Updated PPI Commodity Weight Allocations to Stage-of-Processing Indexes
Effective with the release of January 2009 data on February 19, 2009, the Bureau of Labor Statistics (BLS) will update the weight allocations used to calculate its stage-of-processing (SOP) producer price indexes (PPI) to more accurately reflect recent sales patterns. While PPI weights will continue to be based on shipment values from the 2002 economic census(1), the proportion of these weights allocated to the various SOP categories within and, in some cases, across the Finished, Intermediate, and Crude goods stages have been changed. The new allocations are based primarily on data contained in the 2002 Input/Output Accounts published by the Bureau of Economic Analysis (BEA) at the Department of Commerce.
It is important to note that the allocation update does not change the PPI classification system, reference base, or aggregation structure. The update does cause some significant, though not unexpected, shifts in the relative importance of component series in the stage-of-processing indexes. Some of the more noteworthy shifts are presented later in this report.
The primary source of data used in the allocation of the PPI commodity SOP weights is the “Use of commodities by industries, before redefinition,” a table included in the Benchmark Input-Output Accounts of the United States, 2002, published by BEA. This table shows—for each commodity group—the dollar value (in millions of dollars at producers’ prices) used by each industry and final user. BLS analysts convert these dollar values of use to percentages and sum them to 100 percent for each I/O commodity group. Individual values less than 0.5 percent are truncated and the residual values are then normalized.
Stage-of-processing categories that correspond to the uses of each commodity group in the I/O table are then determined. Each detailed record on the I/O table is analyzed and assigned to one or more of the detailed SOP codes. The assignment process is a function of the type of use indicated in the table as well as informed judgment by a BLS analyst relating to definitions of the SOP categories. These definitions are included in the next section of this article. Only the lowest level SOP codes are used in the assignment process. Direct assignments are not made to the higher level SOP codes (for example, SOP 3000 – Finished Goods) as these indexes are calculated through aggregation of the lower level SOP indexes.
To make the SOP assignments, the analyst determines:
The combined answer to these questions is used to determine the appropriate SOP code assignment. The same product generally will fall into different SOP categories, depending on its use. For example, fresh fruit purchased by households is considered a Finished Consumer Food (SOP 3111), while the same fruit purchased by a food company for canning is considered a Crude Food (SOP 1100).
SOP weight allocations are assigned at the PPI 6-digit commodity group level, since this is the level used for building lowest level SOP indexes. Consequently, the next step in the process is to match the 6-digit PPI codes with I/O codes in the BEA use table. This step is accomplished through use of a concordance between the PPI and the North American Standard Industrial Classification System (NAICS). BEA I/O data are generally classified according to NAICS, and BEA provides a concordance between the NAICS and the I/O industry/commodity codes, which further enhances the match. The percentage allocations by SOP for each PPI 6-digit code are then applied to the total value weight of the 6-digit commodity, and the resultant products are used in their respective SOP aggregations for index calculation. Relative importances are then calculated for component 6-digit series in the PPI by stage-of-processing.
SOP Structure and Definitions
Inherent in the SOP categorization is the concept of processing. For PPI purposes, processing is the act of subjecting goods to a treatment or series of treatments, which in some way alters the initial physical nature or function of the goods. Actions that do not constitute processing are picking, sorting, washing, packing, or transporting. Mixing goods or assembling components is considered processing because, though the good itself is not changed, its function or usefulness is altered.
The Stage-of-Processing categories consist of three major levels differentiated by the amount of fabrication undergone by specific commodities as well as the point at which the items enter the market. The three major SOP categories are Crude Materials for Further Processing; Intermediate Materials, Supplies, and Components; and Finished Goods.
Crude Materials for Further Processing are unprocessed goods purchased by businesses as inputs to production. Intermediate Materials, Supplies, and Components include processed goods purchased by businesses as inputs to production. Finished Goods include commodities consumed as personal consumption or by businesses as capital investment. The SOP system does not include government purchases or exports.
The full SOP structure and definitions of each SOP index are provided below. Direct weight allocations are made to the SOP categories italicized in the following table of definitions.
