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Box 2-1.The CPI-U-RS, a Consumer Price Index with MoreConsistent MethodologyAs noted in previous editions of the Economic Report of the President,some of the recent deceleration in measured consumer prices isattributable to a series of changes in the methods used to compute theCPI. When making changes to its methods of computing the CPI, theBureau of Labor Statistics does not revise past official CPI data using thenewer method. In 1999, however, the agency produced a research versionof the CPI, called the CPI-U-RS (the RS stands for “researchseries”), in which 14 methodological revisions adopted since 1978 andstill in use today are applied back to that year. Throughout this editionwe use the CPI-U-RS rather than the CPI-U as a deflator when appropriate.(The text and chart footnotes indicate which series is being used.)The new measure shows CPI inflation to have been lower than theofficial estimate over 1977-98 by an average 0.45 percentage point (seetable). The difference is a percentage point over the 1977-82 period;revised methods of measuring the cost of home ownership account formost of the difference. In 1983 the BLS replaced a measure of homeownership costs based on purchase price and mortgage interest rateswith a measure based on rental equivalence—roughly, what thehomeowner would pay to rent the same house.Estimated Effect of Specific Methodological Changes on the CPI-U[Average annual percentage-point effect on December-to-December percent changes]Type of changeincorporated1977to19821982to19861986to19971997to19981977to1998Rental equivalence .............. -0.86 0.00 0.00 0.00 -0.21Revised formulas ................ -.28 -.26 -.41 -.23 -.34Other changes ..................... .14 .13 .06 .00 .09Total changes ................ -1.00 -.13 -.35 -.23 -.45Note.—Detail may not add to totals because of rounding.Source: Department of Labor (Bureau of Labor Statistics).A second important change, in 1999, was the switch to geometricrather than arithmetic (fixed-weight) aggregation of price measurementswithin the lowest-level subcategories in the market basket. Thisrevision, which applies to low-level categories comprising 61 percentof consumer expenditures, resolved two problems: the “functionalform bias” in rotating new stores into the sample, and the assumptioncontinued on next page...60 | Economic Report of the President
Box 2-1.—continuedof no substitution between competing products within most categories.The effect of applying this geometric aggregation is largestbefore 1995, when both problems affected the official series. The functionalform bias was eliminated in 1995 for food and in 1996 for otherproducts, and so the effect of geometric aggregation on the discrepancybetween the series diminishes. The effect of this formula change islumped together with a few other formula changes in the second lineof the table.The BLS has omitted a few hard-to-measure methodological changesfrom the CPI-U-RS, albeit with small effects. Among these are the newprocedures for hospital prices (implemented in 1997) and the switch to anew method of sampling (which began to be implemented in 1999) thatmay allow new products to enter the CPI earlier in their life cycle.The CPI-U-RS includes methodological improvements but not the periodicupdates of the CPI market basket designed to take account of changingspending habits. In 1998, for example, the 1982-84 market basket wasreplaced with the 1993-95 basket. This change lowered CPI inflation byroughly 0.2 percentage point relative to a CPI weighted by the earlier marketbasket. Beginning in 2002, the BLS plans to update the market basketevery 2 years rather than approximately once every decade.Taken together, the methodological improvements instituted beginningin 1995, combined with the recent update of the market basket,are estimated to result in roughly a 0.6-percentage-point slower annualincrease in the CPI in 1999 compared with the methodologies andmarket basket used in 1994.But the growth in real wages in 1997 and 1998 was boosted by the effect ofdeclining energy prices on CPI inflation. Arguably, deflating compensation bythe core CPI provides a clearer picture of underlying real consumption wagetrends. If energy and food prices are removed from the equation, the real consumptionwage increased 2.7 percent at an annual rate over the first threequarters of 1999, slightly surpassing the 2.6 percent annual average increaseover 1996-98.PricesInflation picked up in 1999 from its very low 1998 pace. The CPIincreased 2.7 percent over the 12 months of 1999, after rising 1.6 percentduring 1998. The chain-weighted price indexes for GDP and PCE increased1.6 and 2.0 percent, respectively, over the four quarters of the year. Theseinflation rates were also up from their 1998 levels. More than the totalincrease in consumer price inflation can be attributed to energy prices, whichChapter 2 | 61
Page 1 and 2:
E C O N O M I CR E P O R TO F T H E
Page 3 and 4:
C O N T E N T SPageECONOMIC REPORT
Page 5 and 6:
ECONOMIC REPORT OF THE PRESIDENTTo
Page 7 and 8: my State of the Union address, I pr
Page 9 and 10: hard-pressed families—with additi
Page 11 and 12: LETTER OF TRANSMITTALCOUNCIL OF ECO
Page 13 and 14: PageSources of Business Cycle Moder
Page 15 and 16: PageHeterogeneity in Abatement Bene
Page 17 and 18: Page2-3. Net Worth and the Personal
Page 19 and 20: PageLIST OF BOXES2-1. The CPI-U-RS,
Page 21 and 22: These successes notwithstanding, th
Page 23 and 24: $33,740, Americans today can acquir
Page 25 and 26: those in the highest decile rose 0.
