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May 2013

The Great Restructuring: Get Involved or Get Out of the Way

“The root of our problems is not that we’re in a Great Recession, or a Great Stagnation, but rather we are in the early throes of a Great Restructuring.”

– Erik Brynjolfsson and Andrew Mcafee

Contents

World Economy: Get Involved

US Economy: Move Out of the Way

I

II

I World Economy: Get Involved

© 2013 Payden & Rygel All rights reservedConfidential & ProprietaryThe Great Restructuring: Get Involved or Get Out of the Way 4

The Astounding Story of World Economic Growth, 1 AD-2008

Percentage of Total World GDP By Time Period Since 1 A.D.

0 A.D. - 1899 1900-1950 1951-1960 1961-1970 1971-1980 1981-1990 1991-2000 2001-20080%

5%

10%

15%

20%

25%

30%

0.2%0.9%

5.5%

8.7%

13.6%

18.5%

24.8%

27.8%

% o

f Tot

al G

DP

Sin

ce1

A.D

.

Sources: Angus Maddison, “Historical Statistics of the World Economy”; Payden Calculations, The Economist, “Quantifying History: Two Thousand Years in One Chart.”

Approximately one quarter of all the goods and services produced in recorded history have been produced in the last decade…and the vast majority of economic growth occurred in the 20th century.


Emerging Economies Drive Recent Gains in Global Economy

1990 2000 2010 2015

Emerging Economies Advanced Economies

$23 Trillion $43 Trillion $75 Trillion $98.0 Trillion (Estimated)

Source: International Monetary Fund, World Economic Outlook April 2012

Currently, emerging markets (as a share of global GDP) are just surpassing developed markets. EM countries tend to have larger population growth and far more room for investment than DM countries, allowing them to grow at a much faster rate.

**All numbers based on Purchasing Power Parity valuation of country GDP

$46 Trillion

47%

$52 Trillion

53%$39

Trillion52%

$36 Trillion

48%

$27 Trillion

63%

$16 Trillion

37%$16

Trillion69%

$7 Trillion31%

Global GDP

Per Capita GDP $1,841/$18,623 $3,136/$27,734 $6,165/$38,112 $8,391/$44,412


China: Producing “a Sweden” Each Year!

If China grew at a 7.6% year-over-year rate in 2013, this would increase their overall GDP in US dollars by close to 600 billion. In other words…

=

China 2013 GDPChina 2011 GDP

+

Sweden 2011 GDP

Source: International Monetary Fund**Based on GDP calculations in USD

If China grows at a “low” rate of 7.6% per year in 2013, it will still add the equivalent of Sweden GDP in 2011!

As an economy gets bigger, growing at a +8.0% rate becomes infeasible, especially considering global economic headwinds.


For Now, Advanced Economies Lead EM Economies in Per Capita GDP

1990 2000 2010 2015

Emerging Economies Advanced EconomiesPer Capita GDP

$1,841

$18,623

$3,136

$27,734

$6,165

$38,112

$8,391

$44,412


If Japan Is An Example, Plenty of Upside to the China “Story”

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000 GDP per capita Japan GDP per capita China

US

D

Japan 1960 1965 1970 1975 1980 1985China 1995 2000 2005 2010 2015 2020


Does Chinese Growth Threaten? Booming US Exports Suggest No.

Growth in US Exports to Top 10 Markets, 2000-11

China Brazil Hong Kong Netherlands Mexico Germany Canada S. Korea UK Japan Rest of

World

542%

180%150%

96%77% 67% 57% 56%

35%2%

116%

Source: US Department of Commerce

Since the recession officially ended exports have accounted for about half of the nation’s economic growth. Exports account for 14% of GDP, and,, continue to trend upwards

For some economists, the US is well positioned to continue to capture market share in emerging economies: Tyler Cowen writes, “the leading categories of American exports today—civilian aircraft, semiconductors, cars, pharmaceuticals, machinery, entertainment…—are going to be in the sweet spot of growing demand in what we now call the developing world.” (American Interest, May/June 2012)

