Outsourcing and U.S. Economic Growth: The Role of Imported Intermediate Inputs

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

Imported Intermediate Share of Intermediate Inputs

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

1997 1998 1999 2000 2001 2002 2003 2004 2005

Imported share of total intermediates

Imported share of manufacturing intermediates

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• Utilize new data to perform growth accounting– Unpublished industry-commodity level BEA data on imported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

Data

Multiple sources required to perform growth accounting and estimate MFP

For industry or aggregate k:

• Gross output (Qk), intermediate inputs (Mk) and prices from BEA GDP-by-industry accounts.

• Capital stock (Kk) from BEA asset-by-industry net stocks—aggregated to capital services: IT & other

• Labor (Lk) based on hours worked and adjusted with CBP

Outsourcing DataImported 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unpublished BEA data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.

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

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

Methodology: Measuring Intermediates

Intermediate inputs can be decomposed

• Xij 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 .

ki kjij

ownFk

otherDk

ownDk

otherFk

ownFkk

XM

MMMMM

,

,,,,

otherDkM ,

otherDkM ,

ˆkM̂

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 otherDkM ,

ˆ

Total Purchased Inputs (M) for sector/industry k

Domestic Intermediates (MD)

Foreign Intermediates (MF)

Own Foreign (MFown) Other Foreign (MF

other)Own Domestic (MD

own)Other Domestic (MD

other)

otherFk

ownFk

ownDk MMM ,,,

ˆ,ˆ,ˆ

MethodologyTwo approaches:

– Sectoral output Sk

• d is a Domar weight and sj is an cost share

– Gross output Qk

ki

otherFi

Mi

ownFi

Mii

Kii

Lii

ki

otherDk

Mkk

otherDi

Mi

otherFi

Mi

ownFi

Mii

Kii

Liii

ownDkkk

MsMsKsLsPFMdMsS

MsMsMsKsLsSPFM

MQS

otherFi

ownFi

otherDk

otherDi

otherFi

ownFi

,,,

,,,

,

ˆˆˆˆˆˆˆ

)ˆˆˆˆˆ(ˆˆ

ˆˆˆ

,,,

,,,

)ˆˆˆˆˆˆ(ˆˆ,,,,

,,,, ownDi

Mi

otherDi

Mi

otherFi

Mi

ownFi

Mii

Kii

Liii MsMsMsMsKsLsSPFM

ownDi

otherDi

otherFi

ownFi

Results—sources of growth

Sectoral IT Other Purchased Domestic Purchased Foreign Inputs:Output MFP Capital2 Capital3 Labor Inputs: Other Own

(1) (2) (3) (4) (5) (6) (7) (8)

A. 1997 to 20051. Private industries 3.4 1.6 .6 .5 .3 -.1 .4 .16. Manufacturing 1.9 1.9 .2 .1 -.9 .1 .4 .27. Durable goods 2.8 2.9 .2 .1 -1.0 -.1 .5 .38. Nondurable goods .3 .5 .1 .0 -.6 .1 .2 .09. Services-producing industries 3.5 1.2 .7 .6 .6 .1 .2 .0

C. 2003 to 20051. Private industries 3.2 2.4 .3 .2 .2 -.5 .5 .1

D. Difference in Annual Averages, (2003 to 2005) vs. (1997 to 2002)

1. Private industries -.3 1.3 -.5 -.5 -.1 -.7 .2 .0

Table 4Sources of growth in sectoral output

for U.S. private industry and major industry groups1


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


(1) (2) (3) (4) (5) (6) (7) (8)








• 15 percent of the of output growth stems from imported intermediates

• The contribution has accelerated


(1) (2) (3) (4) (5) (6) (7) (8)








• 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


(1) (2) (3) (4) (5) (6) (7) (8)







Results—sources of growth in manufacturing

Gross IT OtherOutput MFP Capital2 Capital3 Labor Other Own Other Own

(1) (2) (3) (4) (5) (6) (7) (8) (9)

