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

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

by Dr. Russ Henke and Dr. Jack Horgan
Henke Associates

In May 2003, August 2003, December 2003, February 2004, May 2004, August 2004, December 2004, February 2005 and May 2005 and August 2005 EDA Commentaries by the authors (published on EDACafé.com), the then-current yearly and quarterly financial performances of a selected group of publicly traded Electronic Design Automation (EDA) companies were analyzed and compared. Expectations regarding the future financial performances of these same EDA entities were documented as well. The selected companies were Altium, Ansoft, Cadence, Magma, Mentor Graphics, Nassda, Synopsys, Synplicity and Verisity.

Now that Synopsys' financial results were announced on November 30, 2005, this December 2005 report covers the selected EDA company performances for the nominal Third Quarter 2005.

In this issue, EDA News Highlights are followed by the revenue & earnings performances of the selected group of EDA players for Q3 2005, and then EDA vendor by vendor details. A comparison of the quarter's results for the Top 3 EDA companies vs. the Top 3 MCAD entities is provided next. EDA Vendor stock prices are discussed. Finally, individual EDA vendor forecasts for Q4 2005 are provided. Enjoy!

Note: As part of continuing EDA industry consolidation, two previously-selected EDA vendors, namely Verisity and Nassda, have been acquired by others and hence have been dropped from the quarterly report. Replacement nominations for publicly traded EDA entities for future coverage are being accepted. Send an email to Email Contact.

EDA News Highlights

On November 16, 2005 the Semiconductor Industry Association (SIA) released its annual forecast of global semiconductor sales, projecting a compound annual growth rate (CAGR) of nearly 10% for the forecast period, 2005 through 2008. The new forecast projects that worldwide sales of microchips will reach $309 billion in 2008, an increase of 45% from the $213 billion record level of 2004.

On a segment basis, the forecast has Optoelectronics, Analog, MOS Logic, Microprocessors, DSP and Flash with CAGR's in the low double digit range and Discrete, Microcontrollers, DRAM and Other under 6% CAGR's.

On a geographic basis, all regions show growth, but only Asia (outside of Japan) shows double digit CAGR.

How did the EDA Vendors fair during the Third Quarter of 2005?

As shown in Table 2, the combined Q3 2005 revenue performance of seven EDA vendors was $836.5 million, a 9% increase relative to the $767 million a year earlier and a 4% increase sequentially. Ansoft, Cadence, Synopsys and Synplicity managed small double digit percentage growth year-over-year. Altium was the only firm with a year-over-year drop. Mentor Graphics at 1.8% trailed the other two major players. On a sequential basis, Ansoft was the clear leader with 22% growth. Altium had significant decline (40%) sequentially while all other firms registered modest growth.

Figures 1 and 2 above provide additional revenue comparisons among vendors. Cadence has the largest market share at 40.3% followed by Synopsys at 30.5% and Mentor at 19.7%. The big three combine for 90.5% market share among the players listed. Magma is a distant fourth with 4.8%.

Turning to earnings performances in Q3 2005, Table 3 shows that the EDA group of six (Altium did not report earnings) reported a combined net income of $10.3 million. This is a considerable improvement over the combined net loss of $11.7 million in the third quarter a year ago but down from combined net income of $13 million in the just prior quarter. Cadence had strong third quarters in both years, while Synopsys had large Q3 losses in both years. The second quarter was off for Cadence due to restructuring charges, but the reverse was true for Synopsys as the third quarter included a $33 million litigation settlement received in connection with the acquisition of Nassda Corporation.

Company by Company Q3 2005 details:

On October 21, 2005 Altium Limited reported the results of its first quarter of 2005/2006, the period ending September 30, 2005.

Table 4 below shows the regional results in terms of local currencies. The US is the only region with growth (9.3%) year-over-year.

At the same time, Altium announced the restructuring of its global sales teams. The firm appointed Mike Stipe as Vice President, Sales Americas and Frank Hoschar as Managing Director, Sales Europe. Altium also created a greater Asia Pacific Sales Region which now incorporates Japan, China, Asia Pacific VARs and Australian Sales.

Dick Martin, founder and CEO, said, "As we continue to develop and build our global sales team in all regions we expect the stronger sales performance, as seen in the September results, will continue to grow positively in all regions."

On November 16, 2005 Ansoft Corporation reported the results for its second quarter of fiscal 2006, the period ending October 31, 2005. Total revenue for the quarter was $18 million, an increase of 13% from the $16 million in the same quarter a year earlier and a 22% increase from the $15 million in the prior quarter. This $18 million was at the high end of the guidance given a quarter earlier. License revenue at $9.1 million, accounting for 51% of total revenue, was up 5% year-over-year and 34% sequentially. Service and other revenue at $8.9 million was up 22% year-over-year and up 12% sequentially.

