Effects of the PPI weight update on final-demand relative-importance values

The most recent weight update affected all PPIs, including industry net-output indexes, traditional commodity-group indexes, Final Demand–Intermediate Demand (FD–ID) indexes, special commodity-group indexes, and inputs-to-industry indexes. Although the update did not change the basic classification structures of the PPI commodity and FD–ID indexes, it did result in shifting relative-importance values, which indicate the portion of an aggregate index that is accounted for by a component index at a given point in time. This article analyzes shifts in relative-importance values within PPI’s headline final-demand index, focusing on shifts resulting from weight updates based on 2012 and 2017 value-of-shipments data.

The relative-importance tables available from the PPI program compare values from December 2021 and December 2022.¹ These values changed because of updated value-of-shipments data and price movements from 2021 to 2022. To isolate the effects of the most recent weight update on PPI relative-importance values, this article compares December 2022 relative-importance values based on 2012 value-of-shipments data with December 2022 relative-importance values based on 2017 value-of-shipments data. By comparing relative-importance values for the same period, the analysis removes the effect of shifts in relative prices and isolates the effect of weight changes on relative-importance values.

Final demand

The PPI for final demand measures price change for goods, services, and construction products sold for personal consumption, as capital investment, to government, and as exports. As noted previously, the weight revision based on 2017 value-of-shipments data did not change the basic structure of the PPI for final demand, but it did shift the relative-importance values of component indexes for various products within the overall index.

Within final demand, the update to 2017 weights resulted in positive relative-importance shifts for services and construction, and a negative shift for goods production. The shift away from goods reflects the continuing trend of U.S. economic activity moving from manufacturing to services.² With the shift from 2012 to 2017 weights, the relative importance of the index for final-demand services increased from 64.5 to 66.7 percent, and the relative importance of the index for final-demand construction increased from 1.9 to 2.7 percent. In contrast, the relative importance of the index for final-demand goods fell from 33.6 to 30.7 percent.³ (See chart 1.)

Final-demand services

The index for final-demand services comprises three main component indexes for the following service categories: transportation and warehousing services; trade services; and services less trade, transportation, and warehousing. Contributing most to the increase in the relative importance of the index for final-demand services, the relative importance of the index for final-demand services less trade, transportation, and warehousing grew from 38.9 percent (based on 2012 value-of-shipments data) to 41.8 percent (based on 2017 value-of-shipments data). In addition, with the shift from 2012 to 2017 value weights, the relative importance of the index for final-demand transportation and warehousing services increased from 4.6 to 5.2 percent. Conversely, the relative importance of the index for final-demand trade services declined from 21.0 to 19.7 percent. (See table 1.)

The remainder of this section discusses selected component indexes for detailed final-demand services with notable shifts in relative importance. The discussion examines the underlying drivers of those shifts, highlighting the importance of technological advancements and monetary policy.

Automobile retailing

With the shift from 2012 to 2017 weights, the index for automobile retailing experienced one of the largest relative-importance changes—an increase from 0.8 to 1.5 percent—among commodity indexes included in final demand.⁴ (See appendix table A-1.) A combination of factors, including low interest rates, greater availability of subprime autoloans, pent-up demand, and declining fuel prices, helped boost automotive sales for 7 consecutive years after the end of the 2007–09 Great Recession. Consumers who delayed car purchases because of the recession took advantage of the postrecessionary environment of low interest rates and replaced older vehicles with brand-new ones.⁵ Many of these consumers were approved for autoloans despite having low credit scores.⁶ Additionally, lower fuel prices further boosted demand, with gasoline prices falling from $3.44 per gallon in January 2012 to $2.60 per gallon in December 2017.⁷

Brokerage fees and commissions from residential property sales and rentals

With the shift from 2012 to 2017 weights, the relative importance of the index for residential property sales and rental (brokerage fees and commissions) increased from 1.1 to 1.7 percent. (See appendix table A-1.) This increase was driven by consistent growth in housing sales. Between 2012 and 2017, the number of new homes sold grew from 368,000 to 613,000,⁸ and existing-home sales rose from 4.66 to 5.51 million units.⁹ More Americans also became renters, with the total number of renters jumping from 99.4 million in 2010 to 108.5 million in 2018.¹⁰ The rising demand for rentals is also evident in the number of rental units constructed between 2012 and 2017. In 2017, there were 331,800 rental units built, up from 152,100 in 2012.¹¹ Home and rental prices moved in step with the rise in sales. Over the 2012–17 period, the average home price increased from $244,400 to $322,425,¹² and the median monthly rental price increased from $904 to $1,037.¹³ Although commission rates during this period declined, rising home and rental prices helped offset potential losses in brokerage revenue. As homes became easier to sell during the recovery from the Great Recession, fewer agents were needed to aid homeowners in selling their homes, which put downward pressure on commission rates.¹⁴ The boost in housing prices was facilitated by low interest rates and by demand outpacing the available supply of housing.¹⁵