I. SOP 1000 Crude Materials for Further Processing
SOP 1000 - Crude Materials for Further Processing: contains products that are entering the market for the first time that have not been manufactured or fabricated but will undergo some processing before becoming intermediate or finished goods; scrap materials are also included. Crude materials tend to be products of farms, mines, fisheries, quarries, and well operations.
SOP 1100 - Crude Foodstuffs and Feedstuffs: contains basic agricultural products that will undergo some processing prior to becoming completed food products, as well agricultural products consumed directly by the agricultural sector. Examples include fresh fruit that will be canned or raw corn consumed by livestock as animal feed. Other examples would be cattle, hogs, or chickens intended for slaughter, or raw cane sugar that will be refined.
SOP 1210 - Crude Nonfood Materials for Manufacturing Industries, except Fuel: contains minerals, agricultural products, and scrap materials that are intended to be used in a manufacturing process, other than manufacturing of foods. Raw cotton that will be turned into yarn, or aluminum base scrap that will end up as refined aluminum are examples of this category. Crude petroleum is contained in this grouping rather than in Crude Fuels, since it is not used as a fuel in its crude state, but can be used as a raw material in manufacturing (for example, synthetic rubber or pharmaceuticals). Also included in the category are agricultural inputs to manufactures of pet foods, processed animal feeds, and alcoholic beverages.
SOP 1220 - Crude Nonfood Materials for Construction, except Fuel: contains sand, gravel, and crushed stone used in the construction industry.
SOP 1310 - Crude Fuel for Manufacturing Industries: contains unrefined energy sources, specifically coal and natural gas, used to generate heat and power in manufacturing industries, but not for residential customers. Coal and natural gas intended for residential use are classified in Finished Goods.
SOP 1320 - Crude Fuel for Nonmanufacturing Industries: contains coal and natural gas, used to generate heat and power in nonmanufacturing industries.
II. SOP 2000 Intermediate Materials, Supplies and Components
SOP 2000 - Intermediate Materials, Supplies and Components: contains commodities that have been partly processed but require further processing before becoming finished products. This category may actually encompass several stages of processing. For example, metal may be cast into the shape of a piston, which is then assembled into an automobile engine, which is in turn a component of automobile assembly. All three products in this instance—the metal, the piston, and the engine—are classified in the intermediate category. Intermediate materials may constitute an important part of the finished product (such as flour for cake mixes) or they may represent a minor segment (such as thread used to sew apparel or bolts to secure metal forms).
A supply is a completely processed product that is consumed in the production or distribution of other items and is not part of the end product. Replacement parts for service industries are also considered supplies. To illustrate, rubber heels for shoe repair shops are considered supplies while those sold to shoe manufacturers would be considered components for manufacturing industries.
Containers are considered a supply if used in the course of production but are classified in a separate intermediate SOP category if they are not consumed or are used for transportation purposes. This separate category is clearly defined in the I/O tables.
A further distinction in this as well as the Finished Goods categories is that between durables and nondurables. Durable goods are considered to have a life expectancy of three years or more, while nondurables are either consumed in a single usage or have a life expectancy less than three years.
SOP 2110 - Materials for Food Manufacturing: contains partially processed food products that must undergo further preparation before reaching the final customer. Examples of materials for food manufacturing include milk products, canned or frozen fruits and vegetables, processed sugars, and certain chemicals.
SOP 2120 - Materials for Nondurable Manufacturing: contains partially processed products that will undergo further preparation or usage in the manufacture of goods which have a life expectancy of less than three years. Examples of materials for nondurables manufacturing include cotton yarn used for shirts and woodpulp used to make paper.
SOP 2130 - Materials for Durable Manufacturing: contains partially processed products that will undergo further preparation or usage in the manufacture of goods which have a life expectancy of more than three years. Examples of materials for durable manufacturing include textile materials, lumber, metals, and cement.
SOP 2140 - Components for Manufacturing: includes products, such as pumps, valves, and fittings, that are completely finished except for installation or assembly into a larger item.
