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

The U.S. job market has lost more than twice as many jobs as in previous downturns Decline from peak U.S. employment1 Percentage from peak month prior to recession July 1974- Jan. 1976 June 1990- Jan. 1993 8.4 million jobs lost from peak-to-trough (Dec. 2007 to Dec. 2009) 1.1 million net job gains since the start of 2010 (Jan. 2010 through Dec. 2010) U.S. employment today (Dec. 2010) is 7.2 million jobs below peak of December 2007 March- Nov. 1980 Feb. 2001- Jan. 2005 July 1981- Oct. 1983 Dec. 2007- Dec. 20102           6           12           18           24           30           36           42           Months since employment peak 1 Total non-farm employment, seasonally adjusted 2 Preliminary numbers subject to change SOURCE: U.S. Bureau of Labor Statistics

Full employment reached in Q2 2017 The U.S. needs to create 200,000 jobs per month until mid-2017– a feat not seen since the 1980s Number of months1 required to bring back unemployment rate below 5.0%2 Average job growth during major expansions Months to close the gap # of months Thousands per month 1961 to 19691961 to 1969 122 1975 to 19801975 to 1980 240 Full employment reached in Q2 2017 1983 to 19901983 to 1990 211 1991 to 20011991 to 2001 166 The chart presents the scale of the solutions needed. We take the United States as an example because in some ways the problem there is most acute. The US workforce is still growing, so it must create jobs not just to restore the unemployed to work, but also for the growing number of people in the labor force. At left the chart shows how many jobs per month the United States has created during its big expansions: the 1960s, the Reagan-era boom (shaded), and the post-dot-com boom. A typical US expansion created around 140,000 jobs per month. Two booms were stronger, creating more than 200,000 jobs per month. If in the current recovery the United States were to create only 122,000 jobs per month, similar to the 1960s boom, unemployment in Q4 2012—the time of the next US presidential election—would remain high, at 9.6 percent. No president has ever been reelected in the United States when unemployment is that high. If the US recovery continues to create jobs at that rate, unemployment will still be running at 9 percent in 2016. The only way the United States can get unemployment down to 5 percent, the rate before the crisis, is to create more than 200,000 jobs a month every month for the next six years. That is a big challenge, and perhaps it is not even possible – Quote from WSJ Nov.6 “At the current pace, the unemployment rate would not return to its pre-recession level of around 5% for almost two decades”. It is safe to say we will be living with high unemployment for a while. In other countries, the situation is as bad or worse. India did not have a population-control program like China; as a result, its working population is going to rise by 200 million people over the next 20 years. India must create 200 million jobs to forestall massive unemployment. If, say, 50 million remain unemployed, significant political risks will arise; extremist political parties will be elected and may enact policies that are damaging to long-term economic growth. 2002 to 20072002 to 2007 139 150 200 250 300 350 400 Number of jobs created per month In thousands 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 Moody’s Analytics and Global Insight; Assumes participation of approximately 65% SOURCE: Bureau of Labor Statistics; NBER; Moody’s Analytics; Global Insight; McKinsey Global Institute 2

After decades of growth, deleveraging has begun Change P.p. of GDP Government U.S. debt1 by sector, 1952-Q3 2010 Percent of GDP Non-financial business 2000-08 2008-10 Households 287 74 -6 Financial institutions 16 17 220 204 13 -4 154 91 29 -6 69 59 49 41 45 15 -12 16 24 1980 1990 2000 Q3-10 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 Q1 2010 we have estimated the amount outstanding of GSE MBS in that quarter. SOURCE: Federal Reserve Flow of Funds; SIFMA; McKinsey Global Institute analysis