© 2013 Payden & Rygel All rights reservedConfidential & ProprietaryThe Great Restructuring: Get Involved or Get Out of the Way

From Now Until 2018, GDP Growth in Emerging Regions Will Outpace Growth in Advanced Regions

10

MENAAP*

Centra

l and Eas

tern Europe

Euro Area

Sub-Sahara

n Africa

Other Adv

ance

d Economies

European Union G7

Develo

ping Asia

Indepen

dent S

tates

Latin Ameri

ca0%

10%

20%

30%

40%

50%

60%

% C

hang

e in

GDP

Gro

wth

201

1-20

18

Source: IMF *MENAAP: Middle East, N. Africa, Afghanistan, and Pakistan

II US Economy: Move Out of the Way


1948 1951 1954 1957 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 20110%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

©FactSet Research SystemsSource: Department of Labor

% Unemployed Who Have Been Unemployed for 27 Weeks or Longer

Even With Unemployment Rate Falling, Those Unemployed Have Been Unemployed for a Long Time

The number of long-term unemployed has nearly tripled during the recession.

Unprecedented in post-war era

40.2%

Long-term unemployment creates “hysteris” If allowed to persist, impacts structure of economy through potential output


1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

3,000

4,000

5,000

6,000

7,000

8,000

9,000

Thou

sand

s of

Wor

kers

Source: Bureau of Labor Statistics

Persons At work Part time for Economic Reasons

And Lots of Workers Still At Work Part-Time for “Economic Reasons”


Something We Can All Agree On? In the US, Not Much of A Recovery…Yet

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 201158%

59%

60%

61%

62%

63%

64%

65%

Perc

ent o

f Pop

ulat

ion

With

a J

ob

Source: BLS

Ratio, Civilian Employment To Working-Age Population (Pct.) Recession Periods - United States


Labor Force Participation Has Shown No Signs of Recovery

1948 1951 1954 1957 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011

58

60

62

64

66

68

Source: Bureau of Labor Statistics

Civilian Labor Force Participation Rate - Percent, SA - United States


1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20125,500

6,000

6,500

7,000

7,500

8,000

8,500

9,000

Thou

sand

s of

Em

ploy

ees

©FactSet Research SystemsSource: BLS

Gross Job GainsGross Job Losses

Recession Periods - United States

Gross job losses each quarter

Gross job gains each quarter

Updated through Q2 2010Source: BLS

Digging Into the Labor Market Data: Lack of Hiring Accounts for Current Joblessness


2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20121,400

1,600

1,800

2,000

2,200

2,400

2,600

2,800

3,000

3,200

3,400

Mon

thly

Lev

els,

Tho

usan

ds

Layoffs and Discharges

Quits

Source: BLS

QuitsLayoffs and Discharges

Good News: Layoffs Near Record Lows, “Quits” Are On the Rise


Restructuring Underway: Services Employment Rebounds as Goods Producing and State/Local Declines

2008 2009 2010 2011 2012

88

90

92

94

96

98

100

102

Inde

x to

100

Dec

embe

r 200

7 (N

BER

Rec

essi

on S

tart

Dat

e)

Goods Producing + State & Local Jobs

Priv ate Serv ice-Prov idingJobs

Source: BLS, Payden Calculations

Private Service-Providing JobsGoods Producing + State & Local JobsRecession Periods - United States


Restructuring Underway: Services Employment Rebounds as State/Local Declines

2008 2009 2010 2011 201294

95

96

97

98

99

100

101

Inde

xed

to 1

00 a

t 12/

31/2

007

State Gov ernment, Excluding Education

Local Gov ernment Employees

State Gov ernment Employees

Priv ate Serv ice-Prov idingEmployees

Source: BLS

State Government, Excluding EducationPrivate Service-Providing EmployeesLocal Government EmployeesState Government Employees


$0.0

$500,000,000,000.0

$1,000,000,000,000.0

$1,500,000,000,000.0

$2,000,000,000,000.0

$2,500,000,000,000.0

China, People's Republic of Germany JapanUnited Kingdom United States

The US Still Leads the World In Manufactured Goods Output

China

U.S.

