U.S. Producer Price Index for Commercial and Industrial Machinery and Equipment Maintenance and Repair NAICS Bonnie Murphy Chief, Branch of Industry Pricing Division of Industrial Prices & Price Indexes U.S. Bureau of Labor Statistics 27 th Voorburg Group Meeting Warsaw, Poland 2 October 2012

Agenda Definition of the service being priced Pricing unit of the service Market size Classification structures National accounts concepts Pricing methods Quality adjustment Evaluation of comparability with turnover/output measures Summary 2

Definition of the Service Primary output is the repair and/or maintenance of commercial and industrial machinery and equipment. Inspection and testing services when performed in conjunction with repair or maintenance services are also considered primary to this industry. 3

Pricing unit of measure For most service items: per repair or maintenance job For maintenance contracts: per month or per year 4

NAICS 811, Repair and Maintenance Turnover by NAICS 4-digit code Source: 2007 Economic Census 5 The U.S. PPI currently only produces indexes for NAICS 8113.

NAICS 811, Repair and Maintenance Employment by NAICS 4-digit code Source: 2007 Economic Census 6

Classification Structures NAICS , Commercial Machinery Repair and Maintenance, includes repairs classified in all 4-digit classes in ISIC 331, Repair of fabricated metal products, machinery and equipment NAPCS codes for 8113 are based on the industry where the repaired product is used.  For example, NAPCS is Maintenance and repair services for agricultural machinery and equipment CPC classes and subclasses are based on the type machinery being repaired 7

National Accounts Concepts Commercial and industrial machinery repair and maintenance are considered intermediate services in the U.S. accounts and are not included in estimates of final demand The U.S. PPI for NAICS is not used by BEA as these intermediate services are not deflated in the U.S. National Accounts 8

Pricing Methods As most services in this industry are customized, the U.S. PPI uses model pricing to fix the inputs used to produce the service.  The model prices incorporate aspects of the component pricing method as fees are derived based upon labor charges, charges for parts and any surcharges or discounts. Short term maintenance contracts are priced with the direct use of prices for repeated services method. 9

Pricing Methods (continued) Long term maintenance contracts (those more than two years in duration) typically include escalator clauses as more maintenance is needed as equipment ages.  The U.S. PPI sums the yearly prices as the escalator clauses can produce price increases that are not necessarily inflationary.  The summed price represents prices that are received from both old and new contracts. 10

Example - Long term maintenance contract 11 YearMonthly Rate Year 1$100 Year 2$150 Year 3$300 Calculated Summed Rate for Year 3 $550 YearMonthly Rate Year 2 (old contract)$150 Year 3 (old contract)$300 Year 4 (new contract)$125 Calculated Summed Rate for Year 4 $575

Quality Adjustment When item substitution is necessary, cost data and previous pricing information is often available.  This allows the U.S. PPI to use the overlap method frequently. When previous pricing information is not available, the items are not compared and the differences in prices are not shown in the index. 12

Evaluation of comparability with turnover/output measures 13 U.S. Census Bureau publishes a large amount of turnover data for this industry every five years. The U.S. PPI currently only publishes data at the six-digit NAICS level.

Summary The U.S. PPI has limited coverage in the Repair and Maintenance sub-sector – only ~19% of turnover. Classification comparisons between NAICS and ISIC is not straightforward as this industry contains repair services that are included within all Classes of ISIC group 331. Long term maintenance contracts present price measurement challenges. 14

Contact Information Bonnie Murphy Producer Price Index Program