Download US productivity growth – cost cutting or innovation?

Technology Optimism, but
Employment and GDP Growth
Uncertainty
Martin Neil Baily and James L. Manyika,
Brookings and McKinsey Global Institute
Prepared for the AEA Meetings January 4, 2012
CONFIDENTIAL AND PROPRIETARY
Any use of this material without specific permission of McKinsey & Company is strictly prohibited
Contents
▪
Historical and current patterns in US productivity
▪
Future trends in productivity
McKinsey & Company
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Without a productivity boost, younger generations
will experience slower increases in their standard of living
Forecast
Birth
year
Growth in per
capita GDP
Multiplier
1960
2.54x
220
1970
2.04x
200
1980
1.96x
180
1990
1.78x
160
2000
1.63x
Improvement in per capita GDP by year of birth
Indexed to 100
260
240
140
120
100
0
5
10
15
20
25
30
35
40
Years from birth
SOURCE: U.S. Bureau of Economic Analysis; U.S. Census Bureau; Moody’s Economy.com; McKinsey analysis
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GDP per employee has maintained its long term rate of growth over
the last decade
GDP per employee (aggregate)
Real 2005 USD / employee, Thousands
+1.6% p.a.
+1.4% p.a.
62 62 62 62 63 63
72
69 70 71 71
69
68
65 67
84
82 83
80
77 78
74 75 76 76
87
89
96
94 94 95
92 93
99 99
77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
SOURCE: Moody’s database
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Though productivity has continued to grow steadily, both
GDP and employment have grown slower than before
Pre 1980
1990-99
1980-89
Post 2000
Real GDP growth, % p.a.
7.4
5.4
4.3
4.1
3.0
2.9
3.4 3.2 3.9 3.6
3.3
1.9
-0.3
4.1
2.6
3.7
4.5 4.2 4.7 4.2
2.2
1.0
1.9
2.7
3.5 3.0
2.6
2.3
1.8
1.6
-0.2
-0.2
-1.7
-2.8
Employment growth, % p.a.
4.6
4.2
3.3
2.8
1.8
0.9
0.7 0.8
2.5
3.0
2.3
1.8
1.2
2.8 2.5
1.9
2.4 2.5 2.3 2.0
1.0
0.2
0
-1.7
-1.0
-0.3
-1.2
1.6 1.7 1.1
1.1
-0.5
-0.6
-4.2
78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
SOURCE: Moody’s database
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The 1990s expansion was supported by strong investment
growth. Weak investment in the 80s. Housing in the 00s
Pre 1980
1990-99
1980-89
Post 2000
Gross fixed investment,% real change p.a.
Growth in real GDP and gross fixed investment, % p.a.
7.4
8
6
4
2
2.9
20
4.3
4.1
3.4 3.2 3.9 3.6
3.3
1.9
4.1
2.6
3.7
4.5 4.2 4.7 4.2
2.2
1.0
1.9
2.7
3.5 3.0
2.6
10
0
0
-2
2.3 1.6
1.8
-0.2
-0.2
-10
-1.7
-2.8
-4
-6
-20
Growth in employment and gross fixed investment, % p.a.
