Keeping NAICS Relevant: Identifying and Classifying Factoryless Goods Producers (FGPs)

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1. Why is the treatment of FGPs in economic statistics important to BLS?

   In recent years, producers have incorporated more specialization into goods manufacturing as global competition has forced them to seek more efficient production methods. Many firms have outsourced manufacturing transformation activities (that is, the physical, chemical, or mechanical transformation of inputs into new outputs) to specialized establishments, both foreign and domestic.

   Such outsourcing can lead to inconsistent classification of business establishments in official statistics when the standard classification systems do not provide adequate guidance. Statistics that are not comparable with other data series or that do not reflect current economic activity hinder sound decision making.

   In addition, global production arrangements increase cross-border movements but do not necessarily increase international trade or economic activity. International transactions based on cross-border movements may yield distorted pictures of international trade, especially on a bilateral basis. Likewise, the mix of trade in goods and trade in services may be distorted based simply on cross-border movements of goods.

2. What are the three types of manufacturing establishments currently involved in the manufacturing process?

   • Traditional or Integrated Manufacturer. The traditional or integrated manufacturer uses inputs such as capital, labor, and energy to transform material inputs into a new product to be sold.
   • Manufacturing Service Provider. The manufacturing service provider (MSP) provides contract manufacturing services that use inputs such as capital, labor, and energy to transform material inputs according to the contract specifications. The growth of MSPs (foreign and domestic) is the result of traditional integrated manufacturers substituting away from direct expenditures on capital and labor (that is, factories, equipment, and production workers) to purchases of capital services and labor services. MSPs provide the capital and labor services.
   • Factoryless Goods Producer. The factoryless goods producer (FGP) outsources all of the transformation steps that traditionally have been considered to be manufacturing but undertakes all of the entrepreneurial steps and arranges for all capital, labor, and material inputs required to make a good.

3. How are FGP establishments currently classified under NAICS?

   The treatment of units that outsource all manufacturing transformation varies among the U.S. statistical agencies. Some programs classify the units to manufacturing if the value of intellectual property is a significant portion of the value of the finished good. Other programs classify the units to wholesale trade because there are no factories, plants, or mills to classify in the manufacturing sector. In summary, there is not consistent classification of units that outsource manufacturing transformation in current economic statistics. This is why the Economic Classification Policy Committee recommended a change in the definition of manufacturing that is intended to result in consistent industrial classification across all U.S. statistical agencies.

4. How does the Economic Classification Policy Committee recommend classifying FGP establishments in NAICS?

   The Economic Classification Policy Committee recommended classifying FGPs in the manufacturing sector in NAICS. FGPs should be classified with the existing industries that include the integrated manufacturers and the manufacturing service providers. Programs are encouraged to provide specific industry identifiers to integrated manufacturers, manufacturing service providers, and FGP establishments and to develop and apply appropriate editing and imputation methodologies that recognize not only the differences among the three types of producers but also the different relationships among variables such as employment, shipments, and cost of materials for the three types of manufacturers.

5. Why did the Economic Classification Policy Committee recommend classifying FGP establishments in the NAICS manufacturing sector?

   The basis for this decision is both conceptual and practical and will provide a consistent and stable classification framework regardless of changing outsourcing decisions based on the relative cost of the factors of production across time and international borders.

   From a conceptual standpoint, at the most aggregate level, goods producers arrange for and bring together all of the factors of production necessary to produce a good. Goods producers accept the entrepreneurial risk of producing and bringing goods to market. When individual steps in the complete process are outsourced, an establishment should remain classified in the manufacturing sector.

   A practical problem exists for longer-term consistency in classification. An FGP establishment may move production from point to point based on the relative costs as noted previously. A movement from offshore contractors to domestic contractors because of transportation costs should not change the classification of the establishment.

6. What changes were made to international accounting guidelines?

   The national accounting guidelines were changed so that imports and exports should be recorded based on the change of economic ownership. When material inputs are transferred from the owner in one country to an establishment in another country for further processing and the resulting processed good is then returned to the owner, the material inputs sent for processing should not be recorded in national income and product accounts as an export from the owner or an import to the processing establishment. In addition, the processed goods returned by the processing establishment to the owner should not be recorded as an export of the processor or as an import to the owner. Instead, the fee paid to the processing establishment by the economic owner of the goods should be recorded as the import of processing services to the owner of the goods and an export of processing services from the processing establishment. This change does not affect trade statistics, which will still be compiled on a cross-border basis.

