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Growth and renewal in the U.S.: Retooling Americas economic engine McKinsey Global Institute February 2011 CONFIDENTIAL AND PROPRIETARY Any use of this.

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Presentation on theme: "Growth and renewal in the U.S.: Retooling Americas economic engine McKinsey Global Institute February 2011 CONFIDENTIAL AND PROPRIETARY Any use of this."— Presentation transcript:

1 Growth and renewal in the U.S.: Retooling Americas economic engine McKinsey Global Institute February 2011 CONFIDENTIAL AND PROPRIETARY Any use of this material without specific permission of McKinsey & Company is strictly prohibited

2 McKinsey & Company | 1 1 Total non-farm employment, seasonally adjusted 2 Preliminary numbers subject to change SOURCE: U.S. Bureau of Labor Statistics Decline from peak U.S. employment 1 Percentage from peak month prior to recession Months since employment peak million jobs lost from peak-to-trough (Dec to Dec. 2009) 1.1 million net job gains since the start of 2010 (Jan through Dec. 2010) U.S. employment today (Dec. 2010) is 7.2 million jobs below peak of December 2007 The U.S. job market has lost more than twice as many jobs as in previous downturns Dec Dec Feb Jan June Jan July Oct March- Nov July Jan. 1976

3 McKinsey & Company | to to to to to to to to to to to to to to to to to to to to SOURCE: Bureau of Labor Statistics; NBER; Moodys Analytics; Global Insight; McKinsey Global Institute 1 Projections based on current labor force statistics as of Jan 2011 with unemployment rate of 9.0% 2 Growth in labor force is average between Moodys Analytics and Global Insight; Assumes participation of approximately 65% Number of months 1 required to bring back unemployment rate below 5.0% 2 Average job growth during major expansions Thousands per month The U.S. needs to create 200,000 jobs per month until mid-2017– a feat not seen since the 1980s Number of jobs created per month In thousands Months to close the gap # of months 0350 Full employment reached in Q2 2017

4 McKinsey & Company | U.S. debt 1 by sector, 1952-Q Percent of GDP Q Change P.p. of GDP 1 Includes all instruments that constitute direct credit market borrowing (includes all bond market borrowing and commercial paper); asset-backed securities have been removed from financial sector borrowing to avoid double counting of the underlying loan. Due to a reclassification of GSE MBS in Q we have estimated the amount outstanding of GSE MBS in that quarter Financial institutions Households Non-financial business Government SOURCE: Federal Reserve Flow of Funds; SIFMA; McKinsey Global Institute analysis After decades of growth, deleveraging has begun

5 McKinsey & Company | 4 Growth that is 1 percentage point below trend Double dip recession, then trend Trend based on historical rates of growth U.S. GDP to 2030 under various scenarios Billions of chained 2005 dollars Cumulative increase 43%63%74% SOURCE:U.S. Bureau of Economic Analysis; CMU scenarios; Moodys Economy.com; MGI analysis Notes: Historical rate of growth for is 2.8%; double dip recession assumes GDP declines 1% in 2011, is stagnant in 2012, and trend thereafter A decline in long-term trend growth could be far more damaging to U.S. wealth and job creation than even a severe double dip recession

6 McKinsey & Company | 5 MGIs current work tackles the two horizons to sustained growth and renewal in the United States... And reignite growth and renewal of the economy Retool Americas productivity engine Revive U.S. competitiveness Future of R&D and advanced industries Overcome the drag from recession... Rebalance through deleveraging Tackle unemployment Other new and ongoing efforts… Primary focus of today's discussion

7 The Productivity Imperative Productivity growth matters...

8 McKinsey & Company | 7 SOURCE:U.S. Bureau of Economic Analysis; U.S. Bureau of Labor Statistics; McKinsey Global Institute analysis data used for 2000s Contributions to growth in real U.S. GDP, overall economy Share of compound annual growth rate, , % 100% = Increases in the workforce (labor inputs) Increases in value added per worker (productivity) E s s s s s More than ever before, the U.S. now relies on productivity gains for GDP growth