Residential internet access services

Since the weight revision based on 2012 value-of-shipments data, the internet has become accessible to more Americans. The percentage of U.S households with internet access rose from 74.8 percent in 2012 to 78.0 percent in 2017.¹⁶ As a result, the relative importance of the index for residential internet access services increased from 0.1 to 0.3 percent. (See appendix table A-1.) Although the trend of growing internet access had existed since the 1990s, it was further bolstered in the 2010s, with the telecommunications industry and the federal government increasing investment (a total investment of $795 billion between 2009 and 2017) for expanded access to broadband internet in the United States.¹⁷ Between 2015 and 2017, the Federal Communications Commission expanded internet service to approximately 2.3 million residential and small-business locations.¹⁸ This expansion was especially pronounced in rural areas, which typically face significant barriers to obtaining high-speed internet. Other potential factors that may have contributed to the increase in internet access include a rise in online education, an expansion of telehealth services, and an increase in video on-demand streaming.¹⁹

Home health and hospice care

Because of multiple factors, including a rise in the U.S. elderly population and an increase in demand for home-based healthcare services, the home health and hospice care sector grew consistently between 2012 and 2017. With the shift from 2012 to 2017 weights, the relative importance of the index for home health and hospice care increased from 0.7 to 0.9 percent. (See appendix table A-1.) Population growth among the elderly during the 2012–17 period was due mostly to the aging of the baby-boom generation, which started reaching age 65 in 2011.²⁰ Many providers of home health and hospice care services recognized this demographic shift, as well as the growing patients’ preference for receiving care at home instead of at long-term care facilities. As a result, the number of home health agencies rose from 7,528 in 2000 to 11,300 in 2019.²¹ A similar rising trend occurred in total expenditures on home health and hospice care, with those expenditures increasing from roughly $70 billion in 2012 to just under $100 billion in 2017.²² The growing demand for home health and hospice care was also driven by cost avoidance on the part of patients, insurance companies, and the government, because such care could be used as a more affordable substitute for services at expensive facilities and could prevent costly emergency-room visits by closely monitoring chronic health conditions. The industry has provided relief for long-term care facilities, many of which are faced with limited capacity to house additional patients.²³

Hospital care: outpatient and inpatient

The relative importance of the index for hospital outpatient care rose with the shift from 2012 to 2017 weights, increasing from 3.9 to 4.3 percent. (See appendix table A-1.) Consumer demand and technological advances were among the main factors that drove the growth of outpatient care services in hospitals.²⁴ Over the years, patients have been increasingly drawn to the convenience and low cost of receiving outpatient care as an alternative to hospital admissions. Technological innovations have made clinical procedures less invasive and thus more accessible to patients in outpatient facilities. Some surgical operations can now be performed more precisely with the aid of robotics, and outpatient surgeons can use high-definition cameras for surgical procedures that require smaller incisions. As a result, patient recovery times have become shorter, limiting the need for inpatient care and reducing costs for both patients and providers.²⁵ In contrast, with the update to 2017 weights, the relative importance of the index for hospital inpatient care decreased from 4.9 to 4.5 percent, providing further evidence of the shift from inpatient to outpatient services.

