technology optimism, but employment and gdp ... · employment and gdp growthemployment and gdp...

Technology Optimism, but Employment and GDP GrowthEmployment and GDP Growth Uncertainty

Martin Neil Baily and James L ManyikaMartin 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

Contents

▪ Historical and current patterns in US productivity

▪ Future trends in productivityFuture trends in productivity

McKinsey & Company | 1

ForecastWithout a productivity boost, younger generationswill experience slower increases in their standard of living

Improvement in per capita GDP by year of birthIndexed to 100260

Growth in per capita GDP Multiplier

Birth year

220

240

260 2.54x

2.04x

1960

1970

160

180

200 1.96x

1.78x

1 63x

1980

1990

2000

120

140

160 1.63x2000

0 5 10 15 20 25 30 35 40

100


0 5 10 15 20 25 30 35 40Years from birth

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

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

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

+1.6% p.a.

+1.4% p.a.

99999695949493928987

848382807877 787776767574727171706969686765636362626262

McKinsey & Company | 3SOURCE: Moody’s database

111009070605 0804030201009998979695949392919089888786858483828180797877

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

Pre 1980

1980-89

1990-99

Post 2000

Real GDP growth, % p.a.

4 24.74 24.534 13 94 3

7.4

4 15.4

1.62.3

-0.2

1.82.63.03.5

2.71.9

1.0

4.24.23.72.2

4.12.6

3.3

-0.2

1.93.63.9

3.23.44.34.1

2.9

-0.3

3.0

Employment growth, % p.a.

-2.8-1.7

1.11.11.71.61.02.02.32.52.41.92.52.8

1.80.2

1.22.3

3.02.51.82.8

4.2

0.90.80.7

3.34.6

-0.6

-4.2

-0.5-0.3-1.2

0-1.0

-1.7

McKinsey & Company | 4SOURCE: Moody’s database

0302010099989796959493929190898887868584838281807978 1110090807060504

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

Gross fixed investment,% real change p.a.

Pre 1980

1980-89

1990-99

Post 2000

3 03.52 74.24.74.54.13.33.63.93 23.44.3

7.4

2 9468

10

20

4.23.74.1

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

2.31.82.63.03.52.71.93.3

1.93.63.23.4

-1.7

2.9

-4-2024

-10

0

102.22.6

-0.2

1.6

-2 8

-0.2

1.0

-6-4

-202.8

8 20

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

1.11.02.52.41.91.81.2

2.33.02.51.8 2.3

0

2

4

6

8

0

10

20

1.71.62.52.8

0.22.0

1.12.8

4.2

0.90.8

-0.3-1.2

0-1.0-1.7

-6

-4

-2

0

-20

-10

-4.2

-0.5 -0.6

McKinsey & Company | 5SOURCE: Moody’s, The Economist Intelligence Unit

090807060504979695949392919089888786 030201009998 11108584838281

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

Size represents productivity contribution

NegativePositive

Average annual growth rate 1990 2000 %

7

8Employment growth

Administration

Average annual growth rate, 1990–2000, %

4

5

6Entertainment/Recreation

Transportation/

Information

Construction

Educational Services

Health Care

Professional/Scientific

R l E t t

1

2

3

FinanceOther Services

Acco./Food

Retail Trade

Transportation/Warehousing

Wholesale Trade

Construction

Government

Real Estate Total productivity growth 1990–2000 was 1.6 percent

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

-2

-1

0Wholesale Trade

Computers/ElectronicsNatural resources

ManufacturingUtilities

Managementemployment growth and increasing value added

-5

-4

-3

Value-added growth2137109875432-1 0 61-2-3


Value-added growth137109875432-1 0 61-2-3

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

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

Since 2000, the largest contributors to productivity gainhave shown declining employmentAverage annual growth rate 2000 11 %

NegativePositive

Size representsproductivity contribution1

Average annual growth rate, 2000–11, %

3

4Employment growth

1

2

3

Government

ManagementProfessional/Scientific

Finance

Entertainment/Recreation

Acco./Food

Transportation/

Educational Services

Health Care

-1

0

1 Government Finance

Other ServicesAdministration

Transportation/Warehousing

N l

Retail Trade

Utilities

Total productivity growth 2000–11 was 1.6 percent

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

-3

-2

Information

Wholesale TradeReal Estate

Natural resources

Manufacturing

Constructiongains and job losses

-5

-4

Value-added growth233654210 3-1

Computers/Electronics

-2-3

McKinsey & Company | 7SOURCE: US Bureau of Economic Analysis; Moody’s Economy.com; McKinsey Global Institute Sunrise Productivity Model

Value-added growth33654210 3-1-2-3

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

Opportunities exist for leaders and laggards – heat mapTop quartile

25th–50th quartile

Bottom quartile

1990-20001 2000-11Goods Manufacturing excl. Computers & Electronics

ConstructionNatural resources

Sector productivity growth, %Aerospace can further improve productivity by continuing to set the bar for i ti hil kiNatural resources

Computer & Electronic productsReal estate and rental and leasingWholesale tradeInformation Retail can continue to drive

innovation while making use of standard lean principles

Services Transportation and warehousingRetail tradeAdministrative and other servicesAccommodation and food servicesOther services (except public admin )