9 McKinsey & Company | 8 Improvement in per capita GDP by year of birth 1 Indexed to Years from birth SOURCE:U.S. Bureau of Economic Analysis; U.S. Census Bureau; Moodys Economy.com; McKinsey analysis 40-year growth in per capita GDP Multiplier 2.54x 2.04x 1.96x 1.78x 1GDP data for 2010–15 is based on McKinsey and Moodys consensus projections. Thereafter, we assume 1.7 percent productivity growth in line with the historical rate. The share of the working-age population will decline with UN projections (66 percent in 2009; 60 percent in 2030) Forecast 2000 forecast forecast forecast forecast x Birth year Without a productivity boost, younger generations will experience slower increases in their standard of living

10 McKinsey & Company | s 1970s 1980s 1990s 2000s 1 1 Includes to sustain historical 2.8% GDP growth to sustain historical 1.7% GDP per capita growth Productivity growth rates Compound annual growth rate, % Productivity gain required... The productivity gains needed to sustain historic GDP growth rates are ambitious SOURCE:U.S. Bureau of Economic Analysis; Census 2009 population estimates; McKinsey Global Institute analysis

11 McKinsey & Company | 10 GDP (PPP) growth decomposition Compound annual growth rate, 1991–2008, % SOURCE:U.S. Bureau of Economic Analysis; Census 2009 population estimates; The Conference Board; United Nations Population Division; McKinsey Global Institute analysis Productivity increase required % Historic GDP growth, Required acceleration in productivityRequired acceleration in productivityRequired acceleration in productivity 0.9 Historic productivity growth, Historic productivity growth, Historic productivity growth, Historic productivity growth, Growth of working-age population, Growth of working-age population, Growth of working-age population, China EU-15 Japan United States Many advanced economies face a similar productivity imperative

12 McKinsey & Company | 11 Labor productivity, 2008 GDP at purchasing power parity (PPP), per worker, $ Thousands Global competitiveness score, SOURCE:World Economic Forum, Global competitiveness report ; The Conference Board Correlation between productivity and competitiveness for a sample of countries At the national level, productivity correlates closely with competitiveness

13 The Productivity Imperative Productivity growth matters... Productivity growth is not a job-killer and not just about efficiency – value-added growth and innovation matters more

14 McKinsey & Company | 13 Rolling periods of employment and productivity change, %; periods Increasing employment and productivityIncreasing employment and productivityIncreasing employment and productivityIncreasing employment and productivity Declining employment and increasing productivityDeclining employment and increasing productivityDeclining employment and increasing productivityDeclining employment and increasing productivity Five-year periods Increasing employment and decreasing productivityIncreasing employment and decreasing productivityIncreasing employment and decreasing productivityIncreasing employment and decreasing productivity Declining employment and productivityDeclining employment and productivityDeclining employment and productivityDeclining employment and productivity Ten-year periods 3 3 Three-year periods 5 78 Annual 77 At the national level, the trade-off between aggregate employment and productivity levels is at best short-term... SOURCE: U.S. Bureau of Economic Analysis; McKinsey Global Institute Analysis

15 McKinsey & Company | 14 Growth in U.S. employment two quarters after productivity growth Growth in labor productivity two quarters earlier In 71% of quarters since 1947, productivity growth was followed by employment growth Only in 7% of periods did employment decline after productivity growth Annual change, % SOURCE: U.S. Bureau of Economic Analysis; Bureau of Labor Statistics; McKinsey Global Institute Analysis Percent of total In the United States, every point of GDP growth creates between 500,000 and 750,000 jobs... And even in the short term, employment growth has been positively related to productivity, but with a time lag 11%71% 10%7%

