Commentary: EDA Industry Update December 2005 -- What did the Last Quarter Bring?

EDA Consortium's Market Statistics

On October 5, 2005 - The EDA Consortium's Market Statistics Service (MSS) announced that EDA industry revenue for Q2 of 2005 was $1,092 million, versus $1,094 million in Q2 2004. Total product revenues, without services, were $1,028 million in Q2 of 2005 vs. $1,024 million in the same quarter of 2004.

During 2Q 2005 CAE accounted for 41% of total industry revenue, IC Physical Design & Verification for 27%, Semiconductor IP for 19%, PCB and MCM for 8% and Services for 6%.

Walden C. Rhines, chairman of the EDA Consortium and chairman and CEO of Mentor Graphics Corporation, said: "The EDA industry continues to realign, as strength in printed circuit board, IC physical design and verification, offsets weakness in traditional markets like computer-aided engineering. Japan continued its strong growth momentum, up 15% over the second quarter of 2004."

North America at $528 million accounted for 48% of total industry revenue and was flat year over year. Europe at $189 million accounted for 17% of total industry revenue and was also flat year-over-year. Japan at $242 million accounted for 22% of total industry revenue and was up 15% year-over-year. ROW at $132 million accounted for 12% of total revenue was up 5% year over year.

The EDA Consortium is the international association of companies that provide tools and services that enable engineers to create the world's electronic products. EDA is the critical technology used to design electronics for the communications, computer, space technology, medical and industrial equipment and consumer electronics markets among others.

The Economic Environment

The data in the recent Electronics IP Industry Commentary for November 2005 revealed that combined revenue for the G7 Electronics IP providers was down this last quarter, as were their market caps. Indeed, the EDA industry in general has been struggling just to stay flat for years, as the EDA Consortium report in the foregoing December 2005 EDA Industry Commentary clearly shows.

Nevertheless, the EDA Vendors reported on above did manage to increase their stock prices in Q3 2005 by 15.1% over Q3 2004. But during the same period, the MCAD vendors covered in the recent November 2005 MCAD Commentary had a 45% stock price increase in Q3 year-over-year. Still, the EDA rise of 15%, and the MCAD rise of 45%, both outpaced the common stock indices that rose an average of only 9.5% in the period.

Today the U.S. GDP is apparently rising and corporate profits in general are up (with energy company profits at obscene levels). However, the American public in general have not benefited, and they know it. According to the latest Gallup poll, 63% of Americans rate the economy as only fair or poor, and by 58% say economic conditions are getting worse, not better.

The reasons, as outlined in these Commentaries in the past, is that all the GDP growth and corporate profits of recent years have failed to "trickle down" to most Americans. Real median household income in the United States, adjusted for inflation, has actually fallen for five years in a row.

One of the primary reasons for this, is that for those same five years, chronic problems have existed in U.S. employment levels.

The U.S. Employment Picture

Having witnessed the net deterioration in employment for the past five years, the U.S. job situation sank even further during the last three months, adding an average of only 92,000 a month, despite a preliminary figure of 215,000 jobs added in November 2005. Job growth really slowed in October 2005, even excluding the direct impact of two monstrous hurricanes, the U.S. Labor Department said. Nonfarm U.S. payrolls rose by only 44,000 in October 2005, well below the already-pessimistic estimate of 102,000 that economists had predicted. September had added a miserable 17,000.

These last three months represent a steep fall off from the already-meager job creation year-to-date through August 2005, which averaged barely enough to keep up with population growth. "The job market may have been weaker than previously thought before the hurricanes struck, said Christopher Piros, director of investment strategy for Prudential's Strategic Investment Research Group. "While payrolls have expanded, the growth came mostly from a rise in temporary employment and a gain in construction jobs. Meanwhile, the rest of the economy lost jobs," Piros said. "That's not exactly a picture of strength."

Many economists were even underwhelmed with the job results of November. Merrill Lynch economist David Rosenberg said in an analysis issued December 2, 2005, "While November's rebound was welcome, (monthly) payrolls should be expanding in excess of 300,000 at this stage of the business cycle." Gus Faucher, director of macroeconomics for Moody's in Pennsylvania, said he has been "a little surprised we haven't seen more robust job growth at this point." Offsetting some of the gains in payrolls, total hours worked in the economy fell in November. Robert Brusca, chief economist for FAO Economics, said, "The drop in hours worked in November offset much of the gain in employment." The separate household survey for November showed U.S. employment declined by 52,000, while unemployment rose by 149,000 to 7.58 million. The manufacturing sector grew at a slower pace in November than in October, according to data from the Institute of Supply Management.

Real U.S. consumer spending declined for the second straight month in September. Adjusted for inflation, real spending fell 0.4% in September after dropping 1% in August, the Commerce Department reported. It was the first back-to-back decline in spending in 15 years.

Meanwhile, inflation soared at the fastest rate in 24 years in September, further eroding consumers' purchasing power. Also, wage growth has significantly lagged inflation, which registered 4.3% in October 2005, according to Jared Bernstein, with the liberal Economic Policy Institute. "The news on wages continues to be disappointing," said Peter Morici, a business professor at the University of Maryland. "The wages of ordinary working Americans continue to lag inflation with no relief in sight."

