Real Sectoral Spillovers: A Dynamic Factor Analysis of the Great Recession

Abstract

This paper studies changes in the transmission of common versus sectoral idiosyncratic shocks across different U.S. nonfarm business sectors during the Great Recession, and evaluates the cross-sectoral spillovers. Shocks are identified by dynamic factor methods. We find that the Great Recession is largely a time of heightened impact of common shockswhich accounts for 3/4 of aggregate volatility-and large spillovers of negative financerelated shocks. Moreover, in contrast with the earlier literature that failed to find a significant role of sectoral shocks (propagated through the input-output linkages across sectors) in driving variability in aggregate industry output, this study allows spillovers of shocks to operate through other mechanisms intertemporally. We find that prior to the recession the majority of aggregate fluctuations is explained by sector-specific shocks.

Industrial Connectedness and Business Cycle Comovements

“…Some of these clusters reflect supply chains that are isolated within the sector (motor vehicles); others are final good industries with similar demand elements (agricultural products). We find that for most industries the aggregate regime accounts for most of the cyclical variance, similar to Foerster et al 2011, Garin et al (2018), and Li and Martin (2019). However there are industries that behave similarly to the findings of Atalay (2017) where the "sectoral" or cluster grouping accounts for a larger portion of the variance.…”

“…While much of the literature debates over the importance of sectoral versus aggregate shocks in explaining the volatility across the business cycle, there is seemingly little agreement on what constitutes a sector. 3 For example, Garin et al (2018) estimates a principal component from the 12 sectors that make up the bulk of aggregate IP index and Li and Martin (2019) estimates a factor model from real output for 16 nonfarm private sectors. 4 On the other hand, Foerster et al (2011) considers aggregate and industry factors for 117 industries, roughly corresponding to four-digit NAICS industries.…”

“…The previous literature has focused on two types of shocks: aggregate shocks as affecting all industries simultaneously and idiosyncratic shocks that are specific to industries (Foerster et al, 2011;Atalay, 2017). Here, we consider an intermediate layer of comovement analogous to the two-digit NAICS sectoral level (Garin et al, 2018;Li and Martin, 2019) but with endogenously defined groupings. While the sectoral characterization assumes that demand shocks create comovement within a sector or that supply chains are intra-sectoral, our model nests that definition by having a national business cycle and idiosyncratic industry shocks, similar to the previous literature, and allowing for industries to cluster endogenously.…”

The Great Recession and Job Loss Spillovers: Impact of Tradable Employment Shocks on Supporting Services

“…They argue that this channel has important effects on aggregate employment. Li and Martin (2015), also using national data at the sectoral level, find the financial sector to be the "epicenter" during the Great Recession, from which emanates job loss spillovers in other sectors. Unlike those two papers, we utilize sectoral data at the county level, and for that reason, we are less concerned about the endogeneity issue.…”

Planning for 'The New Normal': Foresight and Management of the Possibilities of Socio-economic Spillovers due to COVID-19 Pandemic

“…Understanding the impact of the spillover in one's business, or region, or community would help to align future design policies and to work on exploiting the opportunities and enhancing the most suitable outcomes. Buheji (2020e), Li et al (2018).…”