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Retooling America’s economic engine: Perspectives on growth, job creation, and innovation

McKinsey Global Institute

December, 2011

CONFIDENTIAL AND PROPRIETARY Any use of this material without specific permission of McKinsey & Company is strictly prohibited

McKinsey & Company | 1 1

Today’s discussion

SOURCE: McKinsey Global Institute

Challenge of US Growth & Renewal

▪ Productivity ▪ Job creation ▪ Innovation

Solutions: Rising to the Challenge

▪ High spark ▪ High skill ▪ High share ▪ High speed

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Contributions to growth in real U.S. GDP, overall economy Share of compound annual growth rate, 1960-2008, %

SOURCE: U.S. Bureau of Economic Analysis; U.S. Bureau of Labor Statistics; McKinsey Global Institute analysis

1 2000-08 data used for 2000s

4665

53 47

20

Increases in value added per worker (productivity)

2000s1

2.1

80

1990s

3.3

53

1980s

3.2

47

1970s

3.1

35

1960s

4.1

54

100% =

Increases in the workforce (labor inputs)

The U.S. now must rely on productivity gains for GDP growth PRODUCTIVITY

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Productivity growth rates Compound annual growth rate, %

2.2

1.1

1.5

1.8

1.6

2.1 2.3

1960s

1970s

1980s

1990s

2000s1

1 Includes 2000-08

Productivity gain required …

The productivity gains needed to sustain historic GDP growth rates are ambitious

SOURCE: U.S. Bureau of Economic Analysis; Census 2009 population estimates; McKinsey Global Institute analysis

PRODUCTIVITY

To sustain historical 2.8% GDP growth, a 44% increase from the ’00s

To sustain historical 1.7% GDP per capita growth, a 31% increase from the ’00s

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-4.5

42 0 6 12

-0.5 -1.0 -1.5 -2.0 -2.5 -3.0

-6.5

-3.5

-4.0

-5.0

-5.5

36

-6.0

30 18 24

The US employment decline in this recession was more than twice as large as in previous postwar recessions

1 Total nonfarm employment, seasonally adjusted.

SOURCE: US Bureau of Labor Statistics; McKinsey Global Institute analysis

US employment decline from peak1 %

Months since employment peak

July 1974 – January 1976

March – November 1980

July 1981– October 1983

June 1990 – January 1993 February 2001–

January 2005

January 2008 – May 2011

JOB CREATION

▪ Lost 8.3 MM jobs during the recession

▪ Remains 7.2 MM jobs below pre-recession peak

▪ US must create 200k jobs a month to regain levels

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1 GDP returned to its pre-recession peak in December 2010

The gap between GDP and employment recovery is growing

SOURCE: U.S. Bureau of Labor Statistics; U.S. Bureau of Economic Analysis; McKinsey Global Institute analysis

6

39

15

63

86676

2001 1981 1990 1973

?

20081 1960 1969 1957 1948 1953

Year in which the recession began

“Jobless recoveries”

Gap between GDP returning to pre-recession peak and employment returning to pre-recession peak

Months

JOB CREATION

▪ Changing competi-tive dynamics of economy (e.g., workers carrying almost the entire burden of recession)

▪ Growing mismatch between – Location – Skills – Industries

▪ Fewer new companies coming along to create jobs in the first place

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02468

10121416182022

Long-run average = 18%

2009 2000 1990 1980 19701 1960 1950

US mobility has been declining since 1990 and is at a 50-year low

SOURCE: U.S. Bureau of Labor Statistics; McKinsey Global Institute analysis

1 Data from 1970–1981 are interpolated due to data constraints.

Annual domestic migration rate, 1948–2009 % of residents who have changed addresses during the past year

JOB CREATION

In the 1950s and 1960s, 1 in 5 Americans changed residences every year . . .