Trying to fend off inflation, Fed policy-makers bumped up its key interest rate to its highest level in more than four years on November 1, 2005, making it still more difficult for U.S. employers and employees alike to get credit. More rate increases are expected on December 13, 2005.

The U.S. Trade Deficit

The U.S. trade deficit swelled to $66.1 billion in September 2005, far surpassing the previous record and providing a stark reminder of America's dependence on foreign capital to fund its import bill. Fueling the September trade gap was a 2.4% rise in imports, to $171.3 billion, and a 2.6% drop in exports, to $105.2 billion. The figures were released November 10, 2005 by the U.S. Commerce Department. See below. The U.S. deficit with China also hit a record as that country again shipped a flood of goods to the United States.

As previously reported in these Commentaries, the U.S. trade gap has been widening steadily during the past several years, and the September 2005 figure was substantially greater than most analysts had forecast, easily exceeding the $60.4 billion high set in February 2005. The trade gap now appears on track to top $700 billion for 2005, compared with last year's record of $617.6 billion.

"I once called a previous record the Grand Canyon of all deficits. How wrong I was," said Joel Naroff, an economic forecaster in Holland, Pa., who, likening the September 2005 gap to the deepest part of the ocean, declared, "We are now talking about the Mariana trench."

Economists rightly worry, because each month's gap adds to the overall debt of the United States. The dollars that U.S. consumers and businesses pay for imports are typically invested by foreigners in the bonds of the U.S. Treasury and mortgage-finance companies such as Fannie Mae. If the foreigners holding the now huge figure of hundreds of billions of dollars in securities become alarmed about U.S. indebtedness, a panicky sell-off could ensue, sparking a worldwide financial crisis.

The September 2005 data on the trade deficits are merely fresh evidence of the Bush administration's ongoing, misguided trade policies. Especially disturbing is the U.S. trade deficit with China, which increased another 9% from the August 2005 level, to a record $20.1 billion. "When it comes to meaningful trade policy with China, this administration is missing in action," said Rep. Benjamin Cardin, the ranking minority member of the trade subcommittee of the House Ways and Means Committee. In July 2005, China revalued its currency by 2.1%. This was seen as a very small move by experts who believe China is keeping the yuan undervalued by 15% to 40%. Note: In a blow to American manufacturers and other firms feeling competition from Chinese exports, the U.S. Treasury Department asserted on November 28, 2005 that China is "not a currency manipulator." So much for tough action by the U.S. administration! "If it walks like a duck and quacks like a duck, it's a duck. The Chinese manipulate their currency and the Administration should not have ducked the issue," NY Senator Chuck Schumer said.

Even Federal Reserve Chairman Alan Greenspan cautioned on November 14, 2005, that foreign investors may sour on bankrolling America's mammoth trade deficit. Moreover, Bush cannot excuse this deficit as "not an important % of the country's GDP" since the current account deficit this year has exceeded 6% of the total U.S. economy as measured by gross domestic product, an all-time high!! In 1986, during a very bad deficit year for Reagan, the trade deficit accounted for only 3.5% of GDP.

The U.S. trade deficit is the direct result of the Bush administration's 5-year record of pushing free-trade agreements and outsourcing that send large numbers of American jobs overseas, where labor costs are lower. Keep in mind that the United States has lost 3 million manufacturing jobs alone, just since 2001.

The National Debt

Last month, the national debt reached yet another unhappy milestone, passing the $8 trillion mark for the first time. As of the week ending November 27, 2005, the United States was $8,084,858,891,735.31 in the hole, according to the U.S. Treasury Department. And it'll only get worse. Brian Riedl, chief budget analyst at the conservative Heritage Foundation, said the Bush administration is expected to return to Congress within the next few months to ask lawmakers -- once again -- to raise the nation's debt ceiling so the country can borrow even more.

David Lazarus of the SF Chronicle asks, "So what's the President doing (aside from, perversely, cutting taxes)? According to Treasury Department figures, the Bush administration has been aggressively passing out IOUs to foreign interests. In fact, Bush has borrowed more money -- $1.05 trillion -- from foreign governments and banks since taking office than all other presidents combined. From 1776 to 2000, the nation's first 42 presidents borrowed a combined $1.01 trillion from foreign interests, official statistics show. In just five years, Bush has out-borrowed them all."

Meanwhile, one fact has gone largely unnoticed: much of Washington's expert economic team has disappeared. The chairmanship of the Council of Economic Advisers will soon be vacant, and two spots on the Federal Reserve Board that were recently filled by academic economists already are vacant. There is no assistant secretary of the Treasury for tax policy, and the director's chair at the Congressional Budget Office, currently occupied by Douglas J. Holtz-Eakin, will soon be empty, too.

Today the White House and Congress need as many as five academic economists of high caliber, and it's not obvious where they will come from. The Republican Party has little bench strength. "Bush's reputation in at least the academic community is about as low as you can imagine," said William A. Niskanen, who was a member of the council during President Ronald Reagan's first term and is now chairman of the Cato Institute, a libertarian research group. "A lot of people would not be willing to give up a good tenured position for a position in the White House."