8
20
6
4.2
4
2
2.8
0.8
0.9
2.5 3.0 2.3
1.8
1.2
1.7 1.1
1.0 1.6
0.2
0
-2
10
2.8 2.5
2.4 2.5 2.3 2.0
1.8
1.9
0
-1.7
-1.0
-1.2
-0.3
1.1
-0.5
-0.6
0
-10
-4
-4.2
-6
-20
81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
SOURCE: Moody’s, The Economist Intelligence Unit
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In the 1990s, productivity growth was driven by sectors with
a virtuous cycle of job growth and increasing value added
Size represents
productivity contribution
Positive
Negative
Average annual growth rate, 1990–2000, %
Employment growth
8
Administration
7
6
Entertainment/Recreation
5
Professional/Scientific
Information
Educational Services
Health Care
4
Transportation/
Warehousing
Construction Real Estate
Acco./Food
3
Retail Trade
Other Services
2
Finance
Government
1
Natural resources
0
Total productivity growth
1990–2000 was 1.6 percent
Wholesale Trade
Management
Productivity gains were
driven by sectors that
experienced positive
employment growth and
increasing value added
Computers/Electronics
-1
Utilities
-2
Manufacturing
-3
-4
-5
-3
-2
-1
0
1
2
3
4
5
6
7
8
9
10
137 Value-added growth2
1 Manufacturing excludes Computers/Electronics
2 Valued-added growth is the contribution of each sector to total GDP growth
SOURCE: US Bureau of Economic Analysis; Moody’s Economy.com; McKinsey Global Institute Sunrise Productivity Model McKinsey & Company
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Since 2000, the largest contributors to productivity gain
have shown declining employment
Size represents
productivity contribution1
Positive
Negative
Average annual growth rate, 2000–11, %
Employment growth
4
3
Health Care
Entertainment/Recreation
2
Educational Services Acco./Food
Management
Government
1
Finance
Retail Trade
Professional/Scientific
Transportation/
Warehousing
0
Other Services
Large share of productivity
gains came from tradable
sectors with large efficiency
gains and job losses
Administration
Utilities
-1
Total productivity growth
2000–11 was 1.6 percent
Natural resources
Real Estate
Construction
Wholesale Trade
-2
Information
Manufacturing
-3
Computers/Electronics
-4
-5
-3
-2
-1
0
1
2
3
4
5
6
33 Value-added growth2
1 Manufacturing excludes Computers/Electronics
2 Valued-added growth is the contribution of each sector to total GDP growth
SOURCE: US Bureau of Economic Analysis; Moody’s Economy.com; McKinsey Global Institute Sunrise Productivity
Model
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Opportunities exist for leaders and laggards – heat map
Top quartile
25th–50th quartile
Bottom quartile
Sector productivity growth, %
Goods
Services
Regulated
and public
1990-20001
Manufacturing excl. Computers & Electronics
Construction
Natural resources
Computer & Electronic products
Real estate and rental and leasing
Wholesale trade
Information
Transportation and warehousing
Retail trade
Administrative and other services
Accommodation and food services
Other services (except public admin.)
Arts, entertainment, and recreation
Finance and insurance
Professional, scientific, technical services
Management of companies
Government
Health care and social assistance
Educational services
Utilities
2000-11
Aerospace can further
improve productivity by
continuing to set the bar for
innovation while making
use of standard lean
principles
Retail can continue to drive
productivity growth through
greater integration of online
and offline channels, and
innovations in responding
to and engaging customers
Healthcare can increase
productivity through greater
use of available technology
(e.g. data/analytics,
electronic record keeping)
and broader adoption of
established lean principles
1 Productivity contribution was calculated using Moody’s Economy.com data.
SOURCE: U.S. Bureau of Economic Analysis; Moody’s Economy.com; McKinsey Global Institute
Sunrise Productivity Model
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Contents
▪
Historical and current patterns in US productivity
▪
Future trends in productivity
– Manufacturing
– Healthcare
– Energy
– Infrastructure
McKinsey & Company
| 9
We have currently identified 8 game changers to evaluate for their
potentially significant impact on US productivity, jobs and GDP
Description
1
Domestic energy and
energy productivity
2
Skills revolution
3
Next-generation
infrastructure
4
Innovation in materials,
biologics, biosciences
5
Diffusion of Big Data,
internet innovation
6
Public-sector
productivity gains
7
Restored business
creation engine
8
Sustained export
growth
SOURCE: McKinsey Global Institute
Domestic production of shale gas and light tight oil combined with higher
energy productivity in power generation, buildings, transport, and industrials
Increasing K-12 and post-secondary attainment and achievement, aligning
skills to job demand, and providing re-employment pathways
Economic gains from sustainable infrastructure spending, long-term
infrastructure investments to address future demand needs, and enabling
trade and innovation growth through transport infrastructure
New products and processes enabled by advanced and lightweight
composites, nanotechnologies, biologics, and biosciences
Productivity impact and innovation in new products and services related to big
data, advanced analytics, social technologies, spectrum reallocation, and
“internet of things” on large sectors of the economy
Productivity growth in three major public or quasi-public sectors including
healthcare, education and government services delivery
Recovery from 23% drop in new business creation since 2007 and reversal of
long-term decline in business creation as a share of working-age population
Acceleration of US gross export growth from current trajectory (at 13% of
GDP, already at highest level since 1950) in both tradable goods and services
