Technology Optimism, but Employment and GDP Growth Uncertainty

1
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, 2012
CONFIDENTIAL AND PROPRIETARY Any use of this
material without specific permission of McKinsey
Company is strictly prohibited
2
Contents

• Historical and current patterns in US productivity

• Future trends in productivity

3
Without a productivity boost, younger
generationswill experience slower increases in
their standard of living
Improvement in per capita GDP by year of
birth Indexed to 100
260
2.54x
1960
240
2.04x
1970
220
1.96x
1980
200
1.78x
1990
180
1.63x
2000
160
140
120
100
Years from birth
SOURCE U.S. Bureau of Economic Analysis U.S.
Census Bureau Moodys Economy.com McKinsey
analysis
4
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.
99
99
96
95
94
94
93
92
89
1.4 p.a.
87
84
83
82
80
78
77
76
76
75
74
72
71
71
70
69
69
68
67
65
63
63
62
62
62
62
11
10
09
07
06
05
08
04
03
02
01
00
99
98
97
96
95
94
93
92
91
90
89
88
87
86
85
84
83
82
81
80
79
78
77
SOURCE Moodys database
5
Though productivity has continued to grow
steadily, bothGDP and employment have grown
slower than before
Pre 1980
1990-99
1980-89
Post 2000
Real GDP growth, p.a.
Employment growth, p.a.
03
02
01
00
99
98
97
96
95
94
93
92
91
90
89
88
87
86
85
84
83
82
81
80
79
78
11
10
09
08
07
06
05
04
SOURCE Moodys database
6
The 1990s expansion was supported by strong
investmentgrowth. Weak investment in the 80s.
Housing in the 00s
Pre 1980
1990-99
1980-89
Post 2000
Gross fixed investment, real change p.a.
Growth in real GDP and gross fixed investment,
p.a.
4.2
4.1
3.7
1.6
2.6
2.2
1.0
-0.2
-0.2
-2.8
Growth in employment and gross fixed investment,
p.a.
4.2
2.8
2.8
2.5
2.0
1.7
1.6
1.1
0.9
0.8
0.2
-0.5
-0.6
-4.2
09
08
07
06
05
04
97
96
95
94
93
92
91
90
89
88
87
86
03
02
01
00
99
98
11
10
85
84
83
82
81
SOURCE Moodys, The Economist Intelligence Unit
7
In the 1990s, productivity growth was driven by
sectors witha virtuous cycle of job growth and
increasing value added
Size represents productivity contribution
Negative
Positive
Average annual growth rate, 19902000,
Employment growth
Administration
Entertainment/Recreation
Professional/Scientific
Educational Services
Information
Health Care
Transportation/ Warehousing
Construction
Real Estate
Total productivity growth 19902000 was 1.6
percent Productivity gains were driven by
sectors that experienced positive employment
growth and increasing value added
Acco./Food
Retail Trade
Other Services
Finance
Government
Wholesale Trade
Management
Natural resources
Computers/Electronics
Utilities
Manufacturing
Value-added growth2
137
10
9
8
7
5
4
3
2
-1
0
6
1
-2
-3
1 Manufacturing excludes Computers/Electronics 2 V
alued-added growth is the contribution of each
sector to total GDP growth
SOURCE US Bureau of Economic Analysis Moodys
Economy.com McKinsey Global Institute Sunrise
Productivity Model
8
Since 2000, the largest contributors to
productivity gainhave shown declining employment
Size representsproductivity contribution1
Negative
Positive
Average annual growth rate, 200011,
Employment growth
Health Care
Entertainment/Recreation
Educational Services
Acco./Food
Management
Professional/Scientific
Government
Finance
Transportation/ Warehousing
Total productivity growth 200011 was 1.6 percent
Large share of productivity gains came from
tradable sectors with large efficiency gains and
job losses
Retail Trade
Other Services
Administration
Utilities
Natural resources
Real Estate
Construction
Wholesale Trade
Information
Manufacturing
Computers/Electronics
Value-added growth2
33
6
5
4
2
1
0
3
-1
-2
-3
1 Manufacturing excludes Computers/Electronics 2 V
alued-added growth is the contribution of each
sector to total GDP growth
SOURCE US Bureau of Economic Analysis Moodys
Economy.com McKinsey Global Institute Sunrise
Productivity Model
9
Opportunities exist for leaders and laggards
heat map
Top quartile
25th50th quartile
Bottom quartile
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
Regulated and public Health care and social assistance
Regulated and public Educational services
Utilities
Sector productivity growth,
Aerospace can further improve productivity by
continuing to set the bar for innovation while
making use of standard lean principles
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
1 Productivity contribution was calculated using
Moodys Economy.com data.
SOURCE U.S. Bureau of Economic Analysis Moodys
Economy.com McKinsey Global Institute Sunrise
Productivity Model
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Contents