Page 27 and 28: Data on poverty also show progress.
Page 29 and 30: Over the years, government support
Page 31 and 32: asis, the current expansion also sh
Page 33 and 34: The current expansion, by contrast,
Page 35 and 36: InflationAccelerating inflation pos
Page 37 and 38: it was argued, must be shifting the
Page 39 and 40: is that the direction of technologi
Page 41 and 42: Challenges for the FutureThis chapt
Page 43 and 44: in the new labor market. The chapte
Page 45 and 46: disruptive in some cases. Finally,
Page 47 and 48: C H A P T E R 2Macroeconomic Policy
Page 49 and 50: Chapter 2 | 51
Page 51 and 52: usiness cycle has changed over the
Page 53 and 54: cent over the four quarters of 1999
Page 55 and 56: framework that continues to pay dow
Page 57: The labor force participation rate
Page 61 and 62: feed directly into the index. Moreo
Page 63 and 64: funds rate (the interest rate that
Page 65 and 66: nesses with below-investment-grade
Page 67 and 68: From 1989 to 1999, corporate earnin
Page 69 and 70: ital includes the value of intellec
Page 71 and 72: of gross personal saving to GDP has
Page 73 and 74: The beginnings and ends of U.S. bus
Page 75 and 76: introduced in 1913 and Social Secur
Page 77 and 78: Of course, it is premature to decla
Page 79 and 80: Box 2-3.What Did We Learn from the
Page 81 and 82: TABLE 2-3.— Accounting for the Pr
Page 83 and 84: future extrapolates long-term trend
Page 85 and 86: Over the past 6 years, the CPI-U-RS
Page 87 and 88: work enables job hunters to work wh
Page 89 and 90: Chart 2-17 shows how this could hap
Page 91 and 92: of professional economic forecaster
Page 93 and 94: Administration’s forecast is used
Page 95 and 96: Innovations during the 20th century
Page 97 and 98: transformations the Internet and e-
Page 99 and 100: Another industry that saw major cha
Page 101 and 102: One example is the “lean” produ
Page 103 and 104: Box 3-1. Measuring the Economy in a
Page 105 and 106: Box 3-2. Implementing Local Competi
Page 107 and 108: of fiber optic cable deployed by te
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How Information Technology IsChangi
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total investment in information tec
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For e-retailers, the Internet repla
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suppliers for surplus quantities of
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However, the same technology that d
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value of each network to its users.
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many possible uses but that depends
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Maintaining CompetitionAnother way
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Similarly, by reducing barriers to
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Formal education was a far less imp
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The Transformation of the Labor Mar
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Americans has risen almost 10-fold
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diploma (Chart 4-5). That same year
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ensuring equal opportunity for all
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those of men (again looking at full
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Box 4-1. The Role of Government Pol
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severe disabilities. For example, a
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Box 4-2.—continuedOther policy in
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equirements of jobs. To right this
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uild and maintain a world-class ele
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Class Size Reduction. Average class
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During this Administration, the Fed
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years ago. In 2000, 13.1 million st
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through a period of unpaid training
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The first major mandatory training
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a 30-year low, labor force particip
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ConclusionTwo key developments—th
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TABLE 5-1.—Contrasting American F
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opened up for women to work and as
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The increased prevalence of single-
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to an increasing share of the popul
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Box 5-1.—continuedAlthough most f
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For the past 50 years, the median i
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gle mothers the median rose from $1
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TABLE 5-3.— Share of Women with C
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income growth over the last 30 year
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consumption patterns have changed,
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Increases in the Minimum WageThe mi
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Box 5-4.The National Strategy to Re
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or older, and of those 85 or older,
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of single-parent families increased
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caregivers for the elderly say thei
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would allow all workers who get tim
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C H A P T E R 6Opportunity and Chal
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Meanwhile innovations in transporta
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But to look at U.S. trade only in t
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Data from the U.S. computer industr
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net indebtedness of about 18 percen
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capital flows. Coupled with other d
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forces to play themselves out. In t
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The Benefits of a Global EconomyThe
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Domestic production can expand when
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In short, increased globalization b
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key sectors such as finance, teleco
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international trade is not a zero-s
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As these data suggest, not all WTO
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For example, preferential U.S. trad
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By contrast, in 1998 output fell on
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Box 6-3.The New International Finan
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The key objective of the initiative
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Chapter 6 | 233
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demand for exports. It would be a m