16 McKinsey & Company | 15 Wholesale Utilities Retail 3 Value-added growth 2 -3 Employment growth 2 Transport 10 Arts/recreation Construction Finance/ insurance Education Agriculture and miningAgriculture and miningAgriculture and miningAgriculture and mining Administration Accommodation/ food servicesAccommodation/ food servicesAccommodation/ food servicesAccommodation/ food services Real estate Professional services Other services Manufacturing Management Information Government Health care Total productivity growth was 1.8 percent Productivity gains were driven by sectors that experienced positive employment growth and increasing value added growth Positive Negative Size represents productivity contribution 1 Compound annual growth rate, % 1Productivity contribution calculated using Moodys Economy.com data 2Valued-added growth is the contribution of each sector to total GDP growth In the 1990s, productivity growth was driven by a virtuous cycle of increasing value added and jobs growth SOURCE: U.S. Bureau of Economic Analysis; Moodys Economy.com; McKinsey Global Institute Sunrise Productivity Model

17 McKinsey & Company | Employment growth 52 Wholesale Utilities Transport Retail Real estate Professional services Value-added growth 2 6 Information Health care Govt. Finance/insurance Education Agriculture and miningAgriculture and miningAgriculture and miningAgriculture and mining Accommodation/ food servicesAccommodation/ food servicesAccommodation/ food servicesAccommodation/ food services Construction Computers/ electronicsComputers/ electronicsComputers/ electronicsComputers/ electronics Arts/ recreation Manufacturing Administration Other services Manage- ment Total productivity growth was 1.6 percent Large share of productivity gains came from tradable sectors with large efficiency gains and job losses Negative Positive Size represents productivity contribution 1 Compound annual growth rate, % Since 2000, the largest contributions to productivity gains were driven by declining employment SOURCE: U.S. Bureau of Economic Analysis; Moodys Economy.com; McKinsey Global Institute Sunrise Productivity Model 1Manufacturing sector excluding Computers/electronics and Other transportation equipment sectors 2Valued-added growth is the contribution of each sector to total GDP growth

18 The Productivity Imperative Productivity growth matters... There are productivity opportunities for laggards AND leaders Productivity growth is not a job-killer and not just about efficiency – value-added growth and innovation matters more

19 McKinsey & Company | 18 Total productivity growth1.6 Construction Other services Accommodation/food services Education Health care Government Retail Transport Administration Professional services Finance/insurance Wholesale Real estate Manufacturing Information Computers/electronics SOURCE: U.S. Bureau of Economic Analysis; U.S. Bureau of Labor Statistics; McKinsey Global Institute analysis Contributions to labor productivity growth 1 Compound annual growth rate, , % Positive contributors to productivity growth Negative contributors to productivity growth 1 Excludes sectors with contributions with an absolute value of less than 0.015%. Numbers may not sum due to rounding. Share of GDP % of total The top five sector contributors had a disproportionate impact on total productivity growth between 2000 and 2008 The top five contributors accounted for nearly 75% of total positive productivity growth and 35% of GDP

20 Productivity growth matters... The Productivity Imperative There are productivity opportunities for laggards AND leaders The U.S. can meet the challenge, but a broad productivity agenda is required Productivity growth is not a job-killer and not just about efficiency – value-added growth and innovation matters more

21 McKinsey & Company | 20 Potential GDP growthProductivity enablers (increase in productivity) Changes in regulated sectorsChanges in regulated sectorsChanges in regulated sectors (increase in productivity) Increases in labor utilization and immigrationIncreases in labor utilization and immigrationIncreases in labor utilization and immigrationIncreases in labor utilization and immigration (increase in labor input) Next-wave innovation (increase in productivity)Adoption of best practice Change in share of working-age populationChange in share of working-age populationChange in share of working-age populationChange in share of working-age populationPopulation increase SOURCE:Organisation for Economic Co-operation and Development; Central Intelligence Agency; World Bank; McKinsey Global Institute analysis Potential GDP growth Compound annual growth rate, , % GDP growth = 2.8 (not quantified) Demographic changesLevers available to companies Levers involving multiple actors The U.S. can achieve historic levels of GDP growth, or better...