A decline in long-term trend growth could be far more damaging to U. S 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 U.S. GDP to 2030 under various scenarios Billions of chained 2005 dollars Cumulative increase Trend based on historical rates of growth 74% Double dip recession, then trend 63% Growth that is 1 percentage point below trend 43% Even as the country confronts a myriad of immediate challenges from persistently high jobless rates to nagging fiscal deficits at all levels of government, we must not loss site of the long-term health of the economy. A prolonged period of slower growth would be far more damaging to the U.S. economy than a double dip recession in the next 12 months. 2010 2015 2020 2025 2030 Notes: Historical rate of growth for 1990-2008 is 2.8%; double dip recession assumes GDP declines 1% in 2011, is stagnant in 2012, and trend thereafter SOURCE: U.S. Bureau of Economic Analysis; CMU scenarios; Moody’s Economy.com; MGI analysis

Overcome the drag from recession . . . MGI’s current work tackles the two horizons to sustained growth and renewal in the United States MVA-AAA123-20091130- Primary focus of today's discussion Tackle unemployment Overcome the drag from recession . . . Rebalance through deleveraging Retool America’s productivity engine Revive U.S. competitiveness . . . And reignite growth and renewal of the economy Future of R&D and advanced industries Other new and ongoing efforts… 5

The Productivity Imperative MVA-AAA123-20091130- The Productivity Imperative Productivity growth matters . . . 6

More than ever before, the U. S More than ever before, the U.S. now relies on productivity gains for GDP growth Contributions to growth in real U.S. GDP, overall economy Share of compound annual growth rate, 1960-2008, % 100% = 4.1 3.1 3.2 3.3 2.1 2.2 Increases in value added per worker (productivity) 35 47 54 53 80 77 Increases in the workforce (labor inputs) Historically, U.S. GDP growth was has been driven by both labor increases in both labor and productivity, but labor’s contribution … Increases in the workforce Footnote 1: 2000–0808 data used for 2000s. Universal fix: SOURCE: U.S. (no periods) Bureau … (appears twice in this exhibit) 1960s 1970s 1980s 1990s 2000s1 2010-20E 1 2000-08 data used for 2000s SOURCE: U.S. Bureau of Economic Analysis; U.S. Bureau of Labor Statistics; McKinsey Global Institute analysis 7 7

t Without a productivity boost, younger generations will experience slower increases in their standard of living 40-year growth in per capita GDP Multiplier 1960 Improvement in per capita GDP by year of birth1 Indexed to 100 Forecast Birth year 1970 1970 forecast 260 1980 1960 2.54x 1980 forecast 240 1990 220 1970 2.04x 1990 forecast 2000 200 1980 1.96x 2000 forecast 180 1990 1.78x 160 2000 1.63x 140 120 100 Without a productivity boost, younger generations will enjoy experience slower … (somehow, I don’t think they’ll be enjoying it) Footnote 1: … share of working-age population … Years from birth 1 GDP data for 2010–15 is based on McKinsey and Moody’s 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) SOURCE: U.S. Bureau of Economic Analysis; U.S. Census Bureau; Moody’s Economy.com; McKinsey analysis 8 8

2.2 The productivity gains needed to sustain historic GDP growth rates are ambitious Productivity growth rates Compound annual growth rate, % 2000s1 1990s 1980s 1970s 1960s 2.1 2.3 Productivity gain required . . . to sustain historical 1.7% GDP per capita growth to sustain historical 2.8% GDP growth 1 Includes 2000-08 SOURCE: U.S. Bureau of Economic Analysis; Census 2009 population estimates; McKinsey Global Institute analysis 9 9

Many advanced economies face a similar productivity imperative 8 Many advanced economies face a similar productivity imperative GDP (PPP) growth decomposition Compound annual growth rate, 1991–2008, % Productivity increase required % 34 United States 0.6 0.6 59 0.8 EU-15 0.8 1.4 -0.1 81 1.0 Japan 1.0 1.2 -1.0 0.9 0.9 11 China Growth of working-age population, 2010-20Growth of working-age population, 2010-20Growth of working-age population, 2010-20 Historic productivity growth, 1990-2008Historic productivity growth, 1990-2008 Required acceleration in productivityRequired acceleration in productivityRequired acceleration in productivity Historic GDP growth, 1990-2008Historic GDP growth, 1990-2008 SOURCE: U.S. Bureau of Economic Analysis; Census 2009 population estimates; The Conference Board; United Nations Population Division; McKinsey Global Institute analysis