North America accounted for 44% of total revenue, Asia 41% and Europe 15%. North American revenue was up 24%, European revenue up 5.3% and Asian revenue 6%. The high performance product segment accounted for 81% of total revenue, while the electromechanical product segment accounted for 19% of total revenue. The three largest customers in the quarter were Raytheon, Intel and Siemens.

Net income for the quarter was $4.1 million, a 117% increase compared to net income of $1.9 million a year earlier and a 250% increase sequentially. Net income for the quarter included a tax benefit of $0.5 million for an expected refund of prior years' federal tax payments. The firm expects an additional $1 million in tax benefits in the remainder of the fiscal year.

Nicholas Csendes, Ansoft's President and CEO, said, "We are pleased to report that our earnings for the second quarter have more than doubled on continued strong revenue growth."

On October 27, 2005 Cadence Design Systems, Inc. reported its results for the third quarter, the period ending September 30, 2005. Total revenue for the quarter was $337 million, a 12% rise from the $301 million a year earlier and a 5% rise from the $320 million in the prior quarter. This $337 million easily exceeded the guidance of $320 million to $330 million given last quarter. Product revenue of $218 million, accounting for 65% of total revenue, grew 19% year-over-year and 8% sequentially. Services revenue of $32 million declined 8% year-over-year but rose 8% sequentially. Maintenance revenue of $87 million increased 3.6% year-over-year but dropped nearly 3% sequentially.

North America accounted for 53% of total revenue, Europe 21%, Japan 20% and Asia 6%. North America was up 6% year-over-year and 14% sequentially. Europe was up 18% year-over-year and 30% sequentially. Japan was up 49% year-over-year but down 16% sequentially. Asia was down 25% year-over-year and down 30% sequentially.

The table below presents the breakdown by product segment. The original data provided by Cadence was in terms of percentages of total revenue. Functional Verification and Digital IC Design had solid growth both year-over-year and sequentially.

Net income for the quarter was $21 million, an 8% increase over the $19.6 million in the same quarter a year ago and a major step up from the $483K in the prior quarter (which included $13 million in restructuring and a $9 million write-off of in-process R&D).

Mike Fister, president and CEO of Cadence Design Systems, Inc. said, "We had great response across the board in the third quarter, including a number of significant competitive wins. Customers are buying from Cadence both for the depth and breadth of our technology, and our ability to deliver at an enterprise level."

Bill Porter, senior vice president and chief financial officer added "Once again, we had solid results in the third quarter across product lines and geographies. Both our verification and digital solutions continue to build momentum."

On October 27, 2005  Magma Design Automation Inc. announced the results for its second quarter of fiscal 2006, the period ending October 2, 2005. Total revenue for the quarter was $39.9 million, an 8% increase over the same quarter a year earlier and a nearly 3% increase over the $38.8 million in the previous quarter. This $39.9 million was near the midrange of the guidance given a quarter earlier. License revenue at $32.7 million, accounting for 82% of total revenue, was up nearly 5% year-over-year but down nearly 4% from the prior quarter. Services revenue at $7.2 million, accounting for 18% of total revenue, was up 27% year-over-year and 46% from the prior quarter.

North America accounted fro 74% of total revenue, Europe 11%, Japan 9% and Asia Pacific 6%. On a year-over-year basis North America was up 46%, Europe down 17%, Japan down 62% and Asia Pacific up 38%. On a sequential basis all geographies except Japan (-12%) were up single digit percentage points.

Net loss for the quarter was $6.6 million, a slight improvement form a net loss of $6.9 million a year ago, but down considerably from the net loss of $23K a quarter ago.

Rajeev Madhavan, chairman and CEO of Magma, said, "It was another good quarter for Magma - we again achieved record revenue and all key financial metrics finished within our target ranges. Our most recently announced products continue to be well received, and customers who presented at our MUSIC users conference in Silicon Valley last month described their use of Magma on very impressive designs - complex, 65-nanometer chips with high gate counts. These are precisely the kind of designs our products are best suited for."

On October 25, 2005 Magma sued Synopsys, claiming that Synopsys' Astro and IC Compiler products infringe a Magma patent. Magma seeks relief that includes preliminary and permanent injunctions to prevent Synopsys from selling any products - including IC Compiler and Astro - that infringe Magma's patent and also seeks an award of treble damages based on Synopsys' willful and deliberate infringement of the patent.

