1. Outsourcing and U.S. Economic Growth: The Role of Imported Intermediate Inputs Christopher Kurz, Paul Lengermann Federal Reserve Board of Governors* World Congress on National Accounts – May 2008 *The views expressed below are those of the authors and should not be attributed to the Federal Reserve Board

3. Overview We define foreign outsourcing as trade in intermediates Focus on outsourcing at the aggregate level Estimate contribution to overall economic growth Utilize new data to perform growth accounting –Unpublished industry-commodity level BEA data on imported intermediates and prices –Outsourcing is a manufacturing phenomenon and is accelerating Results 1997-2005 –15 percent of US growth attributed to imported intermediates, and accelerated –1/3 manufacturing growth from imported intermediates, mostly in durables, and is accelerating –We find link between employment growth and outsourcing growth

4. Data Multiple sources required to perform growth accounting and estimate MFP For industry or aggregate k: Gross output (Q k ), intermediate inputs (M k ) and prices from BEA GDP-by-industry accounts. Capital stock (K k ) from BEA asset-by-industry net stocks— aggregated to capital services: IT & other Labor (L k ) based on hours worked and adjusted with CBP

5. Outsourcing Data Imported intermediates and prices from published and unpublished BEA data Data for 1997 to 2005 at the detailed industry-by-commodity level Value of imported inputs –Based on detailed input-output tables –Assumes value of imported commodities used by each industry is the same as the ratio of total imports to domestic supply Prices for imported inputs –Concorded between BLS SITC import price indexes and BEA commodity codes and constructed by BEA We aggregate and concord the detailed industry-by-commodity data (272) and price data to the GDP-by-industry level (65) for industry or aggregate k.

6. The importance of outsourcing The role of foreign outsourcing has increased over the past several decades –Important in the production process –Important as a driver of increasing trade shares For each industry we construct a measure of “own- industry” imported intermediate use. We find the following stylized facts: –Most imports are in manufacturing: 85% –Intermediate imports large fraction of imports –Own-industry intermediate imports large fraction of imports –Imported share of intermediates is growing –Large amount of heterogeneity

7. The importance of outsourcing…cont Intermediate imports large fraction of imports –43 percent for total imports, 38 percent manufacturing –Shares roughly constant over our sample Own-industry intermediate imports large fraction of imports –28 percent for total, 41 percent for manufacturing –Trending downward (23% and 33% in 2005) Imported share of intermediates is growing –30 percent increase for all intermediates and 40 percent for manufacturing

8. Methodology: Measuring Intermediates Intermediate inputs can be decomposed X ij is element of domestic input-output use table We calculate as a residual. The real growth rates of other-domestic inputs are calculated via chain-stripping from.

9. Measuring Intermediates Total Intermediates and Prices BEA GDP by industry accounts Imported Intermediates and prices from BEA imported intermediates data Assume domestic intermediates price is gross output price Calculate real growth rates Is calculated residually Total Purchased Inputs (M) for sector/industry k Domestic Intermediates (M D ) Own Domestic (MD own) Other Domestic (MD other) Foreign Intermediates (MF) Own Foreign (MF own) Other Foreign (MF other)

10. Methodology Two approaches: –Sectoral output S k d is a Domar weight and s j is an cost share –Gross output Q k

11. Results—sources of growth

12. 15 percent of output growth stems from imported intermediates; 30 percent in manufacturing

13. Results—sources of growth 15 percent of the of output growth stems from imported intermediates The contribution has accelerated

14. Results—sources of growth 15 percent of the of output growth stems from imported intermediates The contribution has accelerated Disaggregation of intermediates inputs would miss contribution from foreign intermediates

15. Results—sources of growth in manufacturing GrossITOther OutputMFPCapital2Capital3LaborOtherOwnOtherOwn (1)(2)(3)(4)(5)(6)(7)(8)(9) A. 1997 to 2005 Durable goods: 1. Wood products0.6 0.0 -0.20.4-0.40.20.0 2. Nonmetallic mineral products1.10.60.10.2-0.30.40.00.20.1 3. Primary metals0.90.0-0.1-0.9-0.8-0.50.2 4. Fabricated metal products-0.50.80.1 -0.6 -0.30.20.0 5. Machinery-0.10.70.30.2-0.7-0.10.40.1 6. Computer and electronic products7.77.90.1 -1.2-0.30.50.30.2 7. Elect. equip., appliances, & components1.20.0-0.1-1.1-0.30.20.1 8. Motor vehicles, bodies and trailers, & parts2.00.50.1 -0.40.50.20.70.4 9. Other transportation equipment0.70.50.20.1-1.20.7-0.60.80.1 10. Furniture and related products2.21.20.10.2-0.50.80.00.40.0 11. Miscellaneous manufacturing3.32.60.10.0-0.80.80.10.40.1 Nondurable goods: 12. Food and beverage and tobacco products0.70.00.1-0.1 0.8-0.10.10.0 13. Textile mills and textile product mills-3.41.50.0-0.2-1.8-1.5-1.40.0-0.1 14. Apparel and leather and allied products-9.71.30.0-0.1-3.2-6.5-0.7-0.4-0.1 15. Paper products-1.40.40.0-0.2-0.8-0.5 0.10.0 16. Printing and related support activities-2.10.60.20.1-1.5-0.40.0 17. Petroleum and coal products-0.2-0.30.1-0.1 -0.4-0.30.4 18. Chemical products0.40.80.20.1-0.2-0.4-0.30.20.1 19. Plastics and rubber products0.80.70.10.2-0.50.0 0.40.0 Table 6 Sources of growth for U.S. manufacturing industries1 Purchased Foreign Inputs Purchased Domestic Inputs

