0. 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

1. 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 Jan. 1976
June Jan. 1993
8.4 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
March- Nov. 1980
Feb Jan. 2005
July Oct. 1983
Dec Dec 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

2. 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 to 1969
122
1975 to to 1980
240
Full employment reached in Q2 2017
1983 to to 1990
211
1991 to 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 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

3. 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
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 Q we have estimated the amount outstanding of GSE MBS in that quarter.
SOURCE: Federal Reserve Flow of Funds; SIFMA; McKinsey Global Institute analysis

4. 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 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

5. Overcome the drag from recession . . .
MGI’s current work tackles the two horizons to sustained growth and renewal in the United States
MVA-AAA
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

6. The Productivity Imperative
MVA-AAA
The Productivity Imperative
Productivity growth matters . . . 6

7. 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, , %
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 E
data used for 2000s
SOURCE: U.S. Bureau of Economic Analysis; U.S. Bureau of Labor Statistics; McKinsey Global Institute analysis 7 7

8. 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

9. 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
SOURCE: U.S. Bureau of Economic Analysis; Census 2009 population estimates; McKinsey Global Institute analysis 9 9

10. Many advanced economies face a similar productivity imperative8
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, Growth of working-age population, Growth of working-age population,
Historic productivity growth, Historic productivity growth,
Required acceleration in productivityRequired acceleration in productivityRequired acceleration in productivity
Historic GDP growth, Historic GDP growth,
SOURCE: U.S. Bureau of Economic Analysis; Census 2009 population estimates; The Conference Board; United Nations Population Division; McKinsey Global Institute analysis

11. At the national level, productivity correlates closely with competitiveness
Correlation between productivity and competitiveness for a sample of countries
Global competitiveness score,
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 ; The Conference Board 11 11

12. The Productivity Imperative
MVA-AAA
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

13. 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,
%; 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

14. 7
. . . And even in the short term, employment growth has been positively related to productivity, but with a time lag
Annual change, %
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

15. In the 1990s, productivity growth was driven by a virtuous cycle of increasing value added and jobs growth
Compound annual growth rate, %
Size represents productivity contribution1
Employment growth
Negative
Positive
Administration
Construction
Education
Real estate
Arts/recreation
Total productivity growth 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

16. 6
Since 2000, the largest contributions to productivity gains were driven by declining employment
Compound annual growth rate, %
Size represents productivity contribution1
Employment growth
Negative
Positive
Accommodation/ food servicesAccommodation/ food services
Arts/ recreation
Education
Real estate
Total productivity growth 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

17. The Productivity Imperative
MVA-AAA
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

18. 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, , %
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

19. The Productivity Imperative
MVA-AAA
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

20. The U.S. can achieve historic levels of GDP growth, or better . . .
Potential GDP growth
Compound annual growth rate, , %
(not quantified)
GDP growth = 2.8
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

21. . . . 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

23. APPENDIX: ADDITIONAL SUPPORTING PAGES

24. 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

25. 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, , %2
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 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)
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

26. 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
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 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
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

27. 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 27 27

28. 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

29. U.S. performance on a sample of country competitiveness indicators is declining relative to other countries
PHL 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

30. 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
SOURCE: U.S. Energy Information Administration; McKinsey Low Carbon Economics tool

31. 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,
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

32. 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

33. 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

34. 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

35. 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

36. Productivity performance differs significantly across U.S. regions
Productivity levels and growth
Productivity growth
Compound annual growth rate, , %
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

37. 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, %
Population, 2008
Millions
Metropolitan
Statistical Area
Productivity growth,
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

38. 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

39. 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 %
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., , 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