SOP 2200 - Materials and Components for Construction: includes both partially and completely finished products that will undergo further preparation or installation in the construction industry. This usage is specifically defined in the I/O tables. Examples of materials and components for construction include plastic construction products, flooring, wire and cable, and clay sewer pipe.
SOP 2410 - Processed Fuels and Lubricants for Manufacturing Industries: includes fuel and related products used in manufacturing industries to generate heat and power and for lubrication. Examples include industrial electric power and natural gas, gasoline, diesel fuel, and greases and oils.
SOP 2420 - Processed Fuels and Lubricants for Nonmanufacturing Industries: includes fuel and related products used in nonmanufacturing industries to generate heat and power and for lubrication. Examples include commercial electric power and natural gas, jet fuel, diesel fuel, and greases and oils.
SOP 2500 - Containers, nonreturnable: contains paper, wood, plastic, metal, and glass receptacles used to ease the transport of unwieldy items.
SOP 2610 - Supplies for Manufacturing Industries: includes products consumed in the manufacturing industries during the course of production or distribution of other items but not physically incorporated in those items. These products are distinguished from capital equipment in that they are not amortized. Examples of supplies for manufacturing industries include plastic packaging, advertising printing, small cutting tools, and machinery.
SOP 2621 - Manufactured Animal Feeds: includes feed products consumed by animals in the livestock industry. Examples of manufactured animal feeds include poultry feed, hog feed, vegetable cakes, and meal feeds.
SOP 2622 - Supplies for Other Nonmanufacturing Industries: includes products used in the nonmanufacturing sector other than the animal feed industry, which are consumed during the course of production or distribution of other items but not physically incorporated in those items. Examples include sedatives (for hospitals), tires, motor vehicle parts for auto repair shops, and photographic supplies.
III. SOP 3000 Finished Goods
SOP 3000 - Finished Goods: contains goods that will not undergo further processing and are ready for sale to the ultimate user, either an individual or a firm. Automobiles, shirts, bread, and apparel are examples of Finished Goods.
SOP 3100 – Finished Consumer Goods: contains all products identified in the I/O tables as Personal Consumption Expenditures (PCE). Examples include gasoline, foods, apparel, and other items destined for consumer use.
SOP 3111 - Finished Consumer Foods, Crude: contains basic food products such as fresh fruits and vegetables that are used in an unprocessed state by the consumer.
SOP 3112 - Finished Consumer Foods, Processed: contains prepared food products that go directly to the consumer. Examples of processed finished foods include bread, packaged fluid milk and related products, candy and nuts, and carbonated drinks.
SOP 3120 - Consumer Nondurable Goods less Food: contains nonfood products with a life expectancy of less than three years, ready for final consumption. Examples of nondurable goods include alcoholic beverages, women’s apparel, residential electric power and natural gas, unleaded regular gasoline, and cigarettes.
SOP 3130 - Consumer Durable Goods: contains nonfood products, ready for final consumption, with a life expectancy of more than three years. Examples of durable goods include furniture, passenger cars, and appliances.
SOP 3200 – Capital Equipment: includes finished products used by businesses in the production or transport of goods and services. These products are distinguished by the fact that they are amortized over their useful lives and are identified in the I/O tables as Gross Private Fixed Investment.
SOP 3210 - Capital Equipment for Manufacturing Industries: contains products that undergo no further processing and are used to manufacture or transport other goods in the manufacturing sector. Examples of capital equipment for the manufacturing industry include industrial molds, motor trucks, tractors, and conveying equipment.
SOP 3220 - Capital Equipment for Nonmanufacturing Industries: contains products that undergo no further processing and are used in the operation of nonmanufacturing industries. Examples of this category include telephone and telegraph equipment, office furniture, passenger cars bought by leasing companies, and civilian aircraft.
Methodological Changes from Previous SOP Allocations
Several methodological changes were implemented for the current update of weight allocations used to calculate stage-of-processing (SOP) indexes.
Processed foods purchased by restaurants and other industries that prepare foods for immediate consumption are now included in SOP 2622 (Supplies for Other Nonmanufacturing Industries). Unprocessed foods purchased by restaurants and other industries that prepare foods for immediate consumption are included in SOP 1100 (Crude Foodstuffs and Feedstuffs). Previously, these foods were included in SOPs 3111 (Finished consumer foods, crude) or 3112 (Finished consumer foods, processed). PPI’s new treatment of food purchases is consistent with BEA’s treatment of food purchases.
