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Indexes and Indicators
The index measures price
changes from a designated reference date - 1967 - which equals
100.0. An increase of 203 percent,
for example, is shown as 303.0. This
change can also be expressed in dollars as follows : the price of a base
period "market basket" of goods
and services in the CPI has risen
from $10.00 in 1967 to $30.30.
Facts and figures about the U.S. economy
pour out of Washington every month, but newspapers, radio, and television usually focus on just a
few. The following article offers brief explanations
of the economic statistics that seem to appear most
often in the headlines: the Consumer Price Index
(CPI); the unemployment rate; and the composite
indexes of leading, coincident, and lagging economic indicators.
CPI
The following excerpts are taken from
two U.S. Department of Labor publications
entitled The Consumer Price Index: Concepts and
Content Over the Years and CPI Detailed Report
(August 1985). Two other Labor Department
publications that readers might find useful
are CPI Issues and Problems in Measuring Consumer Prices. All of the above-mentioned publications are available from the Bureau of
Labor Statistics of the U.S. Department of
Labor.
The Consumer Price Index
(CPI) is the nation's chief measure
of inflation at the retail level. It
measures changes over time in the
cost of buying a fixed set ("market
basket") of goods and services
needed for day-to-day living.
The U.S. Bureau of Labor Statistics publishes CPI's for two population groups: 1) a CPI for All Urban
Consumers (CPI-U) which covers
approximately 80 percent of the
total noninstitutional civilian population; and 2) a CPI for Urban Wage
Earners and Clerical Workers (CPIW) which represents about half the
population covered by the CPI-U.
The CPI-U includes, in addition to
wage earners and clerical workers,
groups such as professional, managerial, and technical workers, the
self-employed, short-term workers,
the unemployed, and retirees and
others not in the labor force .
Prices are collected in 85 urban
areas across the country from about
4,000 food stores, 24,000 rental
units, and 28,000 establishments -
department stores, hospitals, filling
stations, and other types of stores
and service establishments . All
taxes directly associated with the
purchase and use of items are
included in the index. Prices of
food, fuels, and a few other items
are obtained every month in the 85
locations. Prices of most other commodities and services are collected
every month in the five largest geographic areas and every other
month in other areas. Prices of most
goods and services are obtained by
personal visits of the Bureau's
trained representatives. Mail questionnaires are used to obtain public
utility rates, some fuel prices, and
certain other items .
In calculating the index, price
changes for the various items in
each location are averaged together
with weights which represent their
importance in the spending of the
appropriate group. Local data are
then combined to obtain a U.S. city
average. Separate indexes are also
published by size of city, by region
of the country, for crossclassifications of regions and
population-size classes, and for 28
local areas.
Although U.S. government
agencies have studied prices and
living conditions since the late 19th
century, the first CPI, called a costof-living index, grew out of a decision by the Shipbuilding Labor
Adjustment Board during World
War I. In arriving at a "fair wage
scale," the Board determined in
November 1917 that wages in the
shipbuilding yards should be
adjusted when the cost of living had
increased generally.
One important point worth noting, however, is that the current CPI
is not a cost-of-living index. It simply measures price changes for a scientifically selected sample of goods
and services based on the average
experience of certain groups. These
items may run the gamut from
bread and butter to television and
bowling fees. The CPI does not
include income and social security
taxes because these costs are not
directly associated with retail prices
of specific goods and services. A
true cost-of-living index would
account for all taxes.
The purchase of a house is also
excluded from the CPI. (Investment
items such as the purchase of
s t ocks, bonds, or houses are
excluded from the CPI.) The Bureau
of Labor Statistics uses a method
known as "rental equivalence" to
measure price change for homeowners . BLS estimates a rental
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value for all homeowners in the
housing survey, using a combination of the homeowners' own estimate of what their houses would
rent for and the actual rents on similar nearby houses that are rented.
Furthermore, the CPI does not
attempt to report changes in buying
habits or changes in shopping practices. For example, if certain cuts of
beef rise rapidly while prices of
chicken do not, consumers may buy
more poultry and less beef. The CPI
does not take this sort of consumer
behavior into account because the
index is predicated on the purchase
of a fixed "market basket" of the
same goods and services, in the
same proportions, month after
month.
Finally, the CPI does not
attempt to report changes in the
style of living. For example, the
increased use of convenience foods
and the rise in popularity of fastfood restaurants were wellestablished trends before they could
be adequately reflected in the CPI.