On October 20, 2005 Mentor Graphics Corporation announced the results for the third quarter, the period ending September 30, 2005. Total revenue was a record $164.8 million. This was a 1.8% increase over the $162 million in the third quarter of 2004 and a 6.4% increase over the $155 million in the second quarter this year. The $164.8 million was at the high end of the guidance given a quarter earlier. System and software revenue of $91.5 million, accounting for 55% of total revenue, was up 1.7% year-over-year and 12.4% sequentially. Service and support revenue of $73 million, accounting for 45% of total revenue, was up 1.8% year-over-year but essentially flat sequentially.

Revenue by region was 35% Americas, 35% Europe, 15% Japan and 15% Pacific Rim. Year-over-year revenue from Americas was down 19%, Europe up 15%, Japan down 27% and Pac Rim up 78%. By product line, revenue was 30% Design-to-Silicon, 30% scalable verification, 25% integrated system design and 15% new and emerging products.

Term bookings were 55% of total, perpetual was 35%, and subscription was 10%. Top ten accounts were 45% of total bookings, unchanged from the third quarter of 2004.

Net income for the quarter was $0.2 million compared with a net loss of $5.7 million a year earlier, a quarter that contained $14.7 million in merger-related costs, and compared with a net loss of $6.8 million in the prior quarter.

Walden C. Rhines, CEO and chairman of Mentor Graphics, said, "The expected Calibre rebound resulted in a strong booking quarter for Mentor. Bookings for our Design-to-Silicon family of tools were up about 50% sequentially and nearly double the third quarter of 2004. Calibre usage continues to expand. For the third quarter, average dollar value of Calibre family bookings was up 60% versus the third quarter of 2004."

Gregory K. Hinckley, president of Mentor Graphics, added, "We saw positive signs of growth in demand from customers in the quarter. Four of our top ten transactions were renewals, and these deals grew in both absolute dollars and units. Three years ago when these deals were signed, the market looked bleak and customer demand was down. As these deals are coming up for renewal, we believe our customers' businesses are in much better shape and demand is up. However, while the third quarter booking trend is positive compared to the prior year, total year-to-date bookings still lag the first nine months of 2004 due to first half weakness."

As the last of the selected vendors to report, on November 30, 2005 Synopsys, Inc. announced results for its fourth quarter and the fiscal year 2005. Revenue for the quarter was $255 million, an increase of 10.5% over the $230 million in the same quarter a year earlier and a 1.3% increase over the $251 million in the prior quarter. This $225 million was above the midpoint of the guidance given a quarter ago. Time based licensing (TBL) at $193 million, accounting for 75% of revenue, was up 17% year-over-year and 2.2% sequentially. Upfront licensing at $16 million, now accounting for only 6.4% of total revenue, was down 11% year-over-year but up almost 1% sequentially. Service revenue at $45.6 million, accounting for 19% of total revenue, was down nearly 3% year-over-year and down 2% sequentially. Backlog accounted for 92% of revenue in the quarter. Backlog at the end of fiscal 2005 was $1.9 billion, an increase of 25%.

On a geographic basis North American revenue at $136 million accounted for 54% of total revenue, a 6% increase year-over-year and a 1.3% rise sequentially. European revenue at $41 million accounted for 16% of total revenue, a 10.5% increase year-over-year and a 3% rise sequentially. Japanese revenue at $40 million accounted for 16% of total revenue, a 13.6% increase year-over-year and 0.5% increase sequentially. Revenue from the rest of AP at $37 million accounted for 15% of total revenue, a 26% increase year-over-year but flat compared to the prior quarter.

In the quarter Galaxy Design accounted for 54% of total revenue, Discovery Verification for 23%, IP for 8%, DFM for 10% and Services & Other for 5%.

Net loss for the quarter was $13.1 million, compared to a net gain of $74.3 million in the year ago quarter and compared to a net income of $8.5 million in the prior quarter. The Company's fourth quarter and fiscal year 2005 GAAP results include $11 million in incremental tax expense related to the repatriation of $360 million in cash from its international subsidiaries.

For fiscal year 2005 total revenue was $992 million, a 9.4% decline from the $1,095 million in fiscal 2004. TBL revenue at $744 million, accounting for 75% of total revenue, was up nearly 12% from the $666 million in the prior year. Upfront revenue at $60.5 million, accounting for 6% of total revenue, was down 72%. Service revenue for the year was $188 million, accounting for 19% of total revenue, a decrease of 12% from $213 million in fiscal 2004. Net loss for fiscal 2005 was $13 million compared with a net gain of $74 million in fiscal 2004.

