Technical Notes Capital Services Capital services are the services derived from the stock of physical assets and software. There are 86 asset types for fixed business equipment and software, structures, inventories, and land. The aggregate capital services measures are obtained by Tornqvist aggregation of the capital stocks for each asset type within each of the eighteen manufacturing NAICS industry groupings using estimated rental prices for each asset type. Each rental price reflects the nominal rate of return to all assets within the industry and rates of economic depreciation and revaluation for the specific asset; rental prices are adjusted for the effects of taxes. Data on investments in physical assets and software are obtained from Bureau of Economic Analysis (BEA). Nonfarm industry detail for land is based on IRS book value data. Labor Hours The construction of the hours measures follows the methodology described in USDL 12-0494, Multifactor Productivity Trends, 2010, http://www.bls.gov/news.release/archives/prod3_03212012.pdf. Hours in manufacturing are directly aggregated and do not include the effects of labor composition. Hours data for the manufacturing multifactor productivity measures include hours for all persons working in the manufacturing sector wage and salary workers, the self-employed and unpaid family workers. The primary source of hours data is the BLS Current Employment Statistics (CES) survey. Hours paid of production workers are also obtained primarily from the CES survey. The hours of these employees are then converted to an at-work basis by using information from the Employment Cost Index (ECI) of the National Compensation Survey (NCS) and the BLS Hours at Work Survey. Hours at work for nonproduction workers are derived using data from the Current Population Survey (CPS), the CES, and the NCS. The hours at work of proprietors are derived from the CPS. Hours at work data are based on underlying hours data published in the February 2, 2012, USDL-12-0162, Productivity and Costs, http://www.bls.gov/news.release/archives/prod2_02022012.pdf. Therefore, the data do not reflect the benchmark revisions to the CES and other revisions to hours released on March 7, 2012. Intermediate Inputs In manufacturing, intermediate inputs consist of energy, materials, and purchased business services, and represent a large share of production costs. Research has shown that substitution among inputs, including intermediate inputs, affects productivity change. Therefore, it is important to account for intermediate inputs in productivity measures at the level of manufacturing. In contrast, the more aggregate productivity measures compare "value-added" output with two classes of inputs, capital and labor. Because of these differences in concepts and methodology, productivity change in manufacturing cannot be directly compared with changes in private business or private nonfarm business. Data on intermediate inputs are obtained from BEA based on BEA annual input-output tables. Tornqvist indexes of each of these three input classes are derived at the 3-digit NAICS level and then aggregated to total manufacturing. Materials inputs are adjusted to exclude transactions between establishments within the same sector. Combined Inputs The five input indexes (capital services, hours, energy, materials, and purchased business services) are combined using chained superlative Tornqvist aggregation, employing weights that represent each component's share of total costs. Total costs are defined as the current dollar value of manufacturing sectoral output. Capital Intensity Capital intensity is the ratio of capital services to hours worked in the production process. The higher the capital to hours ratio, the more capital intensive the production process is. In a production process, profit maximizing/cost-minimizing firms adjust the factor proportions of capital and labor if the price of one factor falls relative to the price of the other factor; there would be a tendency for the firms to substitute the less expensive factor for the more expensive one. In the short run, changes in hours worked are more variable than changes in capital services. Changes in hours worked in business cycles can result in volatility of the capital intensity ratio over short periods of time. In the long run an increase in wages relative to the price of capital will induce the firm to substitute capital for labor, resulting in an increase in capital intensity. Sectoral Output The output concept used for multifactor productivity in manufacturing is sectoral output. Sectoral output equals gross output (sales, receipts, and other operating income, plus commodity taxes plus changes in inventories), excluding transactions between establishments within the same sector. In contrast, the output concept used for private business and private nonfarm business is real value added. Real value added output in private business equals gross domestic product less general government, government enterprises, private households (including the rental value of owner-occupied real estate), and non-profit institutions. Real value added output excludes intermediate transactions between businesses. The output index for manufacturing is computed using a chained superlative index (Tornqvist) of three-digit NAICS industry outputs. Industry output is measured as sectoral output, the total value of goods and services leaving the industry. Wherever possible, the indexes of industry output are calculated with a Tornqvist formula. This formula aggregates the growth rates of the various industry outputs between two periods, using their relative shares in industry value of production averaged over the two periods as weights. BLS industry output measures for manufacturing industries are constructed using data from the economic censuses and annual surveys of the Bureau of the Census, U.S. Department of Commerce, together with information on price changes, primarily from BLS. Multifactor Productivity The manufacturing multifactor productivity measures describe the relationship between output in real terms and the inputs involved in its production. Manufacturing multifactor productivity measures exclude intermediate inputs between manufacturing establishments from both output and inputs. Multifactor productivity measures do not account for the specific contributions of labor, capital, or intermediate inputs. Rather, they are designed to measure the joint influences on economic growth of technological change, efficiency improvements, returns to scale, reallocation of resources due to shifts in factor inputs across industries, and other factors. The multifactor productivity indexes are derived by dividing an output index by an index of the combined inputs of labor hours, capital services, energy, non-energy materials, and purchased business services. Other information Comprehensive tables containing more detailed data than that which is published in this press release are available upon request at 202-691-5606 or at http://www.bls.gov/mfp/mprdload.htm. More detailed information on methods, limitations, and data sources of capital and labor are provided in BLS Bulletin 2178 (September 1983), Trends in Multifactor Productivity, 1948-81 and on the BLS Multifactor Productivity website under the title Technical Information About the BLS Multifactor Productivity Measures for Major Sectors and 18 NAICS 3-digit Manufacturing Industries at http://www.bls.gov/mfp/mprtech.pdf. Methods for measuring manufacturing multifactor productivity are discussed in "Measurement of productivity growth in U.S. manufacturing in the July 1995 issue of the Monthly Labor Review. See http://www.bls.gov/mfp/mprgul95.pdf.