Japan

Germany

UK

Source: United Nations


Long-Term Structural Trend Toward Services, Away From “Stuff”


The “Roomba Effect”

Who needs a human when you have me?


The Burgeoning Robot Population


Five Years of Labor Data Tell Us: A Great Restructuring Is Underway

Construction

Manufacturing

Retail Trade

Financial Activities

Information

Wholesale Trade

Government

Transportation and Warehousing

Professional Serivces

Mining

Leisure and Hospitality

Education and Healthcare

-2400 -2100 -1800 -1500 -1200 -900 -600 -300 0 300 600 900 1200 1500 1800 2100 2400

Jobs Gained Since the Recovery Began (June 2009 to December 2012) Total Jobs Gained or Lost Since the Start of the Recession (August 2007 to December 2012)

Thousands of Jobs

Structural misalignments in the US labor market appear in the sector-by-sector breakdown. Construction and manufacturing led the job declines—and both sectors have yet to recover. However, on net, some sectors like education/health care and professional services have, on net, added to payrolls over the period.

Source: Labor Department


Evidence of Structural Problems: Skills Mismatch as Employers Face Structural Impediments to Hiring

Kauffman Foundation poll of entrepreneurs, Sept. 2011

Source: BLS; Kauffman Foundation

Finding qualified people

Sluggish EconomyAccessing Capital

Managing Fast Growth

Others• Taxes 4%• Regulatory

Uncertainty 3%• Ability to penetrate

global markets 3%


-200,000

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

Net Jobs Created

Age of FirmSize of Firm

Answer to Employment Problem: New Business Formation Drives Employment!

Source: Business Formation and Dynamics By Business Age

Innovative, creative start-up firms are net job creators, not Fed QE

Young Firms

Older Firms

Large firms

Small firms

25.3% of the 28,776 engineering and

technology companies founded from 1995 to

2005 had an immigrant key founder. These 7,283 companies

produced more than $52 billion dollars in

2005 sales and in 2005 had just under 450,000

employees.

Net job creation, 1985-2005


Start-ups and Innovation in Action


Whatever the Future Brings, It Might Not Be Part of the Routine

Unemployment Rate By Job Type

5/2005 11/2005 5/2006 11/2006 5/2007 11/2007 5/2008 11/2008 5/2009 11/2009 5/2010 11/2010 5/2011 11/2011 5/2012 11/20120%

2%

4%

6%

8%

10%

12%

14%

16%Non-Routine Jobs Routine Jobs

Une

mpl

oym

ent R

ate

Source: New York Federal Reserve

Non Routine: Management, Art, Business Legal, Computer, Science, Architecture, Education, Health, Social, Protection, Building and Grounds, and Personal Food Preparation

Routine: Sales, Office and Administrative, Construction, Maintenance, Production, Transportation


The US Labor Market Is Improving: Job Gains Continue in Q2 2013

29

2008 2009 2010 2011 2012

-500

-400

-300

-200

-100

0

100

200

300

Thou

sand

s

Source: BLS, Payden Calculations

Private Service-Providing Jobs, Monthly ChangeRecession Periods - United States


The Composition of World GDP Is Changing

30

United States24%

China4%

Japan10%

Euro Area22%

Rest of World40%

Source: IMF

United States23%

China7%

Japan8%Euro Area

19%

Rest of World43%

United States20%

China12%

Japan6%

Euro Area16%

Rest of World46%

1991 1998

2008

Over 26 Years….

Europe Cedes Ground from 22% of World GDP to 11%

China Grows from 4% to 19% of World GDP

Rest of World Increases Share of World GDP from 40% to 47% United States

18%

China19%

Japan5%

Euro Area12%

Rest of World47%

2018

Rest of world includes all countries other than US, euro area, China and JapanGross domestic product based on purchasing-power-parity (PPP) valuation of country GDP.”

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