At the national level, productivity correlates closely with competitiveness Correlation between productivity and competitiveness for a sample of countries Global competitiveness score, 2008-09 SOURCE: World Economic Forum, (insert comma) Global competitiveness report (note titles now lowercase except for first word and proper nouns) Before analyzing competitiveness, it is important to be clear what we mean by it. There are two broad ways of assessing national competitiveness. An “outcome” view sees competitiveness as little different from productivity. An “input” view treats competitiveness as an amalgam of institutional and business characteristics that help create the conditions for a productive, growing economy (as we see in the competitiveness ranking systems of the World Economic Forum and International Institute for Management Development. These two perspectives correlate quite closely as countries with efficient businesses, markets, and government institutions (measured by the input view) also tend to have higher productivity (leading to outcomes) and enjoy higher GDP per worker. MGI defines competitiveness as the capacity to sustain value added growth through productivity and/or employment growth, either though capturing global market share or growing the domestic market. Our approach is to assess sector-level productivity and complement this with an understanding of costs relative to benchmark regions to reflect both the capacity to compete in global markets (for industries subject to international competition) and to generate domestic demand (for sectors that are rooted in a local setting). Labor productivity, 2008 GDP at purchasing power parity (PPP), per worker, $ Thousands SOURCE: World Economic Forum, Global competitiveness report 2008-09; The Conference Board 11 11

The Productivity Imperative MVA-AAA123-20091130- 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 12

At the national level, the “trade-off” between aggregate employment and productivity levels is at best short-term . . . Rolling periods of employment and productivity change, 1929-2009 %; periods 80 78 76 71 Declining employment and productivityDeclining employment and productivity 4 1 5 3 3 Increasing employment and decreasing productivityIncreasing employment and decreasing productivity Declining employment and increasing productivityDeclining employment and increasing productivity 99 89 Increasing employment and productivityIncreasing employment and productivity 77 69 Headline: … is a short-term phenomenon 3rd category: Both Declining both employment and productivity 4th category: Both Increasing both employment and productivity Annual Three-year periods Five-year periods Ten-year periods SOURCE: U.S. Bureau of Economic Analysis; McKinsey Global Institute Analysis 13 13

7 . . . And even in the short term, employment growth has been positively related to productivity, but with a time lag Annual change, 1947-2010 % Percent of total Growth in U.S. employment two quarters after productivity growth In 71% of quarters since 1947, productivity growth was followed by employment growth Only in 7% of periods did employment decline after productivity growth 11% 71% In the United States, every point of GDP growth creates between 500,000 and 750,000 jobs 10% 7% Growth in labor productivity two quarters earlier SOURCE: U.S. Bureau of Economic Analysis; Bureau of Labor Statistics; McKinsey Global Institute Analysis

In the 1990s, productivity growth was driven by a virtuous cycle of increasing value added and jobs growth Compound annual growth rate, 1990-2000 % Size represents productivity contribution1 Employment growth Negative Positive Administration Construction Education Real estate Arts/recreation Total productivity growth 1990-2000 was 1.8 percent Productivity gains were driven by sectors that experienced positive employment growth and increasing value added growth Health care Professional services Transport Other services Information Government Wholesale Management Retail Agriculture and miningAgriculture and mining Manufacturing Finance/ insurance Utilities Accommodation/ food servicesAccommodation/ food services Lower right: Value-added growth (add hyphen) -3 -2 -1 1 2 3 4 5 6 7 16 17 1 Productivity contribution calculated using Moody’s Economy.com data 2 Valued-added growth is the contribution of each sector to total GDP growth Value-added growth2 SOURCE: U.S. Bureau of Economic Analysis; Moody’s Economy.com; McKinsey Global Institute Sunrise Productivity Model 15 15

