Second Quarter 1994
Federal Reserve Bank of Dallas

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The Consumer Price Index
Mark A. Wynne and Fiona D. Sigalla

The consumer price index (CPI) is probably the most closely watched indicator of inflation in the U.S. economy. In this article, Mark Wynne and Fiona Sigalla explain the construction of the CPI and evaluate some of its potential shortcomings as a measure of inflation. Specifically, they examine the discrepancies that arise between the CPI and the true cost- of-living index as a result of improvements in the quality of goods, the introduction of new goods, substitution on the part of consumers between different goods and retail outlets, and the difficulty of measuring the prices actually paid by consumers for the goods they purchase.

The authors review the literature that quantifies these discrepancies, with the objective of estimating the magnitude of the overall bias in the CPI. Wynne and Sigalla argue that, in fact, remarkably little is known about the extent or significance of the overall bias in the CPI. They conclude that biases in the CPI cause it to overstate inflation by no more than 1 percent a year, and probably less.

The Texas Construction Sector: The Tail That Wagged the Dog
D'Ann M. Petersen, Keith R. Phillips, and Mine K. Yucel

The boom-to-bust days of the Texas construction industry will linger in people's memory for many years. D'Ann Petersen, Keith Phillips, and Mine Yucel examine the factors that led to the rise and fall of the Texas construction industry and determine the role the industry played in the state's volatile economy during the 1970s and 1980s.

Petersen, Phillips, and Yucel employ an econometric model to analyze the roles residential and nonresidential construction played in the state's economic fluctuations from 1976 through 1990. The authors find that, although large swings in oil prices were the greatest source of economic instability in the Texas economy, the construction sector also played an important and independent role in the changing fortunes of the state. The authors' results show that the homebuilding sector, in particular, had a large impact on the Texas economy. In addition, the authors find that the state's economy needs several years to adjust to shocks in the construction industry. Consequently, the current expansion in residential construction is likely to have positive economic effects in the years ahead.

Is NAFTA Economic Integration?
William C. Gruben and John H. Welch

Most economists agree that trade liberalization raises incomes and living standards. To achieve trade liberalization, though, countries must sometimes first reach trade agreements. And trade agreements, as William Gruben and John Welch observe, may intertwine elements of both liberalization and protectionism. As an example, Gruben and Welch examine the negotiation process that preceded passage of the North American Free Trade Agreement.

Is NAFTA economic integration? Although some authors think so, Gruben and Welch believe that interpreting NAFTA purely as economic integration is misleading. A more useful way to interpret NAFTA, they claim, is to start by recognizing it as the latest synthesis of an ongoing conflict between those who support trade liberalization and those who want trade protectionism. NAFTA offers broad-based trade openings, but it still contains restrictively protectionist components. In considering the efforts of trade liberalization advocates and trade protectionists, the authors also attempt to show how members of these pressure groups form alliances, disguise their efforts, and otherwise attempt to achieve their goals.

Solving the Mystery of the Disappearing January Blip in State Employment Data
Franklin D. Berger and Keith R. Phillips

Frank Berger and Keith Phillips propose a new two-step method of seasonally adjusting state Current Employment Statistics (CES) data produced by the Bureau of Labor Statistics (BLS). This method, first proposed in the July/August 1993 issue of Southwest Economy, recently was adopted by the BLS to seasonally adjust the broadest industry groupings of the state employment series. With this new adjustment procedure, the state employment data should be smoother and better reflect trend-cycle movements than if a more traditional seasonal adjustment method were used.

The article finds that forty-six states suffer a break in their seasonal pattern toward the end of the data series. The authors explain the reason for the break and describe a procedure to adjust for it. Although the BLS is currently using this procedure for states at the broadest level of industry detail, analysts who want to seasonally adjust the state employment data at a finer level of industry detail should find the authors' description of the process useful. Also, analysts who seek to seasonally adjust the CES data for metropolitan areas may find the two-step method helpful.