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integrating with the world economy
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The past century of experience in a
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242 | Economic Report of the Presid
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Box 7-1.—continuedand energy pric
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Box 7-2.—continuedproviding usefu
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Incentive-Based Approaches to Addre
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compliance costs may fall by less t
Page 247 and 248:
Box 7-4.—continuedroughly 5 to 15
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so a system of multipollutant tradi
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sulfur dioxide trading program. The
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coastal zone. Trades can occur with
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Permit Trading: Phasedown of Leaded
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To address the problems associated
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Box 7-5. Individual Quotas for Fish
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A landmark international agreement
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However, the country could cut ener
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Quantitative Restrictions on Tradin
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comprehensive domestic trading syst
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Box 7-9.—continuedthe use of ener
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C O N C L U S I O NA Century of Cha
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More than 40 percent of the work fo
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growth and are credited with helpin
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have much to gain from continuing t
Page 279 and 280:
Appendix AREPORT TO THE PRESIDENT O
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Council Members and Their Dates of
Page 283 and 284:
previously served as the New Centur
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(antidumping, countervailing duties
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with a number of developing countri
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Michael Treadway provided editorial
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Appendix BSTATISTICAL TABLES RELATI
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POPULATION, EMPLOYMENT, WAGES, AND
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AGRICULTURE:PageB-95. Farm income,
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NATIONAL INCOME OR EXPENDITURETABLE
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TABLE B-2.—Real gross domestic pr
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TABLE B-3.—Quantity and price ind
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TABLE B-5.—Contributions to perce
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TABLE B-6.—Chain-type quantity in
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TABLE B-7.—Chain-type price index
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TABLE B-8.—Gross domestic product
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Year orquarterGrossdomesticproductT
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TABLE B-12.—Gross product of nonf
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TABLE B-14.—Personal consumption
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TABLE B-16.—Private gross fixed i
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TABLE B-18.—Government consumptio
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TABLE B-20.—Private inventories a
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Year orquarterTABLE B-22.—Foreign
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TABLE B-24.—Relation of gross dom
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Year orquarterTABLE B-26.—Nationa
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TABLE B-27.—Sources of personal i
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TABLE B-28.—Disposition of person
Page 334 and 335:
TABLE B-30.—Gross saving and inve
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TABLE B-31.—Median money income (
Page 338 and 339:
TABLE B-33.—Civilian population a
Page 340 and 341:
TABLE B-34.—Civilian employment a
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TABLE B-36.—Unemployment by demog
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TABLE B-38.—Civilian labor force
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TABLE B-40.—Civilian unemployment
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TABLE B-42.—Unemployment by durat
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TABLE B-44.—Employees on nonagric
Page 352 and 353:
TABLE B-45.—Hours and earnings in
Page 354 and 355:
Year orquarterOutput per hourof all
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PRODUCTION AND BUSINESS ACTIVITYTAB
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TABLE B-51.—Industrial production
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Year or monthTABLE B-53.—New cons
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TABLE B-55.—Manufacturing and tra
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Year or monthTotalTABLE B-57.—Man
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Year ormonthTABLE B-59.—Consumer
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TABLE B-60.—Consumer price indexe
Page 370 and 371:
TABLE B-62.—Changes in consumer p
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TABLE B-63.—Producer price indexe
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TABLE B-65.—Producer price indexe
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TABLE B-66.—Changes in producer p
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TABLE B-68.—Components of money s
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TABLE B-69.—Aggregate reserves of
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Year andmonthBills(new issues) 13-m
Page 384 and 385:
TABLE B-72.—Credit market borrowi
Page 386 and 387:
TABLE B-73.—Mortgage debt outstan
Page 388 and 389:
TABLE B-75.—Consumer credit outst
Page 390 and 391:
TABLE B-77.—Federal budget receip
Page 392 and 393:
TABLE B-79.—Federal receipts, out
Page 394 and 395:
TABLE B-81.—Federal and State and
Page 396 and 397:
TABLE B-83.—State and local gover
Page 398 and 399:
TABLE B-85.—Interest-bearing publ
Page 400 and 401:
End of monthTABLE B-87.—Estimated
Page 402 and 403:
TABLE B-89.—Corporate profits by
Page 404 and 405:
TABLE B-91.—Sales, profits, and s
Page 406 and 407:
Year or monthTABLE B-93.—Common s
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AGRICULTURETABLE B-95.—Farm incom
Page 410 and 411:
TABLE B-97.—Farm output and produ
Page 412 and 413:
Year ormonthTABLE B-99.—Indexes o
Page 414 and 415:
Year orquarterExportsINTERNATIONAL
Page 416 and 417:
TABLE B-102.—U.S. international t
Page 418 and 419:
TABLE B-104.—U.S. international t
Page 420 and 421:
TABLE B-106.—Industrial productio
Page 422 and 423:
PeriodTABLE B-108.—Foreign exchan
Page 424:
TABLE B-110.—Growth rates in real
show all

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