Production Networks and Propagation of Supply and Demand Shocks

We obtain measures of demand and supply shock spillovers across the U.S. manufacturing industries using monthly data on industrial production (1976-2022) and producer prices (1947-2022). Analyzing the spillovers/connectedness measures and the input-output linkages, we find strong evidence that supply shocks propagate downstream through the producer price channel. In contrast, demand shocks propagate upstream through the production channel. Statistical tests strongly support that the input-output network Granger causes inflation connectedness, especially more significantly during global metal-mineral and oil price hikes. Similarly, the input-output network Granger causes output connectedness, particularly more strongly during U.S. recessions