On a product segment basis, Galaxy Design revenue at $553 million was down 18%, Discovery Verification revenue, at $216 million, was down 4.3%, IP revenue at $72 million was up 2%, DFM revenue at $102 million was up 25% and Service & Other revenue at $49 million was up 26%.

The geographic breakdown by percent of total revenue was fairly constant between the two fiscal years. North American revenue was $532 million, a decrease of 12%, European revenue was $158 million, a 7.5% decrease, Japanese revenue was $167 million, a decrease of 6.5% and revenue from the rest of AP was $136 million, a decrease of nearly 3%.

Aart de Geus, chairman and chief executive officer of Synopsys, said, "We had an excellent quarter to complete our fiscal year, with business above target in all product areas, technology indicators consistently strong and sound financial execution. We have a solid foundation for continued growth in fiscal 2006."

On October 20, 2005 Synplicity, Inc reported results for the third quarter, the period ending September 30, 2005. Total revenue for the quarter was a record $15.9 million, a 13% increase from revenue of $14.1 million for the same quarter in 2004 and a 5% sequential increase from revenue of $15.2 million. The $15.9 million exceeded prior revenue guidance. License revenue at $8.8 million, accounting for 56% of total revenue, was up 14% year-over-year from $7.7 million and up 5.6% sequentially from $8.4 million. Maintenance revenue at $7 million, accounting for 44% of total revenue, was up 10.3% year-over-year from $6.4 million and up 3.5% sequentially from $6.8 million. Synplicity added 50 new customers in the quarter. Recurring revenue was 64% of total revenue. Revenue from Asia was up 65% on a year-over-year basis.

During the conference call repeated references were made to a large TBL contract that was signed in Q3 but had been anticipated to close until Q4.

FPGA bookings (Synplify PRO) comprised 76% of total product bookings. ASIC (Certify) and Structured ASIC (Synplify ASIC) bookings made up remainder. ASIC bookings were up 30%. Structured ASIC bookings were up 150% year-over-year. Time Based Licenses were 23% of bookings in the quarter. Bookings on a geographic basis were 47% NA, 21% Europe 16% Japan and 16% AP.

Net income for the quarter was $2.5 million, or nearly 16% of revenue. This approaches a 300% increase compared to $646K in the third quarter of 2004 and a 170% increase sequentially compared to $921K.

Gary Meyers, President and CEO, said, "In the third quarter, we continued to provide leading FPGA, structured/platform ASIC, and cell-based ASIC solutions while maintaining our excellent standard of support, resulting in revenue growth in excess of the industry, a significant increase in our operating margin and a year over year double digit increase in total product bookings. As we look to the fourth quarter of 2005, we are focused on continuing the momentum of revenue and profitability growth.

EDA versus MCAD

The detailed quarterly performances of a selected group of public MCAD Vendors has been provided in the authors' November 2005 MCAD Commentary recently published on MCADCafe.

The three top mechanical CAD companies (Autodesk, Dassault Systemes and UGS) sported revenues of $929 million in Q3 2005, 23% more than the $757 million in revenue for the top three EDA companies (Cadence, Synopsys and Mentor Graphics). The MCAD vendors also generated 13 times the amount of earnings. MCAD earnings were 14.7% of revenues compared to 1.4% for the EDA vendors. See Table 7 below.

Keep in mind that Autodesk sells its products predominantly through valued added resellers and distributors. Dassault Systemes sells predominantly through IBM and its Business Partners and in some instances, notably SolidWorks, through VARs. Thus, if one were to count actual end-user purchases of the latter MCAD products, the combined MCAD revenue total would raise the Big 3 MCAD dollar total substantially. On the other hand, Autodesk has not-insignificant revenue outside MCAD in AEC, GIS and Media/Entertainment.

The comparison of earnings across the two industries is also difficult general due to a plethora of one-time charges associated with acquisitions. The earnings comparison for UGS is further complicated by purchase accounting adjustments related to its Venture Capital buyout from EDS.

EDA Vendor Stock Performances in Q3 2005

As shown in Tables 8 and 9 and Figure 3 below, the combined Q3 stock prices for the EDA vendors were up 15% in absolute dollars and nearly 9% in average percentage change. This compared to just under a 10% rise in the average price of the three major stock indexes. Ansoft was the leader in terms of year-over-year stock price growth with 83%. Cadence, Synopsys and Synplicity had increases of 20% or more, while Magma, Mentor and Altium had significant double digit stock price declines. On a sequential basis the combined stock prices rose over 11% in absolute dollars and 5.4% in terms of average percentage change while the major stock indexes rose a modest 3.6%. Ansoft, Cadence and Synopsys each rose about 20% from the prior quarter. Altium and Mentor stock prices decline 18% and 16% respectively and Magma stock declined 3%.

