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Intermediate input dynamics

Buying goods to make more goods

When a firm manufactures a good, the production uses not only labor and physical capital, but also intermediate goods and materials produced “upstream” in the production network. For example, when an automaker produces a car, it needs to purchase steel, glass, electronic devices, and more from other companies. The graph above shows the ratio of the costs of intermediate goods to total revenue (or gross output) for all U.S. industries. We see that the whole economy relies heavily on the production network, as the revenue share of intermediate inputs is above 40% on average. Also, the material share isn’t constant and actually fluctuates over time. During the Great Recession (2007-09), for example, the share drops from 46% to 41%, which implies that firms slowed down their purchasing of goods from each other. And, by 2011, they were buying and selling at about the same level as before the recession.

The second graph shows the material share specifically for manufacturing, which is an industry that uses more intermediate goods for production: Its average material share is 65%—much higher than the 43% for the entire economy. Its material share dropped as well in the recession, but in 2011-14 it overshot its pre-recession level, probably because firms were compensating for the amount of shipments they would have ordered (but did not) during 2008-09.

The final graph shows the FIRE sector (finance, insurance, and real estate). The FIRE sector typically uses less material (focusing on office equipment and delivery of services), but the material share is still above 30%. Interestingly, the level of material usage for the FIRE industry fell in 2008, but it has not yet recovered to its pre-recession level.

We’ve seen a solid rebound, an overshoot, and a shortfall in the material share soon after the recession. Overall, the numbers in 2015-17 suggest that a full recovery hasn’t yet occurred for the U.S. production network.

How these graphs were created: From the FRED homepage, select the option to “Browse Data by Release” below the main search bar. Choose “Gross Domestic Product by Industry” as the release. This release contains both intermediate inputs and gross output for all industries. Select the intermediate inputs by industry table and view the first table, in billions of dollars, seasonally adjusted at annual rates. Click on “Private Industries” to view the intermediate input cost of all private industries. To express as a share of gross output, use the “Edit Graph” menu to customize the graph: Add “Gross Output of All Industries” in the search box on the “Edit Line 1” tab. Type a/b in the formula box and click “Apply.” Repeat this process for each subindustry as desired.

Suggested by Sungki Hong.

View on FRED, series used in this post: GOAI, GOFIRL, GOMA, IIAI, IIFIRL, IIMA

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