Speaking of Deficits

Defaulting corporate pension programs have been reported on in these Commentaries in the past. The federal agency (The Pension Benefit Guaranty Corporation) that insures the private pensions of some 44 million US workers said on November 15, 2005 that its deficit was $22.8 billion in fiscal 2005, as big airlines in bankruptcy dumped their pension liabilities. The PBGC disclosed, that as of September 30, 2005, it had only $56.5 billion in assets to cover $79.2 billion in pension liabilities.

During the last five years there has been an explosion in the number of big, ailing companies - especially in labor-heavy US industries like airlines and steel - transferring their pension liabilities to the PBGC. With billions of dollars flying out of the agency's door, concern has been mounting in the US Congress and elsewhere over its financial footing. Indeed, if other liabilities the PBGC assumed after the end of the fiscal year on September 30 had been counted, the 2005 deficit would have been even larger ($25.7 billion). Without a legislative overhaul of the private pension system, the PBGC will run out of money to pay the pension claims of the retirees of companies whose plans it has assumed. That would mean that people retiring from financially troubled companies would have nowhere else to turn for their promised pension payments - raising the possibility of a - you guessed it - a US taxpayer bailout! (Shades of the 80's Savings & Loan bailout, in case anyone remembers).

Traditional US employer-paid pension plans, giving retirees a fixed monthly amount based on salary and years of employment, are now estimated to be underfunded across corporate America by as much as $450 billion, which of course jeopardizes the retirement security of millions of Americans. United Airlines and US Airways used bankruptcy earlier this year, to slash costs by dumping their employee pension liabilities - a combined $9.6 billion - onto the PBGC. Delta Airlines and Northwest Airlines, which both filed for Chapter 11 bankruptcy protection on September 14, 2005, may seek to do the same. The pension plans of Delta and Northwest, the nation's No. 3 and No. 4 airlines, are underfunded by an estimated $16.3 billion. And there is speculation that auto parts maker Delphi, which filed for protection from creditors in October 2005, also could terminate its pension plan and transfer liability to the federal agency.

Indeed, GM itself is in similar danger! (GM announced on November 21, 2005 a plan to reduce an additional 30,000 existing jobs by the end of 2008. Even the much-publicized Saturn plant is not exempt. About 1,500 workers at the plant are set to lose jobs that GM originally assured them were guaranteed. Another 4,000 jobs at Spring Hill, Tennessee, the second-youngest plant in GM's American network, may hinge on whether the auto company gives this factory new models to build. Even if GM does allot new work, the vehicles are likely to be other GM cars. These Saturn workers have learned the harsh reality that building quality cars and cooperating with management are not enough to save their jobs).

These recent PBGC deficits have of course been presided over by the Bush Administration and Republican-dominated U.S. Congress. Democrats are naturally appalled. They say this trend could lead many employers to drop their existing pension plans entirely, or switch from traditional so-called defined-benefit plans to less expensive defined-contribution programs, such as 401(k) plans - in which employers contribute to a retirement fund and workers receive only what their investments have earned. Indeed, many companies are already hard-at-work replacing defined-benefit pension plans with defined-contribution plans. The PBGC only backs defined-benefit plans, which are most prevalent in older US industries such as automobile manufacturing, steel and airlines - now reeling from record fuel costs, historically low fares and cutthroat competition.

The PBGC agency was created in 1974 as a government insurance program for traditional employer-paid pension plans. Companies pay insurance premiums to the agency, and if an employer can no longer support its pension plan, the agency takes over the assets and liabilities and pays promised benefits to retirees up to certain limits. But employees do not receive their full pension benefits when the PBGC takes over a plan. The maximum annual benefit for plans assumed by the agency this year is $45,614 for workers who wait until 65 to retire. And we taxpayers will eventually end up holding the bag if the PBGC goes bust!

Part of an Overall Trend

Unfortunately, the latest jobs picture, increased trade deficits, rising national debt, and new pension bailouts are all part of a host of business, economic and geopolitical indicators that have been causing high-anxiety in the world of high technology in the United States and elsewhere. The last five years have resulted in at least a baker's dozen enervating factors: (1) unremitting extravagance in the face of the shift from US federal budget surplus to deficit, (2) the definite long-term trend of a rich-get-richer, poor-get-poorer US income distribution, (3) sluggish net job growth below the requirements of US population increases, (4) a net US disadvantage in globalization, (6) weakened US environmental stewardship and deteriorating US infrastructure, (6) the ballooning real and psychic costs of war, in lives and treasure, (7) reduced worldwide and domestic admiration for US leadership, (8) a weaker US dollar, (9) rising energy, oil & gas prices, (10) a deteriorated NASDAQ stock market vs. January 2001, (11) ongoing corporate fraud, (12) indictments and criminal investigations in both the White House and Congress, and (13) record trade deficits, requiring the US to borrow billions of dollars every week from abroad.

The most recent problems come as President Bush is confronted with his own sagging job ratings. Not surprisingly, Bush's job approval is at the lowest level of his presidency. A recent AP poll showed Bush's approval rating has dipped below 37%.

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