data. The third section shows the average PPI values by sector and year.

Methodology To calculate average PPI values by sector and year, EPA collected PPI values by 4 digit SIC code from the Bureau of Labor Statistics for 1987 through 1996. EPA also collected data on the value of shipments from the Annual Survey of Manufacturers for non Census years and from the Economic Census for Census years ( i. e., 1987 and 1992). 1 EPA multiplied each PPI value by the value of shipments for that SIC code and year. The Agency then aggregated the value of shipment weighted PPIs and total value of shipments for each year by sector. Finally, EPA divided the value of shipment weighted PPI value by the value of shipments for that sector to calculate a sector specific PPI value by year.

EPA inflated the following survey data using sector specific PPIs:

° Phase 1 Detailed Questionnaires: Facilities reported three years of financial data from 1987 to 1989. EPA estimated three year averages in 1989 dollars for the Phase I analysis and used the sector specific PPIs to inflate those average data to 1996 dollars for the final MP& M analysis.

° Phase 2 Detailed Questionnaires: Facilities reported three years of financial data from 1994 to 1996. EPA inflated the financial data from 1994 and 1995 to 1996 dollars using the sectorspecific PPIs and then calculated an average value.

Filling in Missing PPI Data Nineteen 4 digit SIC codes in eight sectors had missing PPI series data during the ten year analysis period ( 1987 1996). EPA used the following five parameters to fill in these data gaps:

° Information at the 3 digit SIC code level if data were unavailable at the 4 digit SIC code level; ° The percentage change in price at the 3 digit level, applied to the 4 digit level to calculate missing values, if data at the 4 digit level were available for several years; ° GDP price indices for National Defense Consumption Expenditures and Gross Investment by Type for military related industries; ° Excluding the 4 digit SIC code from the calculation of sector specific PPI's; and ° A best fit line to extrapolate data for years with missing data. 2 Data come from the Bureau of Economic Analysis, Table 7.12. Chain Type Quantity and Price Indexes for National Defense Consumption Expenditures and Gross Investment by Type. http:// www. bea. doc. gov/ bea/ dn/ nipaweb/ TableViewFixed. asp? SelectedTable= 155& FirstYear= 1995& LastYear= 2000 & Freq= Year 3 Data come from the Bureau of Economic Analysis, Table 7.12. Chain Type Quantity and Price Indexes for National Defense Consumption Expenditures and Gross Investment by Type. http:// www. bea. doc. gov/ bea/ dn/ nipaweb/ TableViewFixed. asp? SelectedTable= 155& FirstYear= 1995& LastYear= 2000 & Freq= Year Hardware ( Sector 1): One SIC code, 3492 in the hardware sector, is missing PPI data for the five years 1987 1991. The value of shipments in that SIC code represent a maximum of three percent of the total value of shipments in that sector. EPA dropped this SIC code from the sector specific PPI calculation, assuming that the price change in SIC code 3492 is similar to the average price change of the other SIC codes in the hardware sector.

Electronic Equipment ( Sector 3): Two 4 digit SIC codes in the electronic equipment sector, 3663 and 3669, are missing data for the five years 1987 1991. EPA used 3 digit SIC code 366 ( Communications Equipment) to estimate the price changes in both 4 digit SIC codes. There is one other 4 digit SIC code, 3661 in SIC code 366. SIC codes 3663 and 3669 represent between 48 and 56 percent of the total value of shipments in the 3 digit SIC code.

Stationary Industrial Equipment ( Sector 4): Two 4 digit SIC codes, 3593 and 3594, are missing data for the four years 1987 1990. One SIC code, 3565, is missing data for the two years 1987 1988. The value of shipments in SIC codes 3565, 3593, and 3594 represent a maximum of 1.6, 1.5 and 1.3 percent, respectively, of the total value of shipments in the stationary industrial equipment sector. EPA dropped all three SIC codes from the sector specific PPI calculation, assuming that the price change in those SIC codes is similar to the average price change of the other SIC codes in the stationary industrial equipment sector.

