Economic Report President

production at 4¾ percent. Consequently, the capacity utilization ratehas dropped to a level that is now 1 index point below its long-termaverage of 82.1 percent of capacity. This slack in capacity is the legacyof a sustained high level of industrial investment and stands in sharpcontrast to the tightness in labor markets. Over most of the postwarera, slack in capacity has moved with the unemployment rate, and sothese two measures usually tell much the same story. However, in currentcircumstances the excess industrial capacity offsets some of thetightness in labor markets.A final reason for the slowing of reported price indexes has beenmethodological changes to both the CPI and the indexes used in thenational income accounts (Box 2-4). In general, these changes havereduced the measured rate of inflation. For the CPI, methodologicalchanges made from 1995 through 1998 reduced the rate of CPI inflationby about 0.44 percentage point. Changes to be introduced in 1999and 2000 will reduce it by an additional 0.24 percentage point.Box 2-4.—Methodological Changes to Price MeasurementThe Bureau of Labor Statistics (BLS) and the Bureau of EconomicAnalysis (BEA) have recently made several methodologicalchanges that have improved the accuracy of the consumer priceindex and the price indexes in the national income accounts. Oneof these changes goes into effect this year (Table 2-4). Most of theimprovements made by the BLS have reduced the measuredincrease in the CPI, and many will also affect the deflation ofnominal output and therefore raise the growth rate of measuredreal GDP. Changes made through 1998 include the substitution ofgeneric drugs when patents expire on proprietary brands; the correctionof a problem in rotating new stores into the surveythrough a procedure called “seasoning” (a problem that was correctedfirst in the food category and later in other categories ofgoods); a modification of the formula for measuring increases inrent; a change to measuring prices on hospital bills rather thanthe prices of hospital inputs; a switch to measuring computerprices by the computers’ intrinsic characteristics (“hedonics”); andan update of the market basket from one based on the 1982-84period to one based on 1993-95. A change scheduled for this year isthe use of geometric rather than arithmetic means to address substitutionbias within categories; next year the BLS will bring inthe results of more frequent rotation of the items sampled in categorieswith many new product introductions.The combined effect of the changes made through 1998 has beento lower the CPI inflation rate by 0.44 percentage point per year.93