This change in methodology with respect to foods resulted in a substantial number of processed foods being added to SOP 2622 (Supplies for Other Nonmanufacturing Industries), and increased the overall relative importance of foods to SOP 2000 (Intermediate materials, supplies, and components). For example, beef and veal (fresh and frozen), natural cheese (except cottage cheese), ice cream and frozen desserts, young chickens, other meats, as well as a number of other processed foods were added to SOP 2622. The overall relative importance of foods to Intermediate Materials, Supplies, and Components rose from 4.72 to 8.02 percent, and the overall relative importance of foods to Finished Goods fell from 23.74 to 18.71 percent, as a result of the new SOP allocations. (See Table 4.)
Commodities purchased by industries classified by BEA as Government enterprises are now included within either SOP 1000 or SOP 2000 (Crude or Intermediate Goods, respectively). Government enterprises are defined as government agencies that cover a substantial proportion of their operating expenses by selling goods and services to the public and that maintain their own separate accounts. Previously, PPI classified purchases by government enterprises as government purchases, which are excluded from the SOP system. PPI’s new treatment is consistent with BEA’s treatment of purchases by government enterprises.
The change in methodology related to purchases by government enterprises can be seen most clearly with respect to coal products, as state and local government electric utilities are major purchasers of coal. The relative importance of coal to SOP 1000 (Crude Materials) rose from 5.94 to 6.63 percent as a result of the change in methodology.
Commodities purchased by publishing industries, NAICS 511, are now considered supplies for nonmanufacturing, whereas in the previous allocations they were considered materials, supplies, or components for manufacturing. This change was enacted as a result of publishing industries being reclassified from manufacturing to services when the U.S. transitioned from the Standard Industrial Classification System to the NAICS system.
The redefinition of use of commodities purchased by publishers caused, for example, the relative importance of commercial printing to SOP 2622 to increase from 9.06 percent to 9.69 percent. Likewise, commercial printing is no longer represented in SOP 2610 (Supplies for Manufacturing Industries).
Agricultural products purchased by NAICS industry 311119 (Other Animal Food Manufacturing) are now included in SOP 1210 (Crude Nonfood Materials for Manufacturing Industries, except Fuel). Processed materials purchased by NAICS industry 311119 are now allocated to SOP 2120 (Materials for Nondurable Manufacturing). Previously, agricultural products purchased by NAICS industry 311119 were included in SOP 1100 (Crude Foodstuffs and Feedstuffs), and processed materials purchased by NAICS 311119 were classified in SOP 2110 (Materials for Foods Manufacturing).
This new treatment for commodities purchased by NAICS 311119 is consistent with PPI’s previous and current treatment of purchases by NAICS industry 311111 (Dog and Cat Food Manufacturing). In the past, and currently, PPI has defined dog and cat food as separate from food for human consumption, and therefore has not included materials purchased by this industry as materials for food manufacturing.
Noteworthy Relative Importance Shifts
Tables 1 through 3 present substantial relative importance shifts of commodities to the Finished, Intermediate, and Crude Goods Indexes that are due to allocation updates. All relative importance shifts with absolute values of greater than 0.2 percent are included in the tables.
Table 4 presents changes in the relative importance of total foods, energy, and core (goods other than foods and energy) to the three major SOP indexes.
Relative importances as of December 2008 are available on the BLS Web site at: www.bls.gov/ppi/. Choose the "PPI Tables" link, under the “On This Page” heading. The revised SOP relative importance figures will be in the file, "Component series by stage of processing." The information may also be requested from the Division of Industrial Prices and Price Indexes, Section of Index Analysis, at 202-606-7705. For further information on this change, please contact Jon Weinhagen at Weinhagen.Jonathan@bls.gov or (202) 691-7709.
(1) As of the release of January 2012 data, weights have been based on shipment values from the 2007 economic census.
Last Modified Date: July 12, 2018