22 McKinsey & Company | 21 Drive productivity gains in the public and regulated sectors 1 Reinvigorate the innovation economy 2 Develop the U.S. talent pool and harness the full capabilities of the U.S. population 3 Build 21 st -century infrastructure to meet the demands of a globally competitive economy 4 Enhance the competitiveness of the U.S. regulatory and business environment 5 Embrace the energy productivity challenge 6 Harness regional and local capacities to boost overall U.S. growth and productivity 7... However, a broad agenda is required

23

24 McKinsey & Company | 23 APPENDIX: ADDITIONAL SUPPORTING PAGES

25 McKinsey & Company | ; % SOURCE:Organisation for Economic Co-operation and Development; World Bank; CIA Fact Book; McKinsey Global Institute analysis Women (25–64) participation rateSenior workers (55–64) participation rate Youth unemploymentMigration International comparisons suggest there is room to increase the labor inputs to U.S. growth through increased participation and migration

26 McKinsey & Company | 25 SOURCE:Organisation for Economic Co-operation and Development; Central Intelligence Agency; World Bank; McKinsey Global Institute analysis 1Assumes all else remains constant (e.g., working hours and productivity levels). Numbers may not sum due to rounding 2Excludes impact of dynamic demographic changes over a ten-year period 3 All assumptions are based on 2009 data comparing U.S. with international levels; the exception is net migration, which compares U.S. data for 2000 with U.S. projections for 2010 Total impact of labor increases Net migration Youth unemploymentYouth unemploymentYouth unemploymentYouth unemployment Senior participationSenior participationSenior participationSenior participation Female participationFemale participationFemale participationFemale participation Assumptions 3 Increase participation of females aged in labor force from 76 to 87 percent (Sweden) Increase participation of workers aged from 65 to 74 percent (Sweden) Reduce unemployment in age group from 18 to 7 percent (Netherlands) Increase net migration from 4.3 per thousand to 5.7 (level of U.S. net migration in 2000) Increases in the workforce by lever 1 Compound annual growth rate, , % 2 Increasing the U.S. labor force could add a significant amount to GDP growth but would likely require major changes in policy and practices Total impact of labor force increase is equivalent to ~30 percent of historic GDP growth of 2.8 percent

27 McKinsey & Company | 26 Workers, millions SOURCE:U.S. Bureau of Labor Statistics; National Center for Education Statistics; National Science Foundation; McKinsey Global Institute analysis 2018 predicted talent demand2018 predicted talent demand2018 predicted talent demand2018 predicted talent demand Talent gapTalent gapTalent gapTalent gap employ-ment2008 employ-ment2008 employ-ment 1.9 Additions from high-skill foreign workersAdditions from high-skill foreign workersAdditions from high-skill foreign workersAdditions from high-skill foreign workersAdditions from high-skill foreign workers 2018 talent supply2018 talent supply2018 talent supply2018 talent supply2018 talent supply2018 talent supplyPredicted increase in supplyPredicted increase in supplyPredicted increase in supplyAbsorption of extra capacityAbsorption of extra capacityAbsorption of extra capacity 0.4 Predicted attrition NOTE: Numbers may not sum due to rounding Industries requiring analytical and technical workers are likely to experience a talent shortage over the next decade A substantial talent gap of 10% of total demand will remain, even under conservative assumptions

28 McKinsey & Company | 27 The relative quality of U.S. infrastructure has been declining SOURCE: World Economic Forum, Global competitiveness report Tunisia Saudi Arabia Estonia Malaysia Bahrain Namibia Chile United States Spain Oman Belgium Taiwan Barbados Netherlands Luxembourg Japan Portugal Canada South Korea United Arab Emirates Denmark Germany Finland Sweden Austria Iceland France Singapore Hong Kong Switzerland rankingEvolution of rank for United States Distance from top ranking Quality of overall infrastructure

29 McKinsey & Company | 28 Broadband penetration in the United States is lower than in other countries and varies widely across states SOURCE: International Telecommunication Union; Federal Communications Commission Broadband subscriptions per 100 population Japan Estonia Australia Israel United States Hong Kong Finland Belgium Canada United Kingdom Germany France Luxembourg Iceland South Korea Switzerland Netherlands Norway Denmark Sweden MO MS TX PA DC WA RI CO NJ CA NY PR Households Thousand Subscribership ratio Subscribed households/total households Overall United States 0.61 Broadband penetration