The
Unemployment
Rate
The following excerpts are taken from
Haw the Government Measures Unem ployment
and User's Guide to Labor Force Statistics from
the BLS. Both are published by the Bureau of
Labor Statistics of the U. S. Department of
Labor.
Early each month, the Bureau
of Labor Statistics of the U.S.
DepartmentofLaborannouncesthe
total number of employed and
unemployed workers in the United
States for the previous month.
These figures receive wide coverage
in the press and on radio and
television.
Some people think that to get
these figures the government
counts every unemployed person
each month. To do this, every home
in the country would have to be
contacted - just as in the population census every 10 years. This procedure would cost too much and
take too long. Besides, people
would soon grow tired of having a
census taker come to their homes
every month, year after year, to ask
about job-related activities.
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Since everyone cannot be
counted each month, a sample
called the Current Population Survey (CPS) is taken to discover who
in the country is employed or who is
looking for work. First, a sample of
cities and counties is chosen from
the total number of cities and counties in the country. The sample is
designed to reflect urban and rural
areas, different types of industrial
and farming areas, and the major
geographic divisions of the country
in the same proportion as they
occur in the nation as a whole .
Approximately 60,000 households
are included in the sample.
Each month one-fourth of the
households in the sample are
replaced so that no family is interviewed more than four consecutive
months. This practice avoids placing too heavy a burden on the families selected for the sample. After a
household is interviewed for four
months, it is dropped for eight
months and then is interviewed for
four more months before being
dropped from the sample for good.
Persons are counted as unemployed if they have actively looked
for work in the past four weeks, are
currently available for work, and, of
course, do not have a job at the same
time. Looking for work may consist
of any of the following activities :
Registering at a public or private
employment office;
Meeting with prospective
employers;
Checking with friends or relatives;
Placing or answering advertisements;
Writing letters of application; or
Being on a union or professional register.
Two groups of persons do not
have to engage in specific jobseeking activity to be counted as unemployed . They are: 1) persons
waiting to start a new job within 30
days, and 2) workers waiting to be
recalled from layoff. In all other
cases except temporary illness, the
individual must be currently available for work.
The total unemployment figure
measures more than the number of
persons who have lost jobs. It
includes persons who have quit
their jobs to look for other employment, new workers looking for their
first jobs, and experienced workers
looking for jobs after an absence
from the labor force (as, for exam-
ple, a woman who returns to the
labor force after her children have
entered school).
Those persons 16 and over who
have a job or are actively looking for
one are classified as in the labor
force. All others - those who have
no job and are not looking for one are counted as " not in the labor
force." Many who do not participate in the labor force are classified
either as "in school," "keeping
house," "unable to work," or
''retired .''
A fifth group of persons not in
the labor force is classified as
" other." These persons : 1) may
want to work only at certain times of
the year, 2) may believe that no
employment is available for workers
with their training or experience, or
3) may be financially independent
and have no interest in a job.
A special set of questions
obtains information on the number
of persons who want full- or parttime work but who are not actively
seeking a job because they think
they cannot find one. They are often
referred to as "discouraged workers," and they are classified as " not
in the labor force " rather than as
"unemployed" because they are
not actively seeking employment.
Sometimes questions are raised
as to the advisability of including
among the unemployed such persons as teenagers, married women,
and others who are not usually the
family's main breadwinner. The
point is made that, for the family,
unemployment of the main breadwinner is more important than
unemployment of any other member of the family.
This view ignores some very
fundamental changes that have
occurred. For example, the "typical
family" of a working husband, a
wife who is not in the labor force,
and one or more children accounts
for fewer than 1 out of every 5
Americans. Someone other than the
husband is the primary earner in
over one- fourth of the families that
include a husband and wife. Nearly
one-fifth of the unemployed wives
are in families where no one is
working.
To summarize "Employed persons" are:
a) All persons who did any
work for pay or profit during the
survey week.
b) All persons who did at least
15 hours of unpaid work in a familyoperated business.
c) All persons who were temporarily absent from their regular
Job because of illness, vacation, bad
weather, industrial dispute, or various personal reasons.
"Unemployed persons" are:
a) All persons who did not have
a job at all during the survey week
and who made a specific effort to
find a job during the past four
weeks.
b) All persons who were not
working and were waiting to be
called back to a job from which they
had been laid off.
c) All persons who were not
working and were waiting to report
to a new job within 30 days.