7. Which BLS economic statistics will be affected by the new industry classification rules and the revised economic accounting guidelines?

   Any statistical series that is based on the North American Industry Classification System (NAICS), the System of National Accounts 2008 (SNA2008), or the Balance of Payments and International Investment Position Manual, Sixth Edition (BPM6) or that are derived from the series will be affected. Some of the BLS programs that will be affected are listed below:

   • Quarterly Census of Employment and Wages
   • Current Employment Statistics
   • Job Openings and Labor Turnover Survey
   • Producer Price Index
   • Import and Export Price Indexes
   • Major Sector and Industry Productivity Statistics
   • Occupational Employment Statistics
   • Occupational Safety and Health Statistics
   • National Compensation Survey

8. How will the new industry classification rules and the revised economic accounting guidelines affect BLS economic statistics?

   The effects of the changes on U.S. economic statistics will depend on the number and size of individual establishments that are subject to reclassification under NAICS and the size of transactions that are subject to revised economic accounting under the SNA2008 and BPM6. The U.S. Census Bureau is currently researching the number and size of individual establishments based on special questions asked in the 2012 Economic Census. As a result, there is currently not enough information to determine the effects. However, we do have information to describe the directions of changes that are expected for a number of U.S. economic statistics.

9. What changes are expected in U.S. employment and wage statistics?

   Changes in U.S. employment and wage statistics would result from the implementation of the new classification rules under NAICS. The revised economic accounting guidelines do not affect the statistics. The expected effects on U.S. employment and wage statistics are described in the following table. At this point we can only describe directions of change; nothing is known yet about magnitude or significance.

   Total U.S. employment and wages	U.S. totals are not expected to change.
   U.S. sector employment and wages	Values are expected to shift across U.S. sectors, with U.S. manufacturing likely increasing and other U.S. sectors, primarily wholesale trade and management of companies, likely decreasing. Increases in U.S. manufacturing are expected to be concentrated in specific industries. This could result in regional shifts within sectors.
   U.S. production employees	U.S. totals are not expected to change. U.S. sector total changes are expected to be minimal, since FGPs would have few, if any, production employees.

10. What changes are expected in revenue statistics used as inputs to BLS statistics?

    Changes in U.S. revenue statistics would result from both the implementation of the new classification rules under NAICS and the revised economic accounting guidelines. The expected effects on U.S. revenue statistics are described in the following table.

    Total U.S. revenue

    The U.S. total is expected to change, but the direction and amount of the change are unknown. Because of the accounting guidelines changes, U.S. FGPs may report domestic revenue from the full value of the final product that previously would have been treated only as an import. Some statistical measures use the trade margins rather than sales to value the output from establishments classified in the trade sector. For those measures, such as the Producer Price Index, because of the new classification rules if a U.S. establishment previously classified in the trade sector is determined to be an FGP and is reclassified to a manufacturing industry, U.S. revenue for that establishment will increase by the difference between the full value of the product for those statistical measures and the trade margin. Manufacturing service providers and traditional or integrated manufacturers and establishments with a mix of these activities are currently classified in manufacturing and will continue to be. For a U.S. manufacturing establishment that is determined to be a manufacturing service provider rather than a traditional or integrated manufacturer because of the classification rules, its output will be a manufacturing service rather than a good and its revenue will be the value of the manufacturing service provided rather than the value of the good.

    U.S. sector revenue

    Because of the new classification rules, U.S. sector totals are expected to change, with increases expected in U.S. manufacturing and decreases in other U.S. sectors. The U.S. manufacturing changes likely will be limited to specific industries.

11. How will these changes affect Producer Price Indexes?

    The Producer Price Index would be affected by the implementation of the new classification rules under NAICS and the revised economic accounting guidelines. The expected effects on Producer Price Indexes are described in the following table. At this point we can only describe directions of change; nothing is known yet about magnitude or significance.

    Scope

    For areas where the Producer Price Index is not currently pricing products that are produced using foreign contractors, products would be moved from wholesale trade with margin prices to manufacturing with product prices. For products of FGPs, the Producer Price Index would be able to directly reflect price changes when an FGP establishment begins to outsource some its production that was previously fabricated in a domestic location.