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

Other services (except public admin.)Arts, entertainment, and recreationFinance and insuranceProfessional, scientific, technical servicesManagement of companies

Healthcare can increase productivity through greater use of available technology (e.g. data/analytics,g p

Regulated and public

GovernmentHealth care and social assistanceEducational servicesUtilities

(e.g. data/analytics, electronic record keeping) and broader adoption of established lean principles


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

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

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

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 aligningIncreasing 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 t d d i ti th th h t t i f t t

Next-generation infrastructure3

trade and innovation growth through transport infrastructureinfrastructure

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 bigProductivity 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 innovation5

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 Sustained export

McKinsey & Company | 10SOURCE: McKinsey Global Institute

GDP, already at highest level since 1950) in both tradable goods and servicesSustained export growth8

Contents



– Manufacturing

– Healthcare

– Energy

– Infrastructure


Manufacturing is diverse High

Upper-middle

Lower-middle

Low

V lT dEC it lL bR&D

Oth t t i t

Motor vehicles, trailers, parts

Chemicals

GroupValue density

Trade intensity

Energy intensity

Capital intensity

Labor intensity

R&D intensityIndustry

Global i ti f

Rubber and plastics products

Machinery, equipment, appliances

Electrical machinery

Other transport equipmentinnovation for local markets

Wood products

Printing and publishing

Food, beverage, and tobacco

Fabricated metal productsRegional processing

Basic metals

Mineral-based products

Paper and pulp

Refined petroleum, coke, nuclearEnergy-/ resource-intensive commodities

Textiles apparel leather

Medical, precision, and optical

Semiconductors and electronics

Computers and office machinery

Basic metals

Global technologies/ innovators


Furniture, jewelry, toys, other

Textiles, apparel, leatherLabor- inten-sive tradables

New h l i

New materials▪ Nanotech▪ Composites

Product design▪ Internet of Things▪ Advanced analytics

technologies change

manufacturing

p▪ Biologics

y▪ Social media

manufacturing value chains

and processesand processes

Production processesM d li d i l ti

Information systemsBi D t

Business modelsF l i ti▪ Modeling and simulation

▪ Advanced robotics▪ Additive manufacturing

▪ Big Data▪ Computer-aided design

▪ 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

Expected collective impact on healthcare systems

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

p ( p )▪ 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 g g gaccess to information

Switch to ICD10/

▪ Rise in demand for information/ analytics to drive comparative clinical and health economics researchICD10/

HIPPA5010comparative 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

McKinsey & Company | 16SOURCE: Interviews; analyst reports

New technologies in healthcare processes and delivery systemsData driven decision making▪ Data driven R&D for increased efficacy

Transparency in information flow▪ Increased usage of online sources for healthcare information y

▪ Ease of comparing treatments and products▪ Analytical forecasts of effects of EMR and CDS▪ Analytics driven marketing

g▪ Transparent pricing driven by ease of comparing prices▪ Use of social media for health information and marketing

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

Personalization▪ New data sources for more granular information on individuals, ec o ogy e ab ed ed st but o o ca e, e g ute c cs

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

e data sou ces o o e g a u a o at o o d dua s,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


U.S. Natural Gas Production, 1990-2035

McKinsey & Company |20

Contents



– Manufacturing

– Healthcare

– Energy

– Infrastructure


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

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

Switzerland1 Portugal11 Barbados21

Finland

Singapore

3

2

Denmark

Luxembourg

13

12 South Korea

Saudi Arabia

22

23

France

Hong Kong SAR

5

4 Bahrain

Canada

14

15

United Kingdom

United States

24

25

Iceland

UAE

A t i

7

6

8

Japan

S i

Belgium

16

18

17

Qatar

C h R bli

Taiwan, China

26

28

27

Germany

Austria

Netherlands

9

8

10

Spain

Oman

Sweden

18

20

19

Czech Republic

Malaysia

Slovenia

28

29

30

McKinsey & Company | 22SOURCE: World Economic Forum Global Competitiveness Report, 2012-2013

Netherlands10 Oman20 Slovenia30

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 $

381Roads and bridges 930

Estimated infrastructure investment shortfall for the U.S. 2009-14, $ bn Actual

spendingNeed1Asset class

550

Gap

51

46

75

Rail

Aviation

Transit

63

87

265 ~$800B of the gap involves transit infra-structure

12

41

190

153

29

51

Water and wastewater2

Waterways

Rail

318

50

63

21

12

165

46

34

Energy

Waste

75

77

30

43

162

Total 976

Recreation and schools3 245

2,110

“The U.S. is falling dramatically behind much of the world in rebuilding and expanding an overloaded and deteriorating

83

1,134

McKinsey & Company | 23SOURCE: American Society of Civil Engineers – 2009 Report Card for America’s Infrastructure

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

g y g p g gtransport network.” Urban Land Institute, 2011

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 prize

Sustainable 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

Expansion of industry

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

y


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

t 2 2 tat 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 skillscompetitiveness 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 andThere 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.


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