Indicators
The following information comes from a
U.S . Department of Commerce news release
dated September 30, 1985.
"Leading Economic Indicators
Rise," announces the headline.
That sounds like good news. But
what's a leading economic
indicator?
On the last day of every month,
the U.S. Commerce Department
releases figures on how the composite indexes of leading, coincident, and lagging economic
indicators performed during the
~revious month. For example, the
figures released on September 30
would report the indicators' performance for the month of August.
Leading economic indicators are
those that generally move in
advance of the business cycle. They
are: the average workweek for production workers in manufacturing,
the average weekly initial claims at
state unemployment offices, new
orders for consumer goods and
materials, vendor performance
(percentage of companies receiving
slower deliveries from vendors), net
business formations, contracts and
orders for plant and equipment,
building permits, change in inventories on hand and on order, percentage o~ change in sensitive
materials prices, stock prices (500
common stocks), money supply
(M2), and change in business and
consumer borrowing.
A rise in the leading economic
indicators could presage an econ~mic up_swing. Or perhaps economists might use the figures to
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predict how much longer an economic recovery might last. For
example, economists might look at
the average duration of a postwar
economic recovery in the United
States and then try to predict how
much longer the existing recovery
might last. (If the average postwar
economic recovery has lasted 34
months, then economists might say
t~at. the 27th ~onsecutive monthly
nse m the leading economic indicators means that the existing recovery may be nearing its end.)
Economists often use the coincident and lagging indicators to confirm conclusions they had
previously drawn from movement
of the leading indicators.
The coincident economic indicators are those that roughly coincide with the business cycle. They
are: the number of employees on
~onagricultural payrolls, personal
income, manufacturing and trade
sales, and industrial production.
The lagging economic indicators are those that generally lag
behind the business cycle. They are:
average duration of unemployment
(n~ber of weeks), labor costs per
umt of output (manufacturing),
average prime rate charged by
banks, dollar value of commercial
and industrial loans outstanding,
the book value of manufacturing
and trade inventories, and the ratio
of consumer installment debt to personal income.
Because the combination of
prompt availability and reasonable
accuracy is an especially important
requirement of composite indexes,
only monthly series that are available with short lags and are not subject to large revisions are considered
when selecting components of the
three indexes. Nevertheless, the
monthly report from the Department of Commerce almost always
includes revised figures for previous months. (The report released
on September 30, for example,
might also include revised figures
for June and July.)
One final point - when trying
to interpret forecasts based on statistics about the economy, one
should probably bear in mind what
columnist Leonard Silk said in his
book Economics in Plain English, "The
basic techniques of the art of prophecy have not changed much since
ancient times; everything one can
say about the future must be based
on knowledge about the present
and the past."
New England
Update
Agin the
Massachusetts
Classroom
Farming employs only about
3% of the American workforce, but
that is deceiving. Millions of U.S.
workers are e~gaged in processing,
manufacturing, transporting,
exp~rting, retailing, preparing, and
servmg farm-grown products.
The so-called food and fiber system provides jobs and income for
farmers and florists, restaurant
cooks and waiters, truckers and grocers, food processors and food
packagers, underwear makers and
shoemakers, clothing sales people
and many others.
ABCDEFG
The Economic Research Service
of the U.S. Department of Agriculture (USDA) estimates that around
22% of the U .S. labor force is
employed in the food and fiber system. In raw numbers, that's well
over 20 million people.
Most Americans realize they
must have the products of agriculture in order to live. But few really
understand the complexity of the
food and fiber system. Agriculture
in the Classroom is a project aimed
at changing this. The project's goal
is to help young people understand
the source of their food supply as
well as the role of agriculture in the
economy and society.
USDA began working on the
Agriculture in the Classroom project in 1981, when Secretary of Agriculture John R. Block invited
agriculture groups and educators to
a meeting in Washington, D.C.
Prior to that, various farm organizations and educators had developed
and distributed some excellent
materials to schools, but there had
not been a concentrated effort for all
3
farm groups in a state to work
together with educators at the state
and local level.
