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Technology Optimism, but

Uncertainty

. ,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



Contents

▪ Histor ical and current patterns in US productivi ty

▪

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 100

Growth in percapita GDPMultiplier

Birthyear

220

240

2.54x

2.04x

1960

1970

180

200 1.96x

1.78x

1980

1990

120

140

.

100


Years from bir th

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 over the last decade

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

+1.6% p.a.

+1.4% p.a.

9999969594949392

8987

8483828076767574

727171706969686765636362626262

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.

4.74.5

7.4

5.4

1.62.3

-0.2

1.8

2.63.0

3.52.7

1.91.0

..3.7

2.2

.

2.63.3

-0.2

1.9

3.6.3.23.4

..

2.9

-0.3

3.0

Employment growth, % p.a.

-2.8

-1.7

1.11.11.71.6

1.0

2.02.32.52.41.9

2.52.8

1.8

0.2

1.2

2.33.0

2.51.8

2.8

4.2

0.90.80.7

3.3

4.6

-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

4.24.74.54.1

3.63.94.3

7.4

6

8 20

4.23.74.1

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

2.31.8

2.6..

2.71.9

.

1.9

..

-1.7

.

-

-2

02

-10

0

2.22.6

-0.2

1.6

-

-0.2

1.0

-6 -20

.

8 20

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

1.11.0

2.52.41.91.8

1.2

2.33.0

2.51.8

2.3

2

4

6

0

10

1.71.62.52.8

0.2

2.01.1

2.84.2

0.90.8

-0.3-1.2

0-1.0

-1.7

-6

-4

-2

-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 representsproductivity contribution

NegativePositive

7

8

Employment growth

Administration

, – ,

4

5

6

Entertainment/Recreation

InformationEducational Services

Health Care

Professional/Scientific

1

2

3

Finance

Other Services

Acco./Food

Retail Trade

Warehousing

Government

ea s a eTotal productivity growth1990–2000 was 1.6 percent

Productivity gains weredriven by sectors thatexperienced positive

-2

-1

0

Computers/ElectronicsNatural resources

ManufacturingUtilities

Management

increasing value added

-5

-4

-3

- 2---


----

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 employment NegativePositive

Size representsproductivity contribution1

, – ,

4

Employment growth

2

3

Government

ManagementProfessional/Scientific

Entertainment/Recreation

Acco./FoodEducational Services

Health Care

-1

0

Other Services

Administration

WarehousingRetail Trade

Utilities

Total productivity growth2000–11 was 1.6 percent

Large share of productivity

gains came from tradablesectors with large efficiency

-3

-2

Information

Wholesale TradeReal Estate

Natural resources

Manufacturing

Construction

gains and job losses

-5

-4

- 2-

Computers/Electronics

--

McKinsey & Company | 7SOURCE: 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



Opportunities exist for leaders and laggards – heat mapTop quartile

25th–50th quartile

Bottom quartile

1990-20001 2000-11

Goods Manufacturing excl. Computers & Electronics

Construction

Sector productivity growth, %

Aerospace can furtherimprove productivity bycontinu ing to set the bar for

Computer & Electronic products

Real estate and rental and leasing

Wholesale trade

Information Retail can continue to drive

nnova on w e ma ng

use of s tandard leanprinciples

Services Transportation and warehousing

Retail trade

Administrative and other services

Accommodation and food services

productivity growth throughgreater integration of onlineand offline channels, andinnovations in respondingto and engaging customers

.

Arts, entertainment, and recreation

Finance and insurance

Professional, scientific, technical services

Mana ement of com anies

Healthcare can increaseproductivity through greateruse of available technologye. . data/anal tics

Regulatedand public

GovernmentHealth care and social assistance

Educational services

Utilities

electronic record keeping)and broader adoption ofestablished 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 InstituteSunrise Productivity Model



Contents

▪ Historical and current patterns in US productivity

▪

– Manufacturing

– Healthcare

– Energy

– Infrastructure




We have currently identified 8 game changers to evaluate for theirpotentially signif icant impact on US productivity, jobs and GDP

Description

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

Domestic energy andenergy productivity

- - ,skills to job demand, and providing re-employment pathwaysSkills revolution2

Economic gains from sustainable infrastructure spending, long-terminfrastructure investments to address future demand needs, and enabling