6 Since 2000, the largest contributions to productivity gains were driven by declining employment Compound annual growth rate, 2000-08 % Size represents productivity contribution1 Employment growth Negative Positive Accommodation/ food servicesAccommodation/ food services Arts/ recreation Education Real estate Total productivity growth 2000-08 was 1.6 percent Large share of productivity gains came from tradable sectors with large efficiency gains and job losses Construction Health care Manage- ment Professional services Govt. Finance/insurance Other services Retail Wholesale Utilities Agriculture and miningAgriculture and mining Transport Administration Information Manufacturing Computers/ electronicsComputers/ electronics Same change as in preceding exhibit: Value-added growth -3 -2 -1 1 2 3 4 5 6 7 16 17 Value-added growth2 1 Manufacturing sector excluding Computers/electronics and Other transportation equipment sectors 2 Valued-added growth is the contribution of each sector to total GDP growth SOURCE: U.S. Bureau of Economic Analysis; Moody’s Economy.com; McKinsey Global Institute Sunrise Productivity Model 16 16

The Productivity Imperative MVA-AAA123-20091130- 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 There are productivity opportunities for laggards AND leaders 17

7 The top five sector contributors had a disproportionate impact on total productivity growth between 2000 and 2008 Contributions to labor productivity growth1 Compound annual growth rate, 2000-08, % Share of GDP % of total The top five contributors accounted for nearly 75% of total positive productivity growth and 35% of GDP Positive contributors to productivity growth Computers/electronics 1 5 10 13 6 8 3 7 2 4 Information Manufacturing Real estate Wholesale Finance/insurance Professional services Administration Transport Retail Government Health care Negative contributors to productivity growth Education Total productivity compound annual growth at 2% Add wording about rounding? (I get 25 sted 26 for the top 8) Accommodation/food services Other services Construction Total productivity growth 1.6 1 Excludes sectors with contributions with an absolute value of less than 0.015%. Numbers may not sum due to rounding. SOURCE: U.S. Bureau of Economic Analysis; U.S. Bureau of Labor Statistics; McKinsey Global Institute analysis 18 18

The Productivity Imperative MVA-AAA123-20091130- 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 There are productivity opportunities for laggards AND leaders The U.S. can meet the challenge, but a broad productivity agenda is required 19

The U.S. can achieve historic levels of GDP growth, or better . . . Potential GDP growth Compound annual growth rate, 2010-20, % 0.2-0.5+ (not quantified) GDP growth 1990-2008 = 2.8 0.7-1-1 Population increasePopulation increase Change in share of working-age populationChange in share of working-age populationChange in share of working-age populationChange in share of working-age population Adoption of best practiceAdoption of best practice (increase in productivity) Next-wave innovationNext-wave innovation (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) Changes in regulated sectorsChanges in regulated sectorsChanges in regulated sectors (increase in productivity) Productivity enablersProductivity enablers (increase in productivity) Potential GDP growthPotential GDP growth Headline: … by addressing some suboptimal fundamentals … Next-wave innovation Increases in labor utilization and immigration (push “in” to second line, pls, so there’s a little breathing room between this column and the next one) Universal fix: SOURCE: Organisation for Economic Co-operation and Development … Demographic changes Levers available to companies Levers involving multiple actors SOURCE: Organisation for Economic Co-operation and Development; Central Intelligence Agency; World Bank; McKinsey Global Institute analysis 20 20

. . . However, a broad agenda is required 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 21st-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

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APPENDIX: ADDITIONAL SUPPORTING PAGES

6.1 International comparisons suggest there is room to increase the labor inputs to U.S. growth through increased participation and migration 2009; % Women (25–64) participation rate Senior workers (55–64) participation rate -11.5 -9.0 Youth unemployment Migration 2010 +10.3 -1.4 2000 SOURCE: Organisation for Economic Co-operation and Development; World Bank; CIA Fact Book; McKinsey Global Institute analysis

