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Exhibit 12: US Labor Productivity Growth Periods of slow productivity growth have been followed by periods of stronger productivity gains. Average Annual Growth Rate (%) 40 3.5 2 f= 1889-1917 1917-1927 1927-1940 1940-1948 1948-1973 1973-1995 1995-2004 2004-2015 Data through 2015. Source: Investment Strategy Group, Lee Branstetter and Daniel Sichel, “Seven Reasons to Be Optimistic About Productivity,” forthcoming Peterson Institute for International Economics Policy Brief. ] 3.4 a9 34 3.2 : 3.0 4 2 | 2.0 2.0 - 1.6 15 1.5 4 13 0.0 - = Exhibit 13: Correlation of 5-Year US Productivity Growth Rates With Following 5 Years’ Productivity Growth Rates Recent productivity trends tell us little about the future. Correlation 0.25 0.20 5 015 4 014 0.10 - 0.05 - 0.00 —- Since 1957 Since 1970 Data through 03 2016. Source: Investment Strategy Group, Haver Analytics, Olivier Blanchard, “Three Remarks About the US Treasury Yield Curve,” Peterson Institute for International Economics, June 22, 2016. We have examined labor productivity growth rates and, as shown in Exhibit 13, find even lower correlations. There are two issues to consider. First, if the reported productivity growth rates are accurate, then the exceptionally low rates of the last 10 years account for part of the slow pace of this recovery. However, the current low productivity growth rates do not portend low growth rates going forward. Just as Hansen was proven wrong on his secular stagnation theory and Krugman was proven wrong on his diminished expectations for the US economy (and they were both influenced by their pessimistic view on productivity), those who extrapolate stagnation from the current productivity trends may be proven wrong as well. Second, as we discuss below, there is also a high probability that real GDP may be mismeasured. If real GDP is mismeasured, it follows that If real GDP is mismeasured, it follows that productivity is also mismeasured, thereby invalidating the whole theory of secular stagnation and the decline of the US economy. productivity is also mismeasured, thereby invalidating the whole theory of secular stagnation and the decline of the US economy. Mismeasurement of GDP Statistics In addition to the productivity debate, there is a debate as to whether we are measuring GDP correctly in the first place. The key argument being made is that while we correctly measure the value of nominal GDP based on the value of goods and services, we mismeasure the value of real GDP when we convert nominal GDP to real GDP using various price indices, and this therefore understates the pace of this recovery. This debate garnered considerable attention in 2016. The mismeasurement argument states that the official price indices do not adequately reflect significant improvements in many products, especially in information and communication technology, due to the methodology used by the Bureau of Labor Statistics (BLS) and the BEA. If the price indices do not adequately reflect the greater capacity of an improved product such as a smartphone or a microprocessor, then the price index used to convert nominal GDP to real GDP is too high. And if the price index is too high, then real GDP is understated. 14 | Goldman Sachs | JANUARY 2017 HOUSE_OVERSIGHT_014547