. . . but that figure has now dropped to 1 in 10

McKinsey & Company | 7 SOURCE: Moody’s Analytics; McKinsey Global Institute analysis

The high job-growth scenario is the only one that returns the United States to 5 percent unemployment by 2020

Employment demand scenarios Millions of net new jobs, 2010 - 2020 22.5

17.4

9.3

High Middle Low

77 145 187 Average net new jobs per month Thousands of jobs

Need 21 million new jobs to return to 5% unemployment in 2020

JOB CREATION

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Compound annual growth rate, 1990-2000, %

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

6 5 4 3 2 1 0 -1 -2 -3

Wholesale

Utilities

Transport

Retail

Real estate

Professional services

Other services

Manufacturing

Management

Information

Health care

Government

Finance/ insurance

Education Construction

Arts/recreation

Agriculture and mining

Administration

Accommodation/ food services

17 16 7

Negative

Positive

1 Productivity contribution calculated using Moody’s Economy.com data 2 Valued-added growth is the contribution of each sector to total GDP growth

In the 1990s, productivity growth was driven by a virtuous cycle of increasing value added and jobs growth …

SOURCE: U.S. Bureau of Economic Analysis; Moody’s Economy.com; McKinsey Global Institute Sunrise Productivity Model

Size represents produ- ctivity contribution1

Value-added growth2

Employment growth

INNOVATION

▪ Total productivity growth 1990-2000 was 1.8 percent

▪ Productivity gains were driven by sectors that experienced positive employment growth and increasing value added growth

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Compound annual growth rate, 2000-2010, %

Since 2000, the largest contributions to productivity gains were driven by declining employment

SOURCE: U.S. Bureau of Economic Analysis; Moody’s Economy.com; McKinsey Global Institute Sunrise Productivity Model

Size represents productivity contribution1

Value-added growth2

Employment growth

INNOVATION

▪ Total productivity growth 2000-2008 was 1.6 percent

▪ Large share of productivity gains came from tradable sectors with large efficiency gains and job losses

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

Other services

Manufacturing

2 1 0 -1 -2 -3

Wholesale Utilities Transport

Retail

Real estate

Professional services

17 16 7 6 5 4 3

Administration

Manage- ment

Information

Health care

Govt. Finance/insurance

Education

Construction

Computers/electronics

Arts/ recreation

Agriculture and mining

Accommodation/ food services

Positive

Negative

1 Manufacturing sector excluding Computers/electronics and Other transportation equipment sectors 2 Valued-added growth is the contribution of each sector to total GDP growth

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Opportunities exist for leaders and laggards to contribute to productivity growth & innovation

1 Productivity contribution was calculated using Moody’s Economy.com data.

Top quartile 25th–50th quartile Bottom quartile

1990-20001 2000-08

Goods

Manufacturing 36.7 19.2

Construction -0.5 -11.0 Natural resources 1.6 0.2 Computer and electronic products n/a 22.5 Real estate and rental and leasing 19.8 18.4 Wholesale trade 17.5 11.2 Information 7.4 21.6

Services

Transportation and warehousing 3.8 3.9 Retail trade 9.8 1.5 Administrative and other services -4.7 5.6

Accommodation and food services -2.8 -3.2 Other services (except public admin.) -1.7 -4.8 Arts, entertainment, and recreation -0.7 -0.8 Finance and insurance 16.9 9.9 Professional, scientific, technical services 7.3 9.7 Management of companies 0.7 -0.6

Regulated and public

Government -4.1 1.0 Health care and social assistance -8.1 -1.7 Educational services -1.5 -3.1 Utilities 2.5 0.5

Contribution to productivity growth, %

SOURCE: U.S. Bureau of Economic Analysis; Moody’s Economy.com; MGI Sunrise Productivity Model

INNOVATION

Retail can continue to drive productivity growth through greater integration of online and offline channels, and innovations in responding to and engaging customers

Healthcare can increase productivity through greater use of available technology (e.g., e-mail, electronic record keeping) and broader adoption of established lean principles

Aerospace can further improve productivity by continuing to set the bar for innovation while making use of standard lean principles

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US Growth and Renewal: rising to the challenge

SOURCE: McKinsey Global Institute

▪ Encourage innovation, new company creation, and the scaling up of new industries in the U.S. High spark

▪ Ensure Americans acquire the skills that match employer needs High skill

▪ Harness globalization to create more U.S. jobs High share

▪ Remove impediments to investment and job creation High speed

McKinsey & Company | 12 12 SOURCE: McKinsey Global Institute

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