MCAD Industry View -- What did the Last Quarter Bring?

While the real gross domestic product increase in the third quarter of 2003 was the broadest based gain in the US economy in 3 years, many forecasters expect the effects of both the personal tax cuts and real estate re-financings to wane as time passes. Several predict that growth will drop back to around a 4 percent annual rate at best for the remainder of this year and in 2004, a pace some economists fear might not be fast enough to produce many new jobs. If the pace falls below 4%, new job creation may continue in the doldrums.

For example, according to the Wall Street Journal: "While the economy certainly won't keep up with the third quarter's blistering pace in the months ahead, most economists believe the quarter marks a distinctive shift into a more robust expansion that could stretch to next year's presidential election". "We are not going to see 7% growth again but we could well see over 4% over the course of the next year" said Richard Berner, an economist with Morgan Stanley.

What about jobs? A separate report showed initial claims for unemployment benefits falling by 5,000 to 386,000 just last week, the fourth straight week the number has remained below 400,000. But the same report showed that continuing claims for benefits, which had been declining, jumped by 60,000 to 3.57 million.

US Department of Labor reported that the number of unemployed persons, 9.0 million, was virtually unchanged in September, and the unemployment rate was 6.1 percent, the same as in August. October nudged down to an even 6%. These figures do not include long term unemployed who have stopped actively seeking work and those formerly unemployed who may have taken temporary or lower paying jobs. Some fear that many jobs may be permanently lost by a shift to offshore resources.

Moreover, recent job growth may just be a another blip, just like briefly occurred in 2002. In a November 2003 report from Challenger, Gray & Christmas, US employers in October 2003 were planning layoffs over the next few months of 171,874, the highest figure in 12 months (Reuters, November 4, 2003).

During the boom, many high tech companies complained about the lack of available technical resources within the US borders. H1-B visas permitted US employers to hire foreign professionals on temporary assignments of up to six years. In response to pressure from high tech companies the number of allowable H1-B visas rose from 65,000 to 195,000. With the recession the number of H1-B visas issued to workers in the technology industry in the United States dropped nearly 75 per cent from 2001 to 2002, according to a new Department of Homeland Security report. The US is now about to diminish the number of allowable H1-B visas back to the 65,000 level. While this action will reduce the number of foreign nationals competing for jobs inside the US, it will increase the talent pool available overseas.

According to industry figures, more than 500,000 technology jobs were lost from mid-2001 to mid-2003. Many of these were due to a contraction of the tech sector after the dot-com bubble burst. Andrew S. Grove, Intel co-founder and chairman, has said "the software and technology service businesses are under siege by countries taking advantage of cheap labor costs and strong incentives for new financial investment." The cost of achieving high-speed communication plummeted. "As a result," Grove said, "The engineer sitting 6,000 miles away might as well be in the next cubicle." The Gartner Group, a market research firm, estimates that 10 percent of jobs at US information technology vendors will move offshore by next year. And only 40 per cent of those who have lost jobs are likely to be retrained and re-deployed by their firms. Throughout all US companies, Forrester Research predicts the loss of roughly 3.3 million jobs by 2015.

Offshore outsourcing is not without issues including potential loss of Intellectual Property assets, impact on morale and productivity of remaining US workers, and difficulty of managing remote operations in different cultures. There are also political and economic consequences for the US as a whole. What happens if the US winds up losing its technological edge? Will the US tax base be further gutted as well-compensated US technology professionals lose their jobs? "Outsourcing solely to lower costs because one's competition is doing it" displays a lack of imagination.

What will be the impact on MCAD vendors, if large numbers of mechanical engineering and design jobs move overseas? What price can be commanded for MCAD products, when end users offshore are being a paid a third the salary of US and European engineers? Will CAD vendors themselves look to capitalize on lower cost software talent overseas? In July PTC signed a 39 month outsourcing software development deal with ITC Infotech worth an estimated $54M.

It is often alleged that American industry can get along with fewer employees because of the "miracle of productivity improvement". Before we glibly adopt that belief, we'd better keep in mind the denominator behind the statistics: hours actually worked. The US Bureau of Labor Statistics data assumes high-tech white collar workers put in a 40 hour week. But in a February 2003 survey by InfoWorld, fully 89% of such workers put in many more hours per week than 40, with no commensurate compensation, thus driving up the "productivity statistics" artificially. As Doug Henwood puts it in his new book, "This is a pungent reminder of the difference between the capitalist's definition of productivity (the expansion of profit), and the engineer's (the minimization of inputs, which would include unpaid hours)." (Page 67, After The New Economy, Doug Henwood, The New Press, New York, NY 10013, (c) 2003).

Other Progress since August?

OK, so the positive news about the Q3 GDP spurt, about the improved YTD stock market performances, and about enhanced corporate profits - none of these has yet translated into much job relief for the nearly three million US unemployed since 2001 began, especially in the manufacturing sector. But at least progress has occurred during these last three months on all the other issues that were hanging heavy over us in early August, right? For example, now that another quarter has elapsed since the president's May 1st declaration of "Mission Accomplished in IRAQ", surely the IRAQI people with UN help have now resumed control of virtually all of their country. No doubt this means that other countries are of course now supplying troops, and the US troops have begun coming home in large numbers. Hello? What's that you say? Violent attacks in IRAQ against the US troops have increased since August? Deaths and injuries have increased on all sides? As of November 5, the number of US troop fatalities in IRAQ is 384, 245 since May 1? Six more in a November 6 helicopter crash? US troop morale is down? US troops there are having their tours of duty extended? Another 100,000 US-based soldiers have just been alerted to get ready for duty in IRAQ? There are no more troops for in sight for IRAQ from the UN or individually from other countries? Turkey's offer of 10,000 troops was turned down on November 5 by the US-installed ruling council in Baghdad? C'est impossible! Sigh.

Well, surely international outsiders will pony up some significant financial support at least, so we weary taxpayers in the US won't have to foot the whole cost! Come again? Other countries have committed only about $25 billion in total to help? And what? The US Congress just approved another $87 billion to support the war for another year on top of the $79 billion already spent by the US? Man! Well, at least the deep tax cuts of 2001-2003 have been rolled back some to pay the bills in IRAQ, so our national deficit doesn't balloon. Say again? Tax cuts have not been touched? The federal deficit this year alone will be somewhere between $374 billion and $500 billion, when as recently as 2000 we had a surplus of $236 billion? Holy Toledo! Hey, at least the Weapons of Mass Destruction have been found in IRAQ by now, and the pre-war ties between Saddam and Al-Qaeda have been unequivocally proved. No? Neither? Say it isn't so! Well, at the very bare bones we have the satisfaction that both Saddam and Osama are now behind bars! What's that again? Both are still on the loose? You don't mean it! Well, this is distressing!

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