Furniture retailing

Margin revenue for furniture retailing rose as the U.S. housing market recovered during the 2012–17 period, boosting the relative importance of the index for furniture retailing from 0.3 to 0.5 percent. (See appendix table A-1.) Furniture and bedding sales rose from $82.7 billion in 2012 to $105.2 billion in 2017, an increase of 27 percent.²⁶ Besides the improving overall economy and housing market, other major sources of growth in furniture retailing were e-commerce and millennial consumers. From 2009 to 2017, e-commerce furniture sales grew at an annual rate of 22.2 percent, while sales at brick-and-mortar retail establishments grew at an annual rate of 3.0 percent.²⁷ In 2014, millennials became the largest consumer group in the U.S. furniture and bedding market, with a market share of 37 percent, compared with just 14 percent in 2012. This group is also credited for the rise in e-commerce, especially purchases made via smartphones, as retailers experienced substantial growth in mobile traffic and mobile commerce transactions.²⁸

Cable and satellite subscriber services

With the shift from 2012 to 2017 weights, the relative importance of the index for cable and satellite subscriber services declined from 0.7 to 0.4 percent. (See appendix table A-1.) Much of this decrease was due to the growing popularity of television streaming services. Increasingly expensive cable and satellite packages—as well as the convenience of watching content on mobile devices such as laptops, cell phones, and tablets—drove the transition. Many consumers either opted for less expensive cable and satellite packages with fewer channels or canceled their subscriptions entirely.²⁹ The loss of subscriptions began in 2013 and intensified in subsequent years. In those years, existing companies that offered internet-based programming grew in influence and competing companies entered the market, some providing exclusively on-demand content and others also providing live television.³⁰ This development, coupled with lower consumer demand, reduced advertising revenue for cable and satellite companies, further contributing to the downward shift in the relative importance of the index for this category.³¹

Truck transportation of freight

The indexes for local and long-distance motor carrying both increased in relative importance with the shift from 2012 to 2017 weights. The relative importance of the index for local motor carrying rose from 0.6 to 0.7 percent, and the relative importance of the index for long-distance motor carrying rose from 1.9 to 2.2 percent. (See appendix table A-1.) These shifts reflect an upward trend in trucking revenues, which increased from just under $60 billion in the first quarter of 2013 to almost $70 billion in the fourth quarter of 2017.³² The rise in e-commerce during this period can partly account for this growth, as consumers increasingly made purchases online. Online shoppers could also return merchandise more freely, propping up the trucking sector. Additionally, to minimize the distance between product storage facilities and consumers’ homes, e-commerce companies increased investments in urban warehousing, reducing delivery times.³³ These investments likely contributed to the increase in the relative importance of the index for local motor carrying. Other contributors to the rise in trucking revenue included an improving economy, greater operational efficiencies, and an aging workforce that reduced the supply of truckers.³⁴

Final-demand construction

With the shift from 2012 to 2017 weights, the relative importance of the index for final-demand construction increased from 1.9 to 2.7 percent. (See table 1.) This increase can be traced primarily to an advance in new warehouse building construction.³⁵

The relative importance of the index for new warehouse building construction rose from 0.2 to 0.5 percent. (See appendix table A-1.) This increase was driven mostly by growth in online shopping, which forced e-commerce companies to acquire additional space to store inventory. Companies also sought out more warehousing facilities in urban locations in order to reduce delivery times and cut transportation costs. The connection between e-commerce sales and demand for warehousing can be seen in the progression of their growth rates, both of which accelerated between 2012 and 2017 relative to the prior 5-year period. E-commerce sales rose 11 percent annually from 2007 to 2012, and 14 percent annually from 2012 to 2017. Mirroring this trend, demand for warehouse space grew 0.7 percent annually from 2007 to 2012, and 1.1 percent annually from 2012 to 2017.³⁶ Additionally, available warehouse space became scarce, with vacancies reaching a 16-year low in 2016, intensifying the need for new warehouse construction.³⁷

Final-demand goods

The index for final-demand goods comprises three main component indexes for the following commodity categories: foods, energy, and goods less foods and energy. With the update to 2017 weights, the decline in the relative importance of the index for final-demand goods was due mostly to a drop, from 21.3 to 18.9 percent, in the relative importance of the index for final-demand goods less foods and energy. The relative-importance values of the indexes for final-demand foods and final-demand energy also declined, with the former falling from 6.2 to 5.9 percent and the latter from 6.1 to 5.9 percent. (See table 1.)

The remainder of this section discusses selected component indexes for detailed final-demand goods with notable shifts in relative importance. Again, the discussion highlights important economic trends that underpin those shifts.