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Contents
▪
Historical and current patterns in US productivity
▪
Future trends in productivity
– Manufacturing
– Healthcare
– Energy
– Infrastructure
McKinsey & Company
| 11
Manufacturing is diverse
Group
Industry
R&D
intensity
Labor
intensity
Capital
intensity
High
Lower-middle
Upper-middle
Low
Energy
intensity
Trade
intensity
Value
density
Chemicals
Global
innovation for
local markets
Motor vehicles, trailers, parts
Other transport equipment
Electrical machinery
Machinery, equipment, appliances
Rubber and plastics products
Regional
processing
Fabricated metal products
Food, beverage, and tobacco
Printing and publishing
Wood products
Energy-/
resourceintensive
commodities
Refined petroleum, coke, nuclear
Paper and pulp
Mineral-based products
Basic metals
Global
technologies/
innovators
Labor- intensive tradables
Computers and office machinery
Semiconductors and electronics
Medical, precision, and optical
Textiles, apparel, leather
Furniture, jewelry, toys, other
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New
technologies
change
manufacturing
value chains
and processes
Production processes
▪ Modeling and simulation
▪ Advanced robotics
▪ Additive manufacturing
New materials
▪ Nanotech
▪ Composites
▪ Biologics
Product design
▪ Internet of Things
▪ Advanced analytics
▪ Social media
Information systems
▪ Big Data
▪ Computer-aided design
Business models
▪ Frugal innovation
▪ Circular economy
▪ New service models
McKinsey & Company
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New
technologies
change
manufacturing
value chains
and processes
Production processes
▪ Modeling and simulation
▪ Advanced robotics
▪ Additive manufacturing
New materials
▪ Nanotech
▪ Composites
▪ Biologics
Product design
▪ Internet of Things
▪ Advanced analytics
▪ Social media
Information systems
▪ Big Data
▪ Computer-aided design
Business models
▪ Frugal innovation
▪ Circular economy
▪ New service models
McKinsey & Company
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Contents
▪
Historical and current patterns in US productivity
▪
Future trends in productivity
– Manufacturing
– Healthcare
– Energy
– Infrastructure
McKinsey & Company
| 15
Three major legislative and regulatory changes will
force providers to undergo major transformation
Expected collective impact on healthcare systems
Health
Reform
ARRA
Stimulus
Switch to
ICD10/
HIPPA5010
SOURCE: Interviews; analyst reports
▪
▪
▪
Leap in number of insured (up to 20M+ more lives)
Increased cost and pricing pressure in health care industry
Payor urgency to support change to bend cost curve and
remain relevant
▪
Significant increase in penetration of electronic health
records (EHR) resulting in greater medical effectiveness
Increase in patient engagement and knowledge due to
access to information
▪
▪
▪
Rise in demand for information/ analytics to drive
comparative clinical and health economics research
(e.g., provider pay for performance)
Greater complexity in managing compatibility of legacy IT
systems with coding upgrades and regulatory changes
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New technologies in healthcare processes and delivery systems
Data driven decision making
▪ Data driven R&D for increased efficacy
▪ Ease of comparing treatments and products
▪ Analytical forecasts of effects of EMR and CDS
▪ Analytics driven marketing
Transparency in information flow
▪ Increased usage of online sources for healthcare information
▪ Transparent pricing driven by ease of comparing prices
▪ Use of social media for health information and marketing
Low cost channels and solutions
▪ Technology enabled redistribution of care, e.g. minute clinics
and “clinic-in-a-box”
▪ Remote care tools, e.g. Orange healthcare
▪ Self-service, e.g. in vision exams
Personalization
▪ New data sources for more granular information on individuals,
e.g. genome sequencing
▪ Individually customized products, e.g. Herceptin breast cancer
drug paired with HER2 protein detection test
▪ Individually customized treatment regimes
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New technologies in healthcare processes and delivery systems
Data driven decision making
▪ Data driven R&D for increased efficacy
▪ Ease of comparing treatments and products
▪ Analytical forecasts of effects of EMR and CDS
▪ Analytics driven marketing
Transparency in information flow
▪ Increased usage of online sources for healthcare information
▪ Transparent pricing driven by ease of comparing prices
▪ Use of social media for health information and marketing
Low cost channels and solutions
▪ Technology enabled redistribution of care, e.g. minute clinics
and “clinic-in-a-box”
▪ Remote care tools, e.g. Orange healthcare
▪ Self-service, e.g. in vision exams
Personalization
▪ New data sources for more granular information on individuals,
e.g. genome sequencing
▪ Individually customized products, e.g. Herceptin breast cancer
drug paired with HER2 protein detection test
▪ Individually customized treatment regimes
McKinsey & Company
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Contents
▪
Historical and current patterns in US productivity
▪
Future trends in productivity
– Manufacturing
– Healthcare
– Energy
– Infrastructure
McKinsey & Company
| 19
U.S. Natural Gas Production, 1990-2035
20
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Contents
▪
Historical and current patterns in US productivity
▪
Future trends in productivity
– Manufacturing
– Healthcare
– Energy
– Infrastructure
McKinsey & Company
| 21
The United States now ranks 25th in the world for infrastructure quality,
down from 5th in 2002
Question: How would you assess general infrastructure (e.g., transport, telephony, energy) in your country?