3 Increasing the U.S. labor force could add a significant amount to GDP growth but would likely require major changes in policy and practices Increases in the workforce by lever1 Compound annual growth rate, 2009-19, %2 0.2-0.3 0.7-1.1 0.1-0.2 0.1-0.2 0.3-0.5 Total impact of labor force increase is equivalent to ~30 percent of historic GDP growth of 2.8 percent Female participationFemale participation Senior participationSenior participation Youth unemploymentYouth unemployment Net migration Total impact of labor increasesTotal impact of labor increases Assumptions3 Increase participation of females aged 25-54 in labor force from 76 to 87 percent (Sweden) Increase participation of workers aged 55-64 from 65 to 74 percent (Sweden) Reduce unemployment in 15-24 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) 1 Assumes all else remains constant (e.g., working hours and productivity levels). Numbers may not sum due to rounding 2 Excludes 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 SOURCE: Organisation for Economic Co-operation and Development; Central Intelligence Agency; World Bank; McKinsey Global Institute analysis 25

Industries requiring analytical and technical workers are likely to experience a talent shortage over the next decade Workers, millions A substantial talent gap of 10% of total demand will remain, even under conservative assumptions 1.9 0.2 0.4 2008 employ-ment2008 employ-ment2008 employ-ment Predicted attritionPredicted attrition Predicted increase in supplyPredicted increase in supplyPredicted increase in supply Absorption of extra capacityAbsorption of extra capacityAbsorption of extra capacity 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 supply Talent gapTalent gap 2018 predicted talent demand2018 predicted talent demand2018 predicted talent demand2018 predicted talent demand ASSUMPTIONS 1. 2008 employment: Analytical and technical occupations consist of computer science, mathematics and statistics occupations, engineers, physical scientists and techniCentral Intelligence Agencyns, healthcare practitioners and techniCentral Intelligence Agencyns as defined by BLS 2. Predicted attrition: BLS projection of replacement needs, an estimate of openings resulting from analytical and technical workers retiring from or permanently leaving an occupation over the next ten years 3. Predicted increase in supply: 2018 projections calculated based on CAGR from 98-08 of total healthcare, engineering, communications, mathematics and statistics, computer science and other analytical and tech degrees 4. Absorption of extra capacity: Absorption of the extra unemployed due to the recession from 5.8% in 2008 to the ‘low’ unemployment rate of 4.6% in 2007 5. Additions fro high skill foreign workers: Assumes all 85,000 foreign workers with H1-B visas over next 10 years will work in analytical and technical occupations 6. 2018 predicted talent demand: 2018 occupation employment projections from BLS for the analytical and technical occupations used as demand NOTE: Numbers may not sum due to rounding SOURCE: U.S. Bureau of Labor Statistics; National Center for Education Statistics; National Science Foundation; McKinsey Global Institute analysis 26 26

The relative quality of U.S. infrastructure has been declining Quality of overall infrastructure Evolution of rank for United States Distance from top ranking 2010 ranking 30 29 28 27 26 25 24 23 22 21 20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 Switzerland Hong Kong Singapore France Iceland Austria Sweden Finland Germany Denmark United Arab Emirates South Korea Canada Portugal Japan Luxembourg Netherlands Barbados Taiwan Belgium Oman Spain United States Chile Namibia Bahrain Malaysia Estonia Saudi Arabia 2001 02 03 04 05 06 07 08 09 2010 Tunisia SOURCE: World Economic Forum, Global competitiveness report 2010-2011 27 27

n Broadband penetration in the United States is lower than in other countries and varies widely across states Broadband penetration Broadband subscriptions per 100 population Households Thousand Overall United States 0.61 Sweden Denmark Norway Netherlands CA Switzerland South Korea Iceland Luxembourg TX France NY Germany United Kingdom Canada PA Belgium Finland MO WA NJ Hong Kong PR CO United States DC RI MS Israel Australia 0.20 0.45 0.50 0.55 0.60 0.65 0.70 0.75 0.80 Estonia Subscribership ratio Subscribed households/total households Japan SOURCE: International Telecommunication Union; Federal Communications Commission 28 28

