Technology Optimism, but Employment and GDP Growth Uncertainty Martin Neil Baily and James L....

Technology Optimism, but Employment and GDP Growth Uncertainty

Martin Neil Baily and James L. Manyika, Brookings and McKinsey Global Institute

Prepared for the AEA Meetings January 4, 2012CONFIDENTIAL AND PROPRIETARYAny use of this material without specific permission of McKinsey & Company is strictly prohibited

McKinsey & Company | 2

Contents

▪ Historical and current patterns in US productivity

▪ Future trends in productivity


0 5 10 15 20 25 30 35 40

Improvement in per capita GDP by year of birthIndexed to 100

Years from birth

100

120

140

160

180

200

220

240

260

SOURCE: U.S. Bureau of Economic Analysis; U.S. Census Bureau; Moody’s Economy.com; McKinsey analysis

2.54x

2.04x

1.96x

1.78x

Forecast

1.63x

Growth in per capita GDP Multiplier

Birth year

1960

1970

1980

1990

2000

Without a productivity boost, younger generationswill experience slower increases in their standard of living


GDP per employee (aggregate)Real 2005 USD / employee, Thousands

GDP per employee has maintained its long term rate of growth overthe last decade

SOURCE: Moody’s database

+1.6% p.a.

+1.4% p.a.

11

99

10

99

09

9695

07

94

06

94

05

93

0804

92

03

89

02

87

01

84

00

83

99

82

98

80

97

78

96

77

95

76

94

76

93

75

92

74

91

72

90

71

89

71

88

70

87

69

86

69

85

68

84

67

83

65

82

63

81

63

80

62

79

62

78

62

77

62


Though productivity has continued to grow steadily, bothGDP and employment have grown slower than before

SOURCE: Moody’s database

Real GDP growth, % p.a.

Employment growth, % p.a.

Pre 19801980-89

1990-99Post 2000

1.62.3

-2.8

-0.2

1.82.63.03.5

2.71.9

1.0

4.24.74.24.53.7

2.2

4.1

2.63.3

-0.2

1.9

3.63.93.23.4

4.3

7.4

4.1

-1.7

2.9

-0.3

3.0

5.4

1.1

-0.6

-4.2

-0.5

1.11.71.6

1.0

-0.3-1.2

0

2.02.32.52.41.92.52.8

1.8

0.2

-1.0

1.22.3

3.02.5

1.82.8

4.2

0.9

-1.7

0.80.7

3.34.6

0302010099989796959493929190898887868584838281807978 1110090807060504


The 1990s expansion was supported by strong investmentgrowth. Weak investment in the 80s. Housing in the 00s

SOURCE: Moody’s, The Economist Intelligence Unit

2.31.82.63.03.5

2.71.9

4.24.74.54.13.31.9

3.63.93.23.4

4.3

7.4

-1.7

2.9

-6

-4

-2

0

2

4

6

8

-20

-10

0

10

20

4.23.72.22.6

-0.2

4.11.6

-2.8

-0.2

1.0

Gross fixed investment,% real change p.a.

1.11.0

-0.3-1.2

0

2.52.41.91.8

-1.0

1.22.3

3.02.51.8

-1.7

2.3

-6

-4

-2

0

2

4

6

8

-20

-10

0

10

20

09

-4.2

08

-0.5

0706

1.7

05

1.6

04979695

2.5

94

2.8

9392

0.2

919089888786 03020100

2.0

9998 11

1.1

10

-0.6

85

2.8

84

4.2

83

0.9

8281

0.8

Pre 19801980-89

1990-99Post 2000

Growth in real GDP and gross fixed investment, % p.a.

Growth in employment and gross fixed investment, % p.a.


In the 1990s, productivity growth was driven by sectors witha virtuous cycle of job growth and increasing value added

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

7

8

Employment growth

Value-added growth2137109875432

Finance

Entertainment/Recreation

Other Services

Acco./Food

Administration

Retail Trade

Transportation/Warehousing

Information

Wholesale Trade

-1

Computers/ElectronicsNatural resources

Construction

Manufacturing

0 61-2-3

Utilities

Educational Services

Health Care

Government

Management

Professional/Scientific

Real Estate

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

Total productivity growth 1990–2000 was 1.6 percent

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

Size represents productivity contribution

1 Manufacturing excludes Computers/Electronics2 Valued-added growth is the contribution of each sector to total GDP growth

NegativePositive

Average annual growth rate, 1990–2000, %


Since 2000, the largest contributors to productivity gainhave shown declining employment

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

Average annual growth rate, 2000–11, %

-5

-4

-3

-2

-1

0

1

2

3

4

Employment growth

Value-added growth233654210 3

Government

ManagementProfessional/Scientific

Finance

Entertainment/Recreation

Other Services

Acco./Food

Administration

-1

Transportation/Warehousing

Information

Wholesale TradeReal Estate

Computers/Electronics

Natural resources

Retail Trade

Manufacturing

-2-3

Utilities

Educational Services

Health Care

Construction

NegativePositive

1 Manufacturing excludes Computers/Electronics2 Valued-added growth is the contribution of each sector to total GDP growth