1
Switzerland
11
Portugal
21
Barbados
2
Singapore
12
Luxembourg
22
South Korea
3
Finland
13
Denmark
23
Saudi Arabia
4
Hong Kong SAR
14
Bahrain
24
United Kingdom
5
France
15
Canada
25
United States
6
UAE
16
Japan
26
Qatar
7
Iceland
17
Belgium
27
Taiwan, China
8
Austria
18
Spain
28
Czech Republic
9
Germany
19
Sweden
29
Malaysia
Netherlands
20
Oman
30
Slovenia
10
SOURCE: World Economic Forum Global Competitiveness Report, 2012-2013
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The American Society of Civil Engineers estimates the US has a 5-year,
$1.1T funding gap, ~70% of which comes from transport infrastructure
Estimated infrastructure investment shortfall for the U.S. 2009-14, $
Actual
bn
Need
Asset class
spending
381
Roads and bridges
Gap
1
930
550
Transit
75
265
190
Aviation
46
87
41
Rail
51
Waterways
29
63
~$800B of the
gap involves
transit infrastructure
12
50
21
Water and wastewater2
153
318
165
Waste
34
77
43
46
Energy
Recreation and schools3
Total
75
162
30
245
976
2,110
83
1,134
“The U.S. is falling dramatically behind much of the world in rebuilding and expanding an overloaded and deteriorating
transport network.”
Urban Land Institute, 2011
1 Not adjusted for inflation
2 Includes dams and levees
3 Public parks and recreation and schools
SOURCE: American Society of Civil Engineers – 2009 Report Card for America’s Infrastructure
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However, there are many barriers that could prohibit
these economic benefits
Barriers to infrastructure success
Sustainable
financing
Inward FDI
Expansion of
industry
▪
▪
New project financing difficult in budget constrained environment
▪
Importance of considerations (trade agreements, relationships with
new countries etc.) beyond infrastructure
▪
Political questions around selection of export/FDI nodes
▪
Slow moving process to begin to develop new industry practices
and expertise
▪
Environmental concerns, e.g. global climate concerns around
expanding coal exports
Project selection with positive ROI critical to realizing the full prize
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Conclusions
▪ Very uncertain productivity trend. GDP per employee has continued to grow. Nonfarm
▪
▪
▪
▪
▪
business per hour has had trend growth of about 2.5 percent, 1996 to the present, but has
slowed in recent quarters. CBO estimates the trend in nonfarm business per hour growth
at 2.2 percent.
Since 2000 productivity growth has been associated with slow employment growth or
layoffs. Restructuring productivity. For sustained growth going forward the economy
needs output/numerator driven growth, which requires greater thrust on innovation and
competitiveness on skills.
We do not find any evidence of technology stagnation. 3-D chips have prolonged Moore’s
law, probably for another 10 years. There are multiple new technologies emerging from
Silicon Valley and elsewhere.
There has been a revolution in the US energy picture with plentiful natural gas and
possible self-sufficiency in oil. Energy is not a large part of total cost for most industries,
but the stability and certainty of supply adds to the attractiveness of investing in the US.
There are emerging technologies and business process changes that could boost health
care productivity. The barrier to such growth is institutional not a lack of opportunity.
Infrastructure is not currently holding back business productivity (except for urban
congestion). Significant investment is needed to preserve and improve the infrastructure.
There are opportunities to make better use of the capital in place.
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