U.S. performance on a sample of country competitiveness indicators is declining relative to other countries PHL-262608285-20100205-BalaHR1 U.S. relative position Leader Top quartile Average Bottom quartile Key metrics Ten years ago Today Trend Economic fundamentals Household consumption Household consumption growth GDP Stock market capitalization Industrial production Trade as percentage of GDP National spending on R&D Business climate Statutory corporate tax rate Business environment FDI as percentage of GDP1 Growth of local innovation clusters Tax incentives for R&D Human capital Population and demographic profile Availability of high-quality labor Retention of foreign-born talent Cost-adjusted labor productivity Does it matter that the report labels the third category just plain “Human capital”? (the others all match up) I don’t quite get how “Statutory corporate tax rate” is rated as even in the trend line if it went from “average” to the “bottom quartile” Footnote: Rankings … include [or perhaps: are based on ] … Public expenditure on education Number of patent applications Infrastructure Transportation Telecommunications 1 Foreign direct investment SOURCE: McKinsey Global Institute synthesis of data from numerous sources 29 29

The economic benefit of a 5% increase in energy efficiency varies across states Household electricity bill savings $ per year 0-50 51-75 76-100 101-150 SOURCE: U.S. Energy Information Administration; McKinsey Low Carbon Economics tool

Aerospace can apply the lessons of lean manufacturing and performance management learned in other sectors such as best-in-class automotive % ESTIMATES Productivity growth has been much faster in automotive than in aerospace1  Applying several practices from best-in-class automotive could drive significant benefit for aerospace2 Before After Productivity growth, 2000-08 Real-time performance management Labor productivity Assembly line cycle time reduction Production cycle time Production planning techniques Total cost -20% 120 100 100 100 +20% -30% In spite of the several differences between the two sectors, there are several opportunities to reapply learnings Facing increasing global competition, the automotive sector boosted its productivity performance with disciplined lean adoption and overall supply chain optimization Today, on time delivery measures for aerospace players are in the 70% range compared to 95%+ in automotive Key areas of interventions include Automotive Aerospace 1 1 Other transportation equipment in the North American Industry Classification System. Aircraft and spacecraft represented around 76% of value added in other transportation equipment in 2006 2 The various practices complement each other; the sizing estimates should not be considered additive SOURCE: U.S. Bureau of Economic Analysis; McKinsey Global Institute analysis 31 31

3 In some U.S. hospitals, fixed staffing of patient transport specialists means demand outstrips supply for 15 hours of the day Admissions to the ward from the emergency room by time of day Number of patients per hour per day Supply of patient transport specialists1 This slide shows a classic example of a hospital neglecting to staff based on demand. In this case, there were always two porters available to transport patients from the ER to the wards. But between 11 a.m. and 2 a.m. (indicated in blue), there were not enough porters to handle the demand, resulting in delays for transporting patients within the hospital. Hour patient left emergency room 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 1 Based on two specialists transporting patients up to wards 25 percent of their time; assumes 30 minutes per transport. SOURCE: McKinsey analysis 32 32

Radio-frequency identification (RFID) could be used to manage an increasingly integrated supply chain Retail sector supply chain Producer Distributor Distribution center Retail store RFID attached to pallets of goods Optimization of the commodity flow from supplier to the store Measurement of performance of suppliers and service providers Level of supply chain integration facilitated by RFID RFID attached to cases of goods Accuracy check against case numbers Integration of shelf replenishment systems with data from RFID readers RFID attached to individual items Linkage with self-checkout counters and other in-store wireless devices Monitor food supply 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 33 33

Governments can pursue different levels of interventions EXAMPLES Low Degree of intervention High Setting ground rules/direction Building enablers Tilting the playing field Government as principal actor Agenda items for growth and renewal 1 Drive productivity gains in the public and regulated sectors 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., GHG1 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 Greenhouse gases SOURCE: McKinsey Global Institute analysis 34 34

