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
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Contents
▪ Historical and current patterns in US productivity
▪ Future trends in productivity
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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
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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
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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
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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.
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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, %
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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
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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
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Contents
▪ Historical and current patterns in US productivity
▪ Future trends in productivity
– Manufacturing
– Healthcare
– Energy
– Infrastructure
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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
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Contents
▪ Historical and current patterns in US productivity
▪ Future trends in productivity
– Manufacturing
– Healthcare
– Energy
– Infrastructure
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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
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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
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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
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Contents
▪ Historical and current patterns in US productivity
▪ Future trends in productivity
– Manufacturing
– Healthcare
– Energy
– Infrastructure
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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
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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
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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
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Contents
▪ Historical and current patterns in US productivity
▪ Future trends in productivity
– Manufacturing
– Healthcare
– Energy
– Infrastructure
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U.S. Natural Gas Production, 1990-2035
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Contents
▪ Historical and current patterns in US productivity
▪ Future trends in productivity
– Manufacturing
– Healthcare
– Energy
– Infrastructure
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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
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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
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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
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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.