For more information on Massachusetts Agriculture in the Classroom, please contact:
As a result of the June 1981
meeting several important steps
were taken:
Barbara Garner Koech or
Kenneth Parker
Massachusetts Agriculture in
the Classroom
Hills North, Room 420
University of Massachusetts
Amherst, MA 01003
Phone: (413) 545-4645
• A State Action Plan to guide
local groups in establishing Agriculture in the Classroom projects was
developed.
• USDA became a national
clearinghouse for information.
• A Resource Guide to printed
and audiovisual information to support classroom programs was
developed.
• A set of concepts to guide the
development of the Agriculture in
the Classroom program nationally
was also developed.
Agriculture in the Classroom is
a sharing of ideas and projects that
have proven successful in bringing
the story of agriculture to the
nation's children. The method has
been to create local action groups·
made up of educators and agriculturalists who plan materials and
programs for the schools of their
state.
What's Happening
in Massachusetts
The project has been extremely
successful. To date, there are 34
states with some kind of formal
activity. For example, Massachusetts Agriculture in the Classroom
offers a program designed for students in grades 4-6. Curriculum
materials cover the following
topics:
• Types of agriculture in Massachusetts -where and why.
• Agriculture throughout the
history of the Commonwealth.
• The business of agriculture production agriculture and
"agribusiness."
• Issues related to food and
agriculture - their interdependence
with the environment.
• The relationship of government to agriculture.
The Massachusetts Agriculture
in the Classroom program was successfully pilot tested in fifteen
schools during 1984, and expansion
to many urban, rural, and suburban
schools across the state was
launched in 1985. Educational
materials for grades K-3 are currently being developed.
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Those outside Massachusetts
who are interested in the Ag in the
Classroom project should contact:
Dr. Peggy D. Hart, Director
Ag in the Classroom
Room227-W
U.S. Department of Agriculture
Washington, D.C. 20250
Phone: (202) 447-5727
Innovative
Classroom
The World of
Economics
Teaching economics CAN be
fun! The Federal Reserve Bank of
San Francisco has produced The
World of Economics, a six-part series of
audiovisual economic education
packages for classroom instruction.
(The series is based on The World of
Economics, the highly successful,
permanent exhibition in the Bank's
lobby.)
The new series is designed to
introduce junior and senior high
school students to the major principles of economics . Each part uses a
15-minute videotape and matching
curriculum materials to cover a
major area of economic study in a
light-hearted but informative way.
The printed materials reinforce the
points made in the videotape and
provide opportunities for more
intensive study. They include a
teacher's guide, glossary, activity
and lesson plans, background
material for teachers, special student readings, and a bibliography.
Money Games - David, a teenager, learns about money's role in
the U.S. economy through E-KON,
a talking computer. They discuss
what money is; how it affects prices
and employment; and what monetary policy is and its impact on the
economy.
Mind Over Muffins - A young
man who has trouble making deci-
sions seeks the help of Madame
Sonia, a gypsy fortune teller. By
gazing in her crystal ball, she
reveals to him how economics is
basically about making choices and
shows how these choices determine
the economic world we live in.
Hi' i'M
E-KON
•
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lfllllllnll\11
•
•
~
~i-;a}
( mA-f13h';<<,ne\dfJ;\\
Wilde About Trade (available early
1986) - The Wilde family wants to
add imported goods to its shop,
" Wilde Stuff." By visiting an
importer, a foreign exchange dealer,
and an investment banker, they
learn why nations trade; what a foreign exchange rate is and how it is
determined; and why nations invest
in other countries .
The E-Team (available early 1986)
- The E-Team of history's outstanding economic thinkers such as
Adam Smith and Keynes helps students solve some major economic
puzzles - what determines a
nation's wealth, what makes an
economy grow, and what causes
unemployment and inflation.
The final two programs in the
six-part series will be produced in
1986. One will examine how the
overall level of employment, production, and prices in an economy
are determined and the role of government policy in promoting economic stability. The final program
will trace the economic history of
the United States in the 20th century as the country grappled successively with financial crisis, massive
unemployment, war, and inflation.
All materials are free and duplication of the tapes and printed
materials is encouraged. If you
would like to borrow one of the videotapes (for a maximum of three
weeks) and receive an accompanying set of teacher materials, please
write to : World of Economics Curriculum Series, Federal Reserve
Bank of San Francisco, P.O. Box
7702, San Francisco, CA 941209990.
the LEDGER
Editor: Robert Jabaily
Graphics Arts Designer: Ernie Norville
@FedFRASER