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

Productivity performance differs significantly across U.S. regions Productivity levels and growth Productivity growth Compound annual growth rate, 2000-08, % Far West Rocky Mountains Southwest Plains Great Lakes Southeast Mideast New England 1.8 1.4 1.2 1.6 1.3 1.5 1.7 84 87-88 91 97 102 106 113 Productivity levels, 2008 $ Thousands per employee SOURCE: U.S. Bureau of Economic Analysis; U.S. Bureau of Labor Statistics; McKinsey Global Institute 36 36

7 The top 20 U.S. cities account for more than 50% of national productivity growth and approximately 40% of GDP Contribution % Compound annual growth rate, 2000-08 % Population, 2008 Millions Metropolitan Statistical Area Productivity growth, 2000-08 GDP, 2008 Productivity GDP Employment New York 12.2 8.1 18.8 2.0 2.6 0.6 Los Angeles 6.7 4.9 12.9 1.8 2.4 0.5 Washington, DC 4.1 2.5 5.3 2.2 3.7 1.5 Dallas 3.3 2.3 6.1 2.0 2.9 0.9 Chicago 2.9 3.4 9.5 1.2 1.3 0.1 Boston 2.6 2.0 4.5 1.8 1.8 0.1 Houston 2.5 2.4 5.6 1.2 3.0 1.8 San Francisco 2.0 1.9 4.2 1.6 1.1 -0.4 Philadelphia 1.9 2.1 5.8 1.2 1.7 0.5 San Diego 1.9 1.2 3.0 2.1 3.4 1.3 Portland 1.8 0.7 2.2 3.5 4.3 0.8 Miami 1.7 1.6 5.4 1.6 3.0 1.4 San Jose 1.5 0.8 1.8 2.8 1.5 -1.3 Minneapolis 1.4 1.2 3.2 1.6 2.0 0.4 Pittsburgh 1.2 0.8 2.4 2.2 2.4 0.3 Austin 1.1 0.6 1.6 2.9 4.8 1.8 Baltimore 1.1 0.9 2.7 1.6 2.3 0.7 Phoenix 1.1 1.2 4.2 1.3 4.0 2.7 Tampa 1.0 Total 53% 0.8 Total 41% 2.7 1.8 2.5 0.7 Atlanta 0.9 1.7 5.3 0.7 2.0 1.3 SOURCE: U.S. Bureau of Economic Analysis; U.S. Bureau of Labor Statistics; Moody’s Economy.com; McKinsey Global Institute

U.S. multinational companies have increased productivity more than twice as fast as other U.S. private sector firms Recession years Labor productivity (real value added per worker) $ Thousands, 2000 Compound annual growth rate, 1990–2007 % 120 U.S. multinational companies 110 3.6 100 90 All other companiesAll other companies 80 1.5 70 60 1990 95 2000 05   07 SOURCE: U.S. Bureau of Economic Analysis; U.S. Bureau of Labor Statistics; McKinsey Global Institute analysis 38 38 38 38

Opportunities exist for leaders and laggards Top quartile 25th–50th quartile Bottom quartile Opportunities exist for leaders and laggards Aerospace can further improve productivity by continuing to set the bar for innovation while making use of standard lean principles Contribution to productivity growth % 1990-20001 2000-08 Goods Manufacturing 36.7 19.2 Construction -0.5 -11.0 Natural resources 1.6 0.2 Computer and electronic products n/a 22.5 Real estate and rental and leasing 19.8 18.4 Wholesale trade 17.5 11.2 Information 7.4 21.6 Services Transportation and warehousing 3.8 3.9 Retail trade 9.8 1.5 Administrative and other services -4.7 5.6 Accommodation and food services -2.8 -3.2 Other services (except public admin.) -1.7 -4.8 Arts, entertainment, and recreation -0.7 -0.8 Finance and insurance 16.9 9.9 Professional, scientific, technical services 7.3 9.7 Management of companies 0.7 -0.6 Regulated and public Government -4.1 1.0 Health care and social assistance -8.1 Educational services -1.5 -3.1 Utilities 2.5 0.5 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., e-mail, 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; MGI Sunrise Productivity Model 39