Size representsproductivity contribution1

Total productivity growth 2000–11 was 1.6 percent

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


Opportunities exist for leaders and laggards – heat map

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

1990-20001 2000-11

Goods Manufacturing excl. Computers & Electronics

Construction

Natural resources

Computer & Electronic products

Real estate and rental and leasing

Wholesale trade

Information

Services Transportation and warehousing

Retail trade

Administrative and other services

Accommodation and food services

Other services (except public admin.)

Arts, entertainment, and recreation

Finance and insurance

Professional, scientific, technical services

Management of companies

Regulated and public

Government

Health care and social assistance

Educational services

Utilities

Sector productivity growth, %

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

Top quartile

25th–50th quartile

Bottom quartile

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. data/analytics, 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


Contents



– Manufacturing

– Healthcare

– Energy

– Infrastructure


We have currently identified 8 game changers to evaluate for their potentially significant impact on US productivity, jobs and GDP

SOURCE: McKinsey Global Institute

Description

Domestic production of shale gas and light tight oil combined with higher energy productivity in power generation, buildings, transport, and industrials1

Domestic energy and energy productivity

Increasing K-12 and post-secondary attainment and achievement, aligning skills to job demand, and providing re-employment pathwaysSkills revolution2

Economic gains from sustainable infrastructure spending, long-term infrastructure investments to address future demand needs, and enabling trade and innovation growth through transport infrastructure

Next-generation infrastructure

3

New products and processes enabled by advanced and lightweight composites, nanotechnologies, biologics, and biosciencesInnovation in materials,

biologics, biosciences4

Productivity impact and innovation in new products and services related to big data, advanced analytics, social technologies, spectrum reallocation, and “internet of things” on large sectors of the economy

Diffusion of Big Data, internet innovation

5

Productivity growth in three major public or quasi-public sectors including healthcare, education and government services deliveryPublic-sector

productivity gains6

Recovery from 23% drop in new business creation since 2007 and reversal of long-term decline in business creation as a share of working-age populationRestored business

creation engine7

Acceleration of US gross export growth from current trajectory (at 13% of GDP, already at highest level since 1950) in both tradable goods and services

Sustained export growth

8


Contents



– Manufacturing

– Healthcare

– Energy

– Infrastructure


Furniture, jewelry, toys, other

Textiles, apparel, leather

Medical, precision, and optical

Semiconductors and electronics

Computers and office machinery

Basic metals

Mineral-based products

Paper and pulp

Refined petroleum, coke, nuclear

Wood products

Printing and publishing

Food, beverage, and tobacco

Fabricated metal products

Rubber and plastics products

Machinery, equipment, appliances

Electrical machinery

Other transport equipment

Motor vehicles, trailers, parts

Chemicals

Manufacturing is diverse High

Upper-middle

Lower-middle

Low

GroupValue density

Trade intensity

Energy intensity

Capital intensity

Labor intensity

R&D intensityIndustry

Labor- inten-sive tradables

Global technologies/ innovators

Energy-/ resource-intensive commodities

Regional processing

Global innovation for local markets

McKinsey & Company | 14 14

New technologies

change manufacturi

ng value chains and processes

New materials▪ Nanotech▪ Composites▪ Biologics

Product design▪ Internet of Things▪ Advanced analytics▪ Social media

Production processes▪ Modeling and simulation▪ Advanced robotics▪ Additive manufacturing

Information systems▪ Big Data▪ Computer-aided design

Business models▪ Frugal innovation▪ Circular economy▪ New service models

McKinsey & Company | 15 15

New technologies

change manufacturi

ng value chains and processes

New materials▪ Nanotech▪ Composites▪ Biologics

Product design▪ Internet of Things▪ Advanced analytics▪ Social media

Production processes▪ Modeling and simulation▪ Advanced robotics▪ Additive manufacturing

Information systems▪ Big Data▪ Computer-aided design

Business models▪ Frugal innovation▪ Circular economy▪ New service models


Contents



– Manufacturing

– Healthcare

– Energy

– Infrastructure


Three major legislative and regulatory changes will force providers to undergo major transformation

SOURCE: Interviews; analyst reports

Expected collective impact on healthcare systems

Health Reform

▪ Leap in number of insured (up to 20M+ more lives)

▪ Increased cost and pricing pressure in health care industry

▪ Payor urgency to support change to bend cost curve and remain relevant

ARRA Stimulus

▪ Significant increase in penetration of electronic health records (EHR) resulting in greater medical effectiveness