Aerospace ( Sector 6): PPI series data are not available in the Aerospace sector, which includes SIC codes 3761, 3764, and 3769. In the absence of PPI series data, EPA used the price index for National Defense Gross Investment for missiles from the Bureau of Economic Analysis ( BEA). 2 Mobile Industrial Equipment ( Sector 7): No PPI data are available for SIC 3795 ( tanks and tank components) over the ten year analysis period 1987 1996. In the absence of PPI series data, EPA used the price index for National Defense Gross Investment for vehicles from the Bureau of Economic Analysis ( BEA). 3 Instruments ( Sector 8): SIC code 3812 is missing data for the five years 1987 1991. EPA used the price change in the PPI series for SIC code 381 to estimate the PPI series for 3812. SIC code 3812 is the only 4 digit SIC code in SIC code 381, a 3 digit SIC code for which data are available.

Two 4 digit SIC codes , 3821 and 3827, in the 3 digit SIC code 382 ( Laboratory Apparatus and Analytical, Optical, Measuring, and Controlling Instruments) are missing data for the five years 1987 1991. EPA used the 3 digit SIC code to estimate the price changes in both 4 digit SIC codes. SIC codes 3821 and 3827 represent between 11 and 14 percent of the total value of shipments in the 3 digit SIC code.

SIC code 3844 is missing data for the four years 1987 1990. The value of shipments in SIC code 3844 represent a maximum of three percent of the total value of shipments in the instruments sector. EPA dropped this SIC code from the sector specific PPI calculation, assuming that the price change in SIC code 3844 is similar to the average price change of the other SIC codes in the instruments sector.

Office Machines ( Sector 15): Four 4 digit SIC codes in the office machinery sector, 3571, 3572, 3575, and 3577, are missing PPI data. EPA used a best fit line based on the years in which data were available for each SIC code to extrapolate data for years with missing data.

Printed Circuit Board ( Sector 16): The printed circuit board sector has only one 4 digit SIC code, 3672. Data for this sector are missing for the five years 1987 1991. EPA used the known percent change in SIC code 3674 ( Semiconductors and Related Devices) as a proxy for SIC code 3672 ( Printed Circuit Boards) because the industry seems similar and had similar price changes for those years with available data.

Table 1: Summary of M issing PPI Data SIC Code Description Sector Years Missing Proposed Solution 3492 Fluid Power Valves and Hose Fittings Hardware ( Sector 1) 1987 1991 Exclude from sector specific PPI calculation 3663 Radio and Television Broadcasting and Communications Equipment Electronic Equipment ( Sector 3) 1987 1991 Use 3 digit SIC code 366 ( Communications Equipment)

3669 Communications Equipment, Not Elsewhere Classified Electronic Equipment ( Sector 3) 1987 1991 Use 3 digit SIC code 366 ( Communications Equipment)

3565 Packaging Machinery Stationary Industrial Equipment ( Sector 4) 1987 1988 Exclude from sector specific PPI calculation 3593 Fluid Power Cylinders and Actuators Stationary Industrial Equipment ( Sector 4) 1987 1990 Exclude from sector specific PPI calculation 3594 Fluid Power Pumps and Motors Stationary Industrial Equipment ( Sector 4) 1987 1990 Exclude from sector specific PPI calculation 3761 Guided missiles and space vehicles Aerospace ( Sector 6) All Use price index for National Defense Gross Investment for missiles Table 1: Summary of M issing PPI Data SIC Code Description Sector Years Missing Proposed Solution 3764 Guided missile and space vehicle propulsion units and propulsion unit parts Aerospace ( Sector 6) All Use price index for National Defense Gross Investment for missiles 3769 Guided missile and space vehicle parts and auxiliary equipment, not elsewhere classified Aerospace ( Sector 6) All Use price index for National Defense Gross Investment for missiles 3795 Tanks and Tank Components Mobile Industrial Equipment ( Sector 7) All Use price index for National Defense Gross Investment for vehicles 3812 Search, Detection, Navigation, Guidance, Aeronautical, and Nautical Systems and Instruments Instruments ( Sector 8) 1987 1991 Use known percent change in 3 digit SIC code 382 ( Laboratory Apparatus and Analytical, Optical, Measuring, and Controlling Instruments) to estimate PPI series.