• Historical and current patterns in US productivity

• Future trends in productivity

• Manufacturing

• Healthcare

• Energy

• Infrastructure

11
We have currently identified 8 game changers to
evaluate for their potentially significant impact
on US productivity, jobs and GDP
Description
SOURCE McKinsey Global Institute
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Contents

• Historical and current patterns in US productivity

• Future trends in productivity

• Manufacturing

• Healthcare

• Energy

• Infrastructure

13
Manufacturing is diverse
Value density
Trade intensity
Energy intensity
Capital intensity
Labor intensity
RD intensity
Group
Industry
Chemicals
Global innovation for local markets
Motor vehicles, trailers, parts
Other transport equipment
Electrical machinery
Machinery, equipment, appliances
Rubber and plastics products
Regional processing
Fabricated metal products
Food, beverage, and tobacco
Printing and publishing
Wood products
Energy-/ resource-intensive commodities
Refined petroleum, coke, nuclear
Paper and pulp
Mineral-based products
Basic metals
Computers and office machinery
Global technologies/ innovators
Semiconductors and electronics
Medical, precision, and optical
Textiles, apparel, leather
Labor- inten-sive tradables
Furniture, jewelry, toys, other
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• New materials
• Nanotech
• Composites
• Biologics

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

New technologies change manufacturing value
chains and processes

• 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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15

• New materials
• Nanotech
• Composites
• Biologics

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

New technologies change manufacturing value
chains and processes

• 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

17
Three major legislative and regulatory changes
will force providers to undergo major
transformation
SOURCE Interviews analyst reports
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New technologies in healthcare processes and
delivery systems

• Data driven decision making
• Data driven RD for increased efficacy
• Ease of comparing treatments and products
• Analytical forecasts of effects of EMR and CDS
• Analytics driven marketing

• 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

• 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

• 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 systems

• Data driven decision making
• Data driven RD for increased efficacy
• Ease of comparing treatments and products
• Analytical forecasts of effects of EMR and CDS
• Analytics driven marketing

• 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

• 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

• 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

20
Contents

• Historical and current patterns in US productivity

• Future trends in productivity

• Manufacturing

• Healthcare

• Energy

• Infrastructure

21
U.S. Natural Gas Production, 1990-2035
22
Contents

• Historical and current patterns in US productivity

• Future trends in productivity

• Manufacturing

• Healthcare

• Energy

• Infrastructure

23
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?
11
21
Switzerland
Portugal
Barbados
12
22
Singapore
Luxembourg
South Korea
13
23
Finland
Denmark
Saudi Arabia
Hong Kong SAR
Bahrain
14
United Kingdom
24
15
25
France
Canada
United States
16
26
UAE
Japan
Qatar
17
27
Iceland
Belgium
Taiwan, China
Austria
Spain
18
Czech Republic
28
Germany
Sweden
19
Malaysia
29
20
30
Netherlands
Oman
Slovenia
SOURCE World Economic Forum Global
Competitiveness Report, 2012-2013
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The American Society of Civil Engineers estimates
the US has a 5-year, 1.1T funding gap, 70 of
which comes from transport infrastructure
Estimated infrastructure investment shortfall for
the U.S. 2009-14, bn
Actual spending
Need1
Asset class
Gap
Roads and bridges
550
800B of the gap involves transit infra-structure
Transit
190
Aviation
Rail
Waterways
Water and wastewater2
165
Waste
Energy
Recreation and schools3
Total
976
2,110
1,134
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
1 Not adjusted for inflation 2 Includes dams and
levees 3 Public parks and recreation and schools
SOURCE American Society of Civil Engineers
2009 Report Card for Americas Infrastructure
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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 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
• Environmental concerns, e.g. global climate
  concerns around expanding coal exports

Expansion of industry
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Conclusions