30 McKinsey & Company | 29 Economic fundamentals Business climate Human capital Infrastructure SOURCE: McKinsey Global Institute synthesis of data from numerous sources Leader Top quartile Average Bottom quartile Key metricsTen years agoTodayTrend U.S. relative position Household consumption Household consumption growth GDP Stock market capitalization Industrial production Trade as percentage of GDP National spending on R&D Business environment FDI as percentage of GDP 1 Growth of local innovation clusters Tax incentives for R&D Population and demographic profile Availability of high-quality labor Retention of foreign-born talent Cost-adjusted labor productivity Public expenditure on education Number of patent applications Transportation Telecommunications Statutory corporate tax rate 1Foreign direct investment U.S. performance on a sample of country competitiveness indicators is declining relative to other countries

31 McKinsey & Company | 30 Household electricity bill savings $ per year SOURCE: U.S. Energy Information Administration; McKinsey Low Carbon Economics tool The economic benefit of a 5% increase in energy efficiency varies across states

32 McKinsey & Company | 31 SOURCE: U.S. Bureau of Economic Analysis; McKinsey Global Institute analysis Productivity growth has been much faster in automotive than in aerospace 1 AutomotiveAerospace 1 Applying several practices from best-in-class automotive could drive significant benefit for aerospace 2 Production planning techniques Total cost Productivity growth, Assembly line cycle time reduction Production cycle time Real-time performance management Labor productivity 1Other transportation equipment in the North American Industry Classification System. Aircraft and spacecraft represented around 76% of value added in other transportation equipment in The various practices complement each other; the sizing estimates should not be considered additive Before After % % % % Aerospace can apply the lessons of lean manufacturing and performance management learned in other sectors such as best-in-class automotive ESTIMATES

33 McKinsey & Company | Hour patient left emergency room Supply of patient transport specialists 1 1 Based on two specialists transporting patients up to wards 25 percent of their time; assumes 30 minutes per transport. SOURCE: McKinsey analysis Admissions to the ward from the emergency room by time of day Number of patients per hour per day In some U.S. hospitals, fixed staffing of patient transport specialists means demand outstrips supply for 15 hours of the day

34 McKinsey & Company | 33 Level of supply chain integration facilitated by RFID Retail sector supply chain ProducerDistributor Distribution center Retail store RFID attached to individual items Linkage with self-checkout counters and other in-store wireless devices Monitor food supply RFID attached to cases of goods Accuracy check against case numbers Integration of shelf replenishment systems with data from RFID readers RFID attached to pallets of goods Optimization of the commodity flow from supplier to the store Measurement of performance of suppliers and service providers Potential implications Increased visibility Early identification and timely reaction Supply chain cost savings Reduction of inventories Fewer stock-outs and unplanned markdowns Reduction in logistics costs and fewer delays Effects beyond the supply chain Enhanced shopping experience Better theft monitoring Radio-frequency identification (RFID) could be used to manage an increasingly integrated supply chain