16. Results—sources of growth in manufacturing GrossITOther OutputMFPCapital2Capital3LaborOtherOwnOtherOwn (1)(2)(3)(4)(5)(6)(7)(8)(9) A. 1997 to 2005 Durable goods: 1. Wood products0.6 0.0 -0.20.4-0.40.20.0 2. Nonmetallic mineral products1.10.60.10.2-0.30.40.00.20.1 3. Primary metals0.90.0-0.1-0.9-0.8-0.50.2 4. Fabricated metal products-0.50.80.1 -0.6 -0.30.20.0 5. Machinery-0.10.70.30.2-0.7-0.10.40.1 6. Computer and electronic products7.77.90.1 -1.2-0.30.50.30.2 7. Elect. equip., appliances, & components1.20.0-0.1-1.1-0.30.20.1 8. Motor vehicles, bodies and trailers, & parts2.00.50.1 -0.40.50.20.70.4 9. Other transportation equipment0.70.50.20.1-1.20.7-0.60.80.1 10. Furniture and related products2.21.20.10.2-0.50.80.00.40.0 11. Miscellaneous manufacturing3.32.60.10.0-0.80.80.10.40.1 Nondurable goods: 12. Food and beverage and tobacco products0.70.00.1-0.1 0.8-0.10.10.0 13. Textile mills and textile product mills-3.41.50.0-0.2-1.8-1.5-1.40.0-0.1 14. Apparel and leather and allied products-9.71.30.0-0.1-3.2-6.5-0.7-0.4-0.1 15. Paper products-1.40.40.0-0.2-0.8-0.5 0.10.0 16. Printing and related support activities-2.10.60.20.1-1.5-0.40.0 17. Petroleum and coal products-0.2-0.30.1-0.1 -0.4-0.30.4 18. Chemical products0.40.80.20.1-0.2-0.4-0.30.20.1 19. Plastics and rubber products0.80.70.10.2-0.50.0 0.40.0 Table 6 Sources of growth for U.S. manufacturing industries1 Purchased Foreign Inputs Purchased Domestic Inputs Contribution of domestic intermediates mostly negative; imported intermediates mostly positive

17. Results—sources of growth in manufacturing GrossITOther OutputMFPCapital2Capital3LaborOtherOwnOtherOwn (1)(2)(3)(4)(5)(6)(7)(8)(9) A. 1997 to 2005 Durable goods: 1. Wood products0.6 0.0 -0.20.4-0.40.20.0 2. Nonmetallic mineral products1.10.60.10.2-0.30.40.00.20.1 3. Primary metals0.90.0-0.1-0.9-0.8-0.50.2 4. Fabricated metal products-0.50.80.1 -0.6 -0.30.20.0 5. Machinery-0.10.70.30.2-0.7-0.10.40.1 6. Computer and electronic products7.77.90.1 -1.2-0.30.50.30.2 7. Elect. equip., appliances, & components1.20.0-0.1-1.1-0.30.20.1 8. Motor vehicles, bodies and trailers, & parts2.00.50.1 -0.40.50.20.70.4 9. Other transportation equipment0.70.50.20.1-1.20.7-0.60.80.1 10. Furniture and related products2.21.20.10.2-0.50.80.00.40.0 11. Miscellaneous manufacturing3.32.60.10.0-0.80.80.10.40.1 Nondurable goods: 12. Food and beverage and tobacco products0.70.00.1-0.1 0.8-0.10.10.0 13. Textile mills and textile product mills-3.41.50.0-0.2-1.8-1.5-1.40.0-0.1 14. Apparel and leather and allied products-9.71.30.0-0.1-3.2-6.5-0.7-0.4-0.1 15. Paper products-1.40.40.0-0.2-0.8-0.5 0.10.0 16. Printing and related support activities-2.10.60.20.1-1.5-0.40.0 17. Petroleum and coal products-0.2-0.30.1-0.1 -0.4-0.30.4 18. Chemical products0.40.80.20.1-0.2-0.4-0.30.20.1 19. Plastics and rubber products0.80.70.10.2-0.50.0 0.40.0 Table 6 Sources of growth for U.S. manufacturing industries1 Purchased Foreign Inputs Purchased Domestic Inputs ● Contribution of domestic intermediates mostly negative; imported intermediates mostly positive ● Within durables, domestic and foreign intermediates both contribute

18. Results—sources of growth in manufacturing ● Contribution of domestic intermediates mostly negative; imported intermediates mostly positive ● Within durables, domestic and foreign intermediates both contribute ● Acceleration in output growth highly correlated with acceleration in imported intermediates

19. Results—sources of growth in manufacturing ●Output growth remained elevated for computers due to contribution from pickup in imported intermediates

20. Outsourcing, Productivity, and Employment Test basic relationship between foreign outsourcing & –productivity growth –employment growth Outsourcing it is a measure of foreign outsourcing –Growth in real outsourcing (own or other) –Change in share of outsourcing (own or other) We find little significance in the relationship between outsourcing growth and productivity growth There is a significant relationship between outsourcing and employment growth

21. Conclusion Results 1997-2005 –15 percent of US growth attributed to imported intermediates, and accelerated –1/3 manufacturing growth from imported intermediates, mostly in durables, and is accelerating –We find link between employment growth and outsourcing growth