Complementarities and Comovements

Short-run interindustry comovement may be due either to common shocks or to complementarities that progagate shocks across sectors. This paper assesses the importance of input-output linkages, aggregate activity spillovers, and local activity spillovers to comovement in postwar U.S. manufacturing. I find that input-output linkages and local activity spillovers are important to comovement, while aggregate activity spillovers are not important. I find that complementarities are important to aggregate volatility, even after I remove observable aggregate shocks from the data. Local spillovers are particularly important, explaining between 15 and 36 percent of manufacturing employment volatility. The importance of local spillovers stems from the fact that industries that cluster together in space also comove through time, contrary to the Marshallian idea that industries with negatively correlated fluctuations should cluster together in order to stabilize local demand.