Industrial Connectedness and Business Cycle Comovements

40 Pages Posted: 5 Jan 2021 Last revised: 28 Oct 2021

See all articles by Amy Guisinger

Amy Guisinger

George Washington University

Michael Owyang

Federal Reserve Bank of St. Louis - Research Division

Daniel Soques

University of North Carolina (UNC) at Wilmington

Date Written: December, 2020

Abstract

While aggregate shocks account for most business cycle fluctuations, sectoral shocks have become relatively more important since the 1980s. Previous studies show that sectoral shocks propagate through industry supply chains. Typically, sectors are defined by similarities in function and/or market. While some industries have supply chains within their own sector (vertical), others have supply chains across a number of sectors (horizontal). Similarity in these supply chain characteristics appear to be a determining factor in how industries comove. Using industrial production data of 82 four-digit NAICS industries over the period 1972 to 2019, this comovement is analyzed in a panel Markov-switching model incorporating a number of features relevant for sub-national analysis: (i) industry-specific trends that differentiate cyclical downturns from secular declines; (ii) a national-level business cycle; and (iii) factors that represent industrial comovement. While national-level shocks are typically still the most important driver of cyclical fluctuations, endogenously clustering by industry comovement highlights the role of sectoral shocks.

Keywords: cluster analysis, Markov-switching

JEL Classification: C32, E32

Suggested Citation

Guisinger, Amy and Owyang, Michael T. and Soques, Daniel, Industrial Connectedness and Business Cycle Comovements (December, 2020). FRB St. Louis Working Paper No. 2020-52, Available at SSRN: https://ssrn.com/abstract=3760156 or http://dx.doi.org/10.20955/wp.2020.052

Amy Guisinger

George Washington University

2121 I Street NW
Washington, DC 20052
United States

Michael T. Owyang (Contact Author)

Federal Reserve Bank of St. Louis - Research Division ( email )

411 Locust St
Saint Louis, MO 63011
United States

Daniel Soques

University of North Carolina (UNC) at Wilmington ( email )

601 South College Road
Wilmington, NC 28403
United States

HOME PAGE: http://people.uncw.edu/soquesd/index.html

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