▪ Increase in patient engagement and knowledge due to access to information

Switch to ICD10/ HIPPA5010

▪ Rise in demand for information/ analytics to drive comparative clinical and health economics research (e.g., provider pay for performance)

▪ Greater complexity in managing compatibility of legacy IT systems with coding upgrades and regulatory changes


New technologies in healthcare processes and delivery systemsData driven decision making▪ Data driven R&D for increased efficacy▪ Ease of comparing treatments and products▪ Analytical forecasts of effects of EMR and CDS▪ Analytics driven marketing

Low cost channels and solutions▪ Technology enabled redistribution of care, e.g. minute clinics

and “clinic-in-a-box”▪ Remote care tools, e.g. Orange healthcare▪ Self-service, e.g. in vision exams

Transparency in information flow▪ Increased usage of online sources for healthcare information ▪ Transparent pricing driven by ease of comparing prices▪ Use of social media for health information and marketing

Personalization▪ New data sources for more granular information on individuals,

e.g. genome sequencing▪ Individually customized products, e.g. Herceptin breast cancer

drug paired with HER2 protein detection test▪ Individually customized treatment regimes


Contents



– Manufacturing

– Healthcare

– Energy

– Infrastructure

McKinsey & Company |21

U.S. Natural Gas Production, 1990-2035


Contents



– Manufacturing

– Healthcare

– Energy

– Infrastructure


The United States now ranks 25th in the world for infrastructure quality, down from 5th in 2002

SOURCE: World Economic Forum Global Competitiveness Report, 2012-2013

Question: How would you assess general infrastructure (e.g., transport, telephony, energy) in your country?

Switzerland

Finland

France

Iceland

Germany

Singapore

Hong Kong SAR

UAE

Austria

Netherlands

1

3

5

7

9

2

4

6

8

10

Portugal

Denmark

Luxembourg

Bahrain

Canada

11

13

12

14

15

Japan

Spain

Oman

Belgium

Sweden

16

18

20

17

19

South Korea

United Kingdom

Qatar

Czech Republic

Barbados

Saudi Arabia

United States

Taiwan, China

Malaysia

Slovenia

22

24

26

28

21

23

25

27

29

30


162

46

34

153

29

51

46

75

381

Total 976

Recreation and schools3

Energy

Waste

Water and wastewater2

Waterways

Rail

Aviation

Transit

Roads and bridges

245

75

77

318

50

63

87

265

930

2,110

The American Society of Civil Engineers estimates the US has a 5-year, $1.1T funding gap, ~70% of which comes from transport infrastructureEstimated infrastructure investment shortfall for the U.S. 2009-14, $ bn

SOURCE: American Society of Civil Engineers – 2009 Report Card for America’s Infrastructure

Actual spending Need1Asset class

1 Not adjusted for inflation 2 Includes dams and levees 3 Public parks and recreation and schools

“The U.S. is falling dramatically behind much of the world in rebuilding and expanding an overloaded and deteriorating transport network.” Urban Land Institute, 2011

~$800B of the gap involves transit infra-structure

83

30

43

21

12

41

1,134

165

190

550

Gap


However, there are many barriers that could prohibitthese economic benefits

Barriers to infrastructure success

▪ New project financing difficult in budget constrained environment

▪ Project selection with positive ROI critical to realizing the full prizeSustainable financing

▪ Importance of considerations (trade agreements, relationships with new countries etc.) beyond infrastructure

▪ Political questions around selection of export/FDI nodes

Inward FDI

▪ Slow moving process to begin to develop new industry practices and expertise

▪ Environmental concerns, e.g. global climate concerns around expanding coal exports

Expansion of industry


Conclusions

▪ Very uncertain productivity trend. GDP per employee has continued to grow. Nonfarm business per hour has had trend growth of about 2.5 percent, 1996 to the present, but has slowed in recent quarters. CBO estimates the trend in nonfarm business per hour growth at 2.2 percent.

▪ Since 2000 productivity growth has been associated with slow employment growth or layoffs. Restructuring productivity. For sustained growth going forward the economy needs output/numerator driven growth, which requires greater thrust on innovation and competitiveness on skills.

▪ We do not find any evidence of technology stagnation. 3-D chips have prolonged Moore’s law, probably for another 10 years. There are multiple new technologies emerging from Silicon Valley and elsewhere.

▪ There has been a revolution in the US energy picture with plentiful natural gas and possible self-sufficiency in oil. Energy is not a large part of total cost for most industries, but the stability and certainty of supply adds to the attractiveness of investing in the US.

▪ There are emerging technologies and business process changes that could boost health care productivity. The barrier to such growth is institutional not a lack of opportunity.

▪ Infrastructure is not currently holding back business productivity (except for urban congestion). Significant investment is needed to preserve and improve the infrastructure. There are opportunities to make better use of the capital in place.

Technology Optimism, but Employment and GDP Growth Uncertainty Martin Neil Baily and James L....

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