    Aggregate indexes

    The Producer Price Index uses revenue data to calculate weights for its aggregation structures. As a result, the price movements for products and industries with significant FGP activity would have a bigger impact on the movement of aggregates, including the Final Demand-Intermediate Demand indexes, because of their increasing relative importance.

12. How will these changes affect U.S. import and export price indexes?

    The import and export prices indexes would be affected by the revised economic accounting guidelines. The expected effects on import and export price indexes are described in the following table.

    Scope

    The Import and Export Price Indexes program will need to decide whether to measure imports and exports based on the U.S. Merchandise Trade Statistics guidelines, the international accounting guidelines, or both. If the international accounting guidelines are used, the program would need to measure prices for contract manufacturing services. If the Merchandise Trade Statistics guidelines are used, there may be inconsistent treatment between the Producer Price Index and Import and Export Price Indexes of products output by FGPs, with the Producer Price Index treating them as domestic production and Import and Export Price Indexes treating them as imports.

    Aggregate indexes

    If Import and Export Price Indexes program uses the Merchandise Trade Statistics guidelines, there would be no change. If the program uses the international guidelines, the relative importance of products that are primarily produced by FGPs likely will decrease. The ability to publish locality-of-origin indexes also may be affected.

13. How will these changes affect productivity statistics?

    Productivity measures would be affected by the implementation of the new classification rules under NAICS and the revised economic accounting guidelines. Because productivity measures are calculated using data collected by other programs, they rely on consistent implementation across programs that supply source data. The expected effects on productivity data are described in the following table. At this point we can only describe directions of change; nothing is known yet about magnitude or significance.
     

    Labor and multifactor productivity measures

    Values are expected to shift across U.S. sectors and industries, with U.S. manufacturing output and inputs likely increasing and those in other U.S. sectors, primarily wholesale trade and management of companies, probably decreasing. The shifts in output are likely to be different in magnitude from the shifts in labor hours and other inputs, thus affecting labor productivity and multifactor productivity measures for major sectors and for detailed industries. Data to adjust (bridge) historical output and input data back in time would be needed in order to create consistent historical time series for analyzing productivity trends.

14. How will these changes affect safety and health statistics?

    Expected changes in occupational injury and illness statistics are described in the following table.  All of these changes result from the new classification rules.

    Total U.S. injuries, illnesses, and fatalities

    U.S. totals are not expected to change.

    U.S. industry-level injuries, illnesses, and fatalities

    Values would shift across U.S. sectors, with the count of injuries, illnesses and fatalities likely increasing in the U.S. manufacturing sector and shifting away from other U.S. industry sectors, primarily wholesale trade and management of companies and enterprises. The shift of employees from relatively lower risk industries into the manufacturing sector would lower the incidence rate of injuries, illnesses and fatalities in the overall manufacturing sector.

15. How will these changes affect U.S. compensation statistics?

    The BLS National Compensation Survey provides estimates of benefit coverage, characteristics of benefit plans, and employer costs for wages and benefits (including the quarterly Employment Cost Index). Because of the relatively small sample of employers, these estimates are only available for broad industry groups, such as manufacturing and wholesale trade. Estimates are not available for more detailed industries. To the extent that compensation differs between these broad industry groups, the reclassification of certain establishments into manufacturing may result in a variations from current patterns. Any changes are likely to be minimal.

16. How will the changes affect the ability of data users to analyze BLS time series data?

    It is important to U.S. statistical agencies and data users to be able to distinguish between definitional and economic changes in order to analyze trends in data over time. U.S. statistical programs are still in the process of determining how they will reflect these changes in their economic statistics. Where possible, the agencies will provided bridge data to allow valid comparisons of data over time. There may be unavoidable time series breaks because of the lack of historical data. While the final impact of this recommendation is not yet known, the scope of program and data changes, including breaks in time series, must be weighed against the value of more comparable statistics related to factoryless goods production.

    Each BLS program will use program-specific guidelines for determining time series continuity and will provide guidance to users as changes are implemented.
     

17. When will BLS implement this classification change?

    The decision to classify factoryless goods producers in manufacturing was included in the NAICS United States 2012 manual and is subject to review during the NAICS 2017 revision process. Therefore, implementation is still under consideration.

    The feasibility of identifying FGP establishments and collecting data that are reliable and useful is still being determined. Research on the feasibility of data collection is ongoing. If identification and data collection are feasible, BLS statistical programs would begin the work of implementing this change depending on the availability of resources. Any implementation would have a reference year no earlier than 2017.