A. 1997 to 2005Durable goods:

1. Wood products 0.6 0.6 0.0 0.0 -0.2 0.4 -0.4 0.2 0.02. Nonmetallic mineral products 1.1 0.6 0.1 0.2 -0.3 0.4 0.0 0.2 0.13. Primary metals -1.0 0.9 0.0 -0.1 -0.9 -0.8 -0.5 0.2 0.24. Fabricated metal products -0.5 0.8 0.1 0.1 -0.6 -0.6 -0.3 0.2 0.05. Machinery -0.1 0.7 0.3 0.2 -1.0 -0.7 -0.1 0.4 0.16. Computer and electronic products 7.7 7.9 0.1 0.1 -1.2 -0.3 0.5 0.3 0.27. Elect. equip., appliances, & components -1.0 1.2 0.0 -0.1 -1.1 -1.0 -0.3 0.2 0.18. Motor vehicles, bodies and trailers, & parts 2.0 0.5 0.1 0.1 -0.4 0.5 0.2 0.7 0.49. Other transportation equipment 0.7 0.5 0.2 0.1 -1.2 0.7 -0.6 0.8 0.1

10. Furniture and related products 2.2 1.2 0.1 0.2 -0.5 0.8 0.0 0.4 0.011. Miscellaneous manufacturing 3.3 2.6 0.1 0.0 -0.8 0.8 0.1 0.4 0.1

Nondurable goods:12. Food and beverage and tobacco products 0.7 0.0 0.1 -0.1 -0.1 0.8 -0.1 0.1 0.013. Textile mills and textile product mills -3.4 1.5 0.0 -0.2 -1.8 -1.5 -1.4 0.0 -0.114. Apparel and leather and allied products -9.7 1.3 0.0 -0.1 -3.2 -6.5 -0.7 -0.4 -0.115. Paper products -1.4 0.4 0.0 -0.2 -0.8 -0.5 -0.5 0.1 0.016. Printing and related support activities -2.1 0.6 0.2 0.1 -1.0 -1.5 -0.4 0.0 0.017. Petroleum and coal products -0.2 -0.3 0.1 -0.1 -0.1 -0.4 -0.3 0.4 0.418. Chemical products 0.4 0.8 0.2 0.1 -0.2 -0.4 -0.3 0.2 0.119. Plastics and rubber products 0.8 0.7 0.1 0.2 -0.5 0.0 0.0 0.4 0.0

Table 6Sources of growth for U.S. manufacturing industries1

Purchased Foreign InputsPurchased Domestic Inputs



(1) (2) (3) (4) (5) (6) (7) (8) (9)







•Contribution of domestic intermediates mostly negative; imported intermediates mostly positive



(1) (2) (3) (4) (5) (6) (7) (8) (9)







● Contribution of domestic intermediates mostly negative; imported intermediates mostly positive● Within durables, domestic and foreign intermediates both contribute


● 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


(1) (2) (3) (4) (5) (6) (7) (8) (9)B. Difference in Annual Averages, (2003 to 2005) vs. (1997 to 2002)

Durable goods:1. Wood products 0.5 0.6 0.0 -0.1 0.3 0.3 -0.3 0.1 -0.22. Nonmetallic mineral products 1.4 0.9 -0.2 -0.3 0.1 0.4 0.2 0.3 0.13. Primary metals 3.1 0.0 -0.1 -0.1 0.6 -0.1 1.1 1.0 0.74. Fabricated metal products -0.4 2.4 -0.1 -0.2 0.8 -2.5 -0.8 0.0 0.05. Machinery 6.1 2.7 -0.4 -0.3 0.8 2.4 0.1 0.8 0.26. Computer and electronic products -0.4 -1.1 -0.5 -0.3 -0.2 0.2 -0.1 0.9 0.77. Electrical equipment, appliances, and components1.6 -0.1 -0.1 -0.3 -0.4 1.5 0.2 0.6 0.18. Motor vehicles, bodies and trailers, and parts -1.6 -1.0 -0.1 -0.2 0.0 -0.8 -0.4 0.5 0.29. Other transportation equipment 2.1 -0.2 -0.3 -0.2 -0.7 2.5 0.1 0.9 0.0

10. Furniture and related products 0.5 3.3 -0.1 -0.3 -0.2 -2.0 -0.2 -0.1 0.011. Miscellaneous manufacturing -1.1 2.2 -0.1 -0.1 0.7 -2.7 -0.5 -0.3 -0.2