3821 Laboratory Apparatus and Furniture Instruments ( Sector 8) 1987 1991 Use known percent change in 3 digit SIC code 382 ( Laboratory Apparatus and Analytical, Optical, Measuring, and Controlling Instruments) to estimate PPI series.

3827 Optical Instruments and Lenses Instruments ( Sector 8) 1987 1991 Use known percent change in 3 digit SIC code 382 ( Laboratory Apparatus and Analytical, Optical, Measuring, and Controlling Instruments) to estimate PPI series.

3844 X Ray Apparatus and Tube and Related Irradiation Apparatus Instruments ( Sector 8) 1987 1990 Exclude from sector specific PPI calculation 3571 Electronic Computers Office Machines ( Sector 15) 1987 1990 Use a best fit line to extrap olate data for years with missing d ata 3572 Computer Storage Devices Office Machines ( Sector 15) 1987 1992 Use a best fit line to extrap olate data for years with missing d ata 3575 Computer Terminals Office Machines ( Sector 15) 1987 1993 Use a best fit line to extrap olate data for years with missing d ata 3577 Computer Peripheral Equipment, Not Elsewhere Classified Office Machines ( Sector 15) 1987 1993 Use a best fit line to extrap olate data for years with missing d ata Table 1: Summary of M issing PPI Data SIC Code Description Sector Years Missing Proposed Solution 3672 Printed Circuit Boards Printed Circuit Board ( Sector 16) 1987 1991 Use known percent change in SIC code 3674 ( Semiconductors and Related Devices) to estimate PPI series.

Results Table 2 shows the final sector specific producer price indices by year. Table 2: Summary of Sector Specific Producer Indices by Year Name 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Hardware 108.0 113.8 119.1 122.1 124.0 124.3 125.7 128.5 133.0 135.2 Aircraft 101.2 103.9 109.9 115.3 119.8 124.3 127.9 131.7 134.8 138.0 Electronic Equipment 105.7 106.7 108.6 110.1 111.3 112.5 114.4 114.9 114.9 114.9 Stationary Industrial Equipment 109.4 113.3 118.4 123.0 125.9 128.0 130.5 132.8 136.3 139.3 Ordnance 102.4 105.0 107.8 109.0 113.0 117.3 121.3 123.1 125.2 125.8 Aerospace 122.3 120.5 118.7 114.2 110.6 108.2 111.2 107.6 103.1 100.0 Mobile Industrial Equipment 112.2 115.4 121.1 125.3 128.3 131.8 135.3 138.4 142.5 146.5 Instruments 99.6 102.7 106.9 110.8 114.1 117.4 120.9 123.1 125.0 126.4 Precious Metals and Jewelry 106.6 110.2 113.2 116.8 118.9 120.1 121.7 123.0 124.6 126.3 Ships and Boats 110.0 113.3 117.7 120.9 122.3 126.3 131.4 135.0 137.6 141.1 Household Equipment 112.8 117.0 121.2 123.8 124.9 125.8 127.4 129.8 132.9 136.8 Railroad 101.9 103.7 110.0 114.2 117.3 118.7 119.8 122.6 127.6 129.6 Motor Vehicle 109.7 111.0 114.1 116.2 119.9 122.3 124.8 127.8 128.8 129.7 Bus & Truck 115.4 118.6 123.9 125.5 128.1 131.1 133.4 137.6 146.9 149.1 Office Machine 118.4 113.4 106.2 99.9 95.5 86.1 79.2 72.5 66.3 62.0 Printed Circuit Boards 107.0 107.0 106.2 103.7 101.5 99.4 97.1 95.0 95.1 95.9 Job Shop 106.7 110.6 115.7 117.5 118.7 119.5 121.3 122.0 124.3 125.5 Other Metal Products 103.7 106.6 111.0 114.0 115.0 116.5 117.7 118.8 121.7 123.4 Iron and Steel 99.6 110.0 113.1 111.6 110.4 109.6 112.3 117.7 123.8 121.6 Sources U. S. Department of Commerce. 1987,1992. Bureau of the Census. Census of Manufacturers.

U. S. Department of Commerce. 1988 1991,1993 1996. Bureau of the Census. Annual Survey of Manufacturers.

Bureau of Labor Statistics. Producer Price Index. http:// www. bls. gov/ ppi/ home. htm