35 McKinsey & Company | 34 Governments can pursue different levels of interventions SOURCE: McKinsey Global Institute analysis Government as principal actor Tilting the playing field Building enablers Setting ground rules/direction Agenda items for growth and renewal Degree of intervention HighLow Establish and track key productivity metrics by sector Fund enabling IT infrastructure and training Set incentives that reward more productive providers/individuals Conduct lean program through the public sector 2 Reinvigorate the innovation economy Set clear regulatory environment (e.g., GHG 1 fiscal) Establish skill-based points system to manage immigration Offer tax incentives for private R&D activities Establish public R&D institutions on strategic industries 3 Cultivate the US talent pool Set retirement incentives to reward staying in workforce Establish skill-based points system to manage immigration Provide subsidized low- cost study loans; attract ex-pats to return Publicly funded educational systems 4 Build efficient and economically viable infrastructure Set national standards for construction Enable private infrastructure investments Provide fiscal incentives for private infrastructure build-out Expand and upgrade public infrastructure investment arm 5 Enhance the competitiveness of the business environment Reduce regulatory complexity Establish mechanism to share best practices across localities/states Offer fiscal and other investment incentives Target multinational companies to attract and pursue 6 Embrace the energy productivity challenge Set evolving energy efficiency standards Require energy efficiency reporting for goods and companies Provide tax benefits to companies engaged in energy-saving activity Improve efficiency of public buildings and purchasing 7 Harness regional and local capacities Increase efficiency of local/state business regulation Strengthen local schools/infrastructure Offer local fiscal investment incentives Establish public city broadband networks 1 Drive productivity gains in the public and regulated sectors 1 Greenhouse gases EXAMPLES

36 McKinsey & Company | 35 SOURCE: McKinsey Global Institute analysis What have we learned about the ingredients for productivity MGI experience over two decades across more than 20 countries and 30 industry sectors Flexibility in labor and capital markets enables productivity gains by ensuring resources can be deployed quickly and efficiently where they will be most productive Competitive intensity is the primary driver of innovation and best practice adoption in private companies – this competition leads to aggregate productivity gains as more productive companies gain share and less productive ones exit the market Innovation that drives value-added growth and efficiency and its diffusion and scaling is the driving force of productivity growth and aggregate economic growth Large employment sectors need to pull their weight – success in emerging or small innovative sectors is not enough to sustain overall productivity growth Strong demand is an enabler facilitating balanced growth from both higher efficiency and the transition to higher value goods and services Sound regulatory and business environment that encourages competition and attracts the most innovative players provides the right incentives for growth Small improvements in large sectors can make a significant difference for the overall productivity of the economy

37 McKinsey & Company | 36 Productivity levels and growth Far West Rocky Mountains Southwest Plains Great Lakes Southeast Mideast New England Productivity growth Compound annual growth rate, , % Productivity levels, 2008 $ Thousands per employee Productivity performance differs significantly across U.S. regions SOURCE: U.S. Bureau of Economic Analysis; U.S. Bureau of Labor Statistics; McKinsey Global Institute

38 McKinsey & Company | 37 Metropolitan Statistical Area GDPEmployment Compound annual growth rate, % Population, 2008 Millions Contribution % GDP, Phoenix1.1 Baltimore1.1 Austin1.1 Pittsburgh Tampa Portland San Diego1.9 Philadelphia1.9 Minneapolis1.4 San Jose1.5 Miami Atlanta San Francisco Chicago Dallas Los Angeles6.7 New York12.2 Boston 2.0 Houston 2.6 Washington, DC Productivity Productivity growth, The top 20 U.S. cities account for more than 50% of national productivity growth and approximately 40% of GDP SOURCE: U.S. Bureau of Economic Analysis; U.S. Bureau of Labor Statistics; Moodys Economy.com; McKinsey Global Institute Total 53% Total 41%

39 McKinsey & Company | 38 SOURCE: U.S. Bureau of Economic Analysis; U.S. Bureau of Labor Statistics; McKinsey Global Institute analysis Labor productivity (real value added per worker) $ Thousands, 2000 Compound annual growth rate, 1990–2007 % Recession years U.S. multinational companies have increased productivity more than twice as fast as other U.S. private sector firms U.S. multinational companies All other companiesAll other companiesAll other companiesAll other companies

40 McKinsey & Company | 39 Opportunities exist for leaders and laggards 1 Productivity contribution was calculated using Moodys Economy.com data. Top quartile 25th–50th quartile Bottom quartile GoodsManufacturing Construction Natural resources Computer and electronic productsn/a22.5 Real estate and rental and leasing Wholesale trade Information ServicesTransportation 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 Contribution to productivity growth % 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., , 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 SOURCE: U.S. Bureau of Economic Analysis; Moodys Economy.com; MGI Sunrise Productivity Model


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