Next-generation3

ra e an nnova on grow roug ranspor n ras ruc ure

New products and processes enabled by advanced and lightweightcomposites, nanotechnologies, biologics, and biosciences

Innovation in materials,biologics, biosciences

4

Productivit im act and innovation in new roducts and services related to bi 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 includinghealthcare, education and government services delivery

Public-sectorproductivity gains

6

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

Restored businesscreation engine

7

Acceleration of US gross export growth from current trajectory (at 13% of

McKinsey & Company | 10SOURCE: McKinsey Global Institute

GDP, already at highest level since 1950) in both tradable goods and services

growth8



Contents


▪

– Manufacturing

– Healthcare

– Energy

– Infrastructure




Manufacturing is diverseHigh

Upper-middle

Lower-middle

Low

Motor vehicles, trailers, parts

Chemicals

Groupa ue

densityra e

intensitynergy

intensityap a

intensitya or

intensity

intensityIndustry

Global

Rubber and plastics products

Machinery, equipment, appliancesElectrical machinery

er ranspor equ pmennnova on orlocal markets

Wood products

Printing and publishing

Food, beverage, and tobacco

Fabricated metal productsRegionalprocessing

Basic metals

Mineral-based products

Paper and pulp

Refined petroleum, coke, nuclear Energy-/resource-intensivecommodities

Medical, precision, and optical

Semiconductors and electronics

Computers and office machinery

Globaltechnologies/innovators


Furniture, jewelry, toys, other

, ,Labor- inten-sive tradables



NewNew materials▪ Nanotech▪

Composites

Product design▪ Internet of Things▪

Advanced analyticstec no og eschange

▪ Biologics ▪ Social media

value chains

Production processes Information systems Business models▪ o e ng an s mu a on▪ Advanced robotics▪ Additive manufacturing

▪ g a a▪ Computer-aided design

▪ ruga nnova on▪ Circular economy▪ New service models




Contents


▪

– Manufacturing

– Healthcare

– Energy

– Infrastructure




Three major legislative and regulatory changes willforce providers to undergo major transformation

Expected collective impact on healthcare systems

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

Reform▪ Increased cost and pricing pressure in health care industry

▪ Payor urgency to support change to bend cost curve andremain relevant

ARRA

Stimulus

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

▪ Increase in patient engagement and knowledge due toaccess to information

Switch to ▪ Rise in demand for information/ analytics to drive

HIPPA5010

(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 systems

Data driven decision making

▪ Data driven R&D for increased efficac

Transparency in in formation flow

▪ Increased usa e of online sources for healthcare information▪ Ease of comparing treatments and products▪ Analytical forecasts of effects of EMR and CDS▪ Analytics driven marketing

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

Low cost channels and solutions▪ Technolo enabled redistribution of care e. . minute clinics

Personalization▪ New data sources for more ranular information on individuals

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

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

7

6 Japan

Belgium

16

17

Qatar

Taiwan, China

26

27

Germany

us r a

9

pa n

Sweden19

zec epu c

Malaysia29

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



The American Society of Civil Engineers estimates the US has a 5-year,$1.1T funding gap, ~70% of which comes from transport infrastructure

381Roads and bridges 930

. . - ,bn Actual

spendingNeed1 Asset class

550

Gap

46

75

Aviation

Transit

87

265~$800B of thegap involvestransit infra-structure41

190

153

29

Water and wastewater 2

Waterways

318

50 21

165

46

34

Energy

Waste

75

77

30

43

162

Total 976

Recreation and schools3 245

2,110

“The U.S. is fallin dramaticall behind much of the world in rebuildin and ex andin an overloaded and deterioratin

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

transport 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 prizeSustainablefinancing

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

▪ Political questions around selection of export/FDI nodes

Inward FDI

▪ Slow moving process to begin to develop new industry practicesand expertise

Expansion ofindustry

▪

Environmental concerns, e.g. global climate concerns aroundexpanding coal exports




Conclusions

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

▪

Since 2000 productivity growth has been associated with slow employment growth orlayoffs. Restructuring productivity. For sustained growth going forward the economyneeds output/numerator driven growth, which requires greater thrust on innovation and

.

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

▪ 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 healthcare productivity. The barrier to such growth is institutional not a lack of opportunity.

▪

Infrastructure is not currently holding back business productivity (except for urbancongestion). 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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