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Exhibit 17: Labor Productivity Growth for Different Groups of Firms Rapid productivity growth of firms at the frontier of innovation is not spreading to the rest of the industry. ndex, 2001=1 (Log Points) Frontier Firms—Top 5% in Each Industry/Year Frontier Firms—Top 100 in Each Industry/ Year a aie Non-Frontier Firms 0.9 2001 2003 2005 2007 2009 2011 2013 Data through 2013. Note: Average across 24 OECD countries and 22 manufacturing and 27 market services industries. Source: Investment Strategy Group, OECD preliminary results based on Dan Andrews, Chiara Criscuolo and Peter N. Gal, “Mind the Gap: Productivity Divergence Between the Global Frontier and Laggard Firms,” OECD Productivity Working Papers, forthcoming. Exhibit 18: US Financial Conditions Index Conditions tightened significantly due to global shocks emanating from the Eurozone, oil prices and China. US Financial Conditions Index 101.5 101.0 + fi 100.5 ~ +142bp 100.0 + a5 4 99.0 + 98.5 4 98.0 ~ 2010 2011 2012 2013 2014 2015 2016 Data through year-end 2016. Source: Investment Strategy Group, Goldman Sachs Global Investment Research. the rest of the industry. Baily and Montalbano suggest that increased regulation after the crisis may be partially responsible for the widening gap between frontier firms and the rest of the industry, which lowers overall productivity growth rates across the economy and hence lowers the pace of economic growth. Our colleagues in GIR think that lower capital investment accounts for the lack of diffusion of new technologies from more productive firms to less productive firms.** Here, again, it is likely that a more favorable business environment could have boosted capital expenditures and increased overall productivity levels. We conclude that it is reasonable to assign some of the weakness in this recovery to less effective fiscal and regulatory policies out of Washington rather than to structural shortcomings in the US economy. A Steady Onslaught of External Shocks A sixth theory posits that numerous external shocks explain the slow pace of this recovery. Just as the US economy was recovering from the trough of 2009, the Eurozone sovereign debt crisis jolted global financial markets. The Eurozone was a source of uncertainty and financial market volatility beyond the initial shock in 2010 as the crisis spread from Greece to Spain and Italy. The Eurozone crisis was followed by a series of what the Brookings Institution has called the “fiscal fights of the Obama administration.” The first fiscal fight resulted in the Standard and Poor’s (S&P) downgrade of US Treasury debt in August 2011. The equity markets, as measured by the S&P 500 Index, dropped about 19% between April and October of 2011. Taken together, the Eurozone sovereign debt crisis and the first of the fiscal fights tightened US financial conditions*®® by 142 basis points (see Exhibit 18). GIR estimates that a 100 basis point tightening of financial conditions is equivalent to a federal funds hike of 150 basis points and a drag on GDP growth of about one percentage point. The drop in oil prices from a post-crisis high of $107 per barrel for West Texas Intermediate in June 2014 to a trough of $26 per barrel in February 2016 also provided a shock to the economy. Employment and capital expenditures in the oil and gas sector dropped by 29% and 67%, respectively, from peak levels seen in 2014. The sector’s par-weighted default rate excluding distressed exchanges reached 14.6% and including such exchanges 19.8%, in October 2016.°? Broad-based fear of policy mistakes in China and unexpected depreciation of the renminbi were Outlook | Investment Strategy Group 19 HOUSE_OVERSIGHT_014552