The COVID-19-pandemic recession and recovery have been unique compared with previous recessions, largely due to policies that led to behavioral changes. Lockdowns meant people were traveling less both for work and for leisure, eating out less, and going to fewer entertainment venues, among other things. At the same time, work from home and fiscal stimulus packages increased the demand for certain goods such as technological goods, cars, and furniture. These changes resulted in an overall shift away from consumption of services and toward consumption of durable goods.The rapid increase in the demand for durable goods, together with the global nature of the pandemic, has exposed vulnerabilities in the current production structure of these goods. Over the past several decades, production of durable goods has become more fragmented, relying heavily on global value chain (GVCs). 1 Instead of doing everything in-house, firms can outsource parts of their production processes to other countries. Figure 1 shows that GVC participation has been rising steadily over time, though it has plateaued in recent years (see Antrás, 2020).While GVC participation has advantages, as firms can benefit from outsourcing production to regions with a comparative advantage, it comes with risks (Santacreu and LaBelle, 2021a,b). ShocksWe investigate the role supply chain disruptions during the COVID-19 pandemic played in U.S. producer price index (PPI) inflation. We exploit pre-pandemic cross-industry variation in sourcing patterns across countries and interact it with measures of international supply chain bottlenecks during the pandemic. We show that exposure to global supply chain disruptions played a significant role in U.S. cross-industry PPI inflation between January and November 2021. If bottlenecks had followed the same path as in 2019, PPI inflation in the manufacturing sector would have been 2 percentage points lower in January 2021 and 20 percentage points lower in November 2021. (JEL F13, F14, F44) Federal Reserve Bank of St. Louis Review, forthcoming 2022.
The rapid spread across the world of COVID-19 in early 2020 led countries to implement drastic policies in an attempt to contain and mitigate the spread of the virus. Vast sectors of the economy were often shut down for significant periods of time, leading to a sizable contraction of world output. While contact-intensive industries were typically hit the hardest, less-contact-intensive sectors such as manufactures were also affected. For instance, in the United States, manufacturing employment and output declined by about 6 percent and 11 percent, respectively, between January and June of 2020.Several channels can account for the decline of economic activity in manufactures. On the one hand, we have domestic factors such as lockdowns and containment policies that depressed demand and curtailed supply across a broad range of industries early in the pandemic. On the other hand, we have foreign factors arising from the dependence of domestic production on inputs produced abroad; that is, the role of global value chains. In particular, industries that rely on inputs produced by countries with severe shutdowns might have had their production process halted due to decreased availability of intermediate inputs.We investigate the role of global value chains in the declines of manufacturing employment and output in the U.S. during COVID-19. Specifically, we identify the role of global value chains by exploiting heterogeneity across industries in cross-country sourcing patterns and its interaction with exogenous cross-country variation in the containment policies introduced to combat the virus. We find that global value chains played a significant role in the decline of output and employment across U.S. manufactures. Moreover, we find a modest impact of diversifying or renationalizing global value chains in mitigating the economy's exposure to foreign shocks. (JEL F13, F14, F44)
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