Passenger cars and light motor trucks

Between 2012 and 2017, consumer preferences shifted from passenger cars to light trucks such as minivans, pickup trucks, and sport utility vehicles. Over this period, sales of new light trucks increased more than 38 percent, from 6.2 to 8.6 million units, while sales of new passenger cars decreased 21 percent, from 5.7 to 4.5 million units.³⁸ This trend is reflected in changes in the relative importance of the indexes for both commodities. With the shift from 2012 to 2017 weights, the relative importance of the index for light trucks rose from 1.3 to 1.6 percent, while the relative importance of the index for passenger cars fell from 0.9 to 0.4 percent. (See appendix table A-1.) In addition to low interest rates and lax lending practices, low gas prices and greater consumer demand for more vehicle space contributed to the preference shift from cars to light trucks.³⁹

Nonelectronic cigarettes

With the shift from 2012 to 2017 weights, the relative importance of the index for cigarettes (excluding electronic) declined from 0.5 to 0.4 percent. (See appendix table A-1.) Cigarette consumption continued a decades-long decline beginning in 1965, when the Center for Disease Control National Health Interview Survey began tracking cigarette usage among adults. The adult usage rate was 42.4 percent in 1965, 18.1 percent in 2012, and 13.9 percent in 2017.⁴⁰ This downward trend can be attributed to rising cigarette prices, antismoking campaigns, smoke-free laws, and smoking-cessation programs.⁴¹ Additionally, between 2010 and 2020, government policies were put in place to reduce usage rates. The Children’s Health Insurance Program Reauthorization Act of 2009 increased federal taxes on cigarettes to $1.01 per pack, and the Patient Protection and Affordable Care Act of 2010 mandated most health insurance plans to cover smoking-cessation programs. Cigarette consumption declined 16.7 percent between 2012 and 2017, as 14 million cigarette packs were sold in 2012, compared with 12 million in 2017.⁴² Although e-cigarettes likely contributed to lower usage rates, it remains unclear if they played a significant role in the decline.⁴³

Residential electric power

The use of electricity by U.S. households declined during the 2010s. As a result, the relative importance of the index for residential electric power decreased from 2.0 to 1.9 percent. (See appendix table A-1.) Advances in technology were the main drivers of this decline, with both electronic devices and appliances becoming smaller and more energy efficient. The transition from traditional incandescent lightbulbs to bulbs with light-emitting diodes (LEDs) played the largest role in reducing electricity use.⁴⁴ Consuming 85 percent less electricity than incandescent lightbulbs, LEDs became more popular as their prices declined. Between 2008 and 2016, LED prices fell 94 percent, and the number of LED installations rose from less than 500,000 to over 450 million.⁴⁵ Additional factors that reduced household electricity use were the increasing prevalence of more-energy-efficient flat-screen television sets and the replacement of larger and less-energy-efficient desktop computers with laptops and tablets. Americans also spent less time watching television and more time using the internet, further contributing to the decline.⁴⁶

Pharmaceutical preparations

With the shift from 2012 to 2017 weights, the relative importance of the index for pharmaceutical preparations declined from 1.4 to 1.1 percent. (See appendix table A-1.) Driving this trend was a consistent shift from domestic to foreign production of pharmaceuticals. This shift, which started in the mid-2000s and continued through the 2010s,⁴⁷ resulted mostly from cost-cutting initiatives prompted by the rising trend of generic drugs hitting the market.⁴⁸ Drug companies were drawn to lower labor and production costs afforded by countries such as China and India, and they faced fewer environmental regulations in China around the buying, handling, and disposing of chemicals used in the pharmaceutical manufacturing process.⁴⁹

Conclusion

The result of the 2023 PPI weight update, which involved a transition from 2012 to 2017 value-of-shipments data, reveals an underlying theme in some of the largest shifts in relative-importance values. Many of those shifts were driven by either technological advancements or monetary policy, which helped boost the economy after the 2007–09 Great Recession. Technological advancements, such as simplified medical procedures, television streaming services, and energy-efficient LEDs, played a major role in reducing the relative importance of the indexes for hospital care, cable and satellite subscriber services, and residential electric power. Monetary policy affected the relative importance of the indexes for real estate brokerages and automobile retailing, as both sectors realized growth in revenue, largely because of the Federal Reserve’s lowering of interest rates.⁵⁰ Additionally, lower borrowing costs incentivized discretionary spending, shifting consumer purchases from passenger cars to more expensive light trucks. Consumers also shopped online more frequently, which in turn increased demand for trucking services and new warehouse building construction, boosting the relative importance of the indexes for these categories.

Appendix