Nondurable goods:12. Food and beverage and tobacco products 0.1 0.4 -0.1 -0.1 -0.2 -0.4 0.5 0.1 -0.113. Textile mills and textile product mills -1.7 3.1 -0.1 -0.2 -0.1 -3.1 -1.3 0.1 -0.214. Apparel and leather and allied products 1.3 1.0 -0.1 -0.2 -1.3 1.5 0.4 0.0 0.115. Paper products -0.7 3.3 -0.1 -0.1 -0.3 -3.3 -0.5 0.2 0.116. Printing and related support activities -1.4 2.4 -0.2 -0.2 -0.3 -2.5 -0.5 -0.1 0.017. Petroleum and coal products -3.1 -0.1 0.0 0.1 0.0 -0.3 -0.9 -1.3 -0.718. Chemical products -0.8 0.4 -0.3 -0.2 -0.2 -1.6 0.5 0.4 0.219. Plastics and rubber products -0.7 1.0 -0.1 -0.4 0.0 -1.4 -0.2 0.4 0.0


Purchased Domestic Inputs Purchased Foreign Inputs


●Output growth remained elevated for computers due to contribution from pickup in imported intermediates


(1) (2) (3) (4) (5) (6) (7) (8) (9)B. Difference in Annual Averages, (2003 to 2005) vs. (1997 to 2002)

Durable goods:1. Wood products 0.5 0.6 0.0 -0.1 0.3 0.3 -0.3 0.1 -0.22. Nonmetallic mineral products 1.4 0.9 -0.2 -0.3 0.1 0.4 0.2 0.3 0.13. Primary metals 3.1 0.0 -0.1 -0.1 0.6 -0.1 1.1 1.0 0.74. Fabricated metal products -0.4 2.4 -0.1 -0.2 0.8 -2.5 -0.8 0.0 0.05. Machinery 6.1 2.7 -0.4 -0.3 0.8 2.4 0.1 0.8 0.26. Computer and electronic products -0.4 -1.1 -0.5 -0.3 -0.2 0.2 -0.1 0.9 0.77. Electrical equipment, appliances, and components1.6 -0.1 -0.1 -0.3 -0.4 1.5 0.2 0.6 0.18. Motor vehicles, bodies and trailers, and parts -1.6 -1.0 -0.1 -0.2 0.0 -0.8 -0.4 0.5 0.29. Other transportation equipment 2.1 -0.2 -0.3 -0.2 -0.7 2.5 0.1 0.9 0.0

10. Furniture and related products 0.5 3.3 -0.1 -0.3 -0.2 -2.0 -0.2 -0.1 0.011. Miscellaneous manufacturing -1.1 2.2 -0.1 -0.1 0.7 -2.7 -0.5 -0.3 -0.2

Nondurable goods:12. Food and beverage and tobacco products 0.1 0.4 -0.1 -0.1 -0.2 -0.4 0.5 0.1 -0.113. Textile mills and textile product mills -1.7 3.1 -0.1 -0.2 -0.1 -3.1 -1.3 0.1 -0.214. Apparel and leather and allied products 1.3 1.0 -0.1 -0.2 -1.3 1.5 0.4 0.0 0.115. Paper products -0.7 3.3 -0.1 -0.1 -0.3 -3.3 -0.5 0.2 0.116. Printing and related support activities -1.4 2.4 -0.2 -0.2 -0.3 -2.5 -0.5 -0.1 0.017. Petroleum and coal products -3.1 -0.1 0.0 0.1 0.0 -0.3 -0.9 -1.3 -0.718. Chemical products -0.8 0.4 -0.3 -0.2 -0.2 -1.6 0.5 0.4 0.219. Plastics and rubber products -0.7 1.0 -0.1 -0.4 0.0 -1.4 -0.2 0.4 0.0


Purchased Domestic Inputs Purchased Foreign Inputs

Outsourcing, Productivity, and Employment

• Test basic relationship between foreign outsourcing &– productivity growth– employment growth

• Outsourcingit 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

itititit XgOutsourcinY ˆ

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

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Outsourcing and U.S. Economic Growth: The Role of Imported Intermediate Inputs

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