EDA Vendor Forecasts for the nominal Q4 2005

Altium provided no forecast guidance.

As guidance Ansoft expects continued revenue growth for the remainder of its fiscal year of around 10% to 15% with earnings increasing around 25% over the last fiscal year. This translates into expected revenue of $19 to $20 million in the next quarter and $25 to $25 million in the following quarter.

As guidance Cadence expects revenues in the fourth quarter to be in the range of $360 million to $370 million compared to $337 million in the quarter just completed. For the full year 2005 the company expects total revenue in the range of $1.31 billion to $1.32 billion.

For guidance Magma expects revenue in the next quarter to be in the range of $38 to $42 million.

For guidance Synopsys expects revenue in the next quarter to be in the range $254 million to $262 million, with 95% to come from backlog. For fiscal 2006 Synopsys expects revenue in the range $1,055 million to $1,085 million.

Synplicity expects revenue for the fourth quarter of 2005 to be approximately $16.8 million compared to $15.9 million in the quarter just completed. Revenue for 2005 is expected to be approximately $62.4 million, within the range of previous guidance. tracks the financial performance of some seventeen (17) public companies across the broader electronics tools market, from which we had arbitrarily selected nine (9) to represent EDA vendors in the software & programming industry.

Taken together, three of these EDA companies (Cadence, Mentor Graphics, and Synopsys) represent a dominant 85 to 90 percent of the total revenue in this grouping, and each of these three companies offers a wide array of software products and services.

The remaining six (6) EDA public companies selected - Altium, Ansoft, Magma, Nassda, Synplicity, and Verisity - offered specialized software/services products in specific EDA niches. Combined, they generated the remaining 10 to 15 percent of the revenue of the nine companies originally considered here. Not infrequently, some of these six smaller companies partnered with one or more of the Big Three (Cadence, Mentor, Synopsys) to provide end-customers with broader solution suites. (Of course, the possibility always remained (and remains) that one or more of the smaller companies could become acquisition candidates for the Big Three as well - see reference to Nassda and Verisity above).

The collective annual revenue of the originally-selected nine EDA companies worldwide was just north of $3 billion, a total which compares favorably to the combined ~$4 billion in annual revenue created by the eight MCAD companies covered in May 2003 and the nine MCAD companies covered quarterly since August 2003. However, even the pooled ~$7 billion in revenues of both of the selected MCAD and EDA company groupings pales in comparison to the $190 billion or so spent globally on an annual basis across all categories of software.

As with MCAD software, however, the importance of the EDA software niche lies in the leverage it provides to users applying the tools. EDA helps to create the electronic integrated circuits, microprocessors, memories, boards, MCMs, computers, PDAs, cell phones, automotive electronics and avionics, smart appliances, and other such electronic systems now clearly omnipresent in our everyday lives. Indeed, most of products mentioned above are electromechanical - demanding a smooth merger of EDA and MCAD software tools (still an objective yet to be fully realized).

Both MCAD and its slightly more youthful companion industry of EDA are arguably responsible for enabling virtually all contemporary design - analysis - manufacturing industries - industries which are key to creating real productivity and national wealth in every modern economy.

Note: Lawsuits; acquisitions of outside public & private companies; acquisitions of intellectual property; purchases of other assets; strategic changes in pricing and software license/lease practices; and/or other similar events frequently affect both the reported revenues and GAAP net income of all companies. Both EDA and MCAD companies are no strangers to these many and varied actions. Many of these "non-operating" company activities lead to entries "below the Operating Income line". Often these entries -- such as "integration costs, in-process R&D, amortization of intangible assets & deferred comp, interest income, pro or con income tax effects, etc" - can make large differences between pro-forma net income and GAAP net income.

Nevertheless, these impacts, positive or negative, are almost always the results of explicit employee actions and/or management decisions designed to supplement organic revenue growth in revenues, in earnings, or both. Accordingly, both the gain and the pain must be borne, in one accounting period or another. Accordingly, total revenues, GAAP net income and GAAP Earnings Per Share (EPS) are universally accepted measures to analyze fairly the relative and absolute performances of most private and public companies.

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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About the Authors:

Since 1996, Dr. Russ Henke has been president of HENKE ASSOCIATES, a San Francisco Bay Area high-tech business & management consulting firm. The number of client companies for Henke Associates now numbers more than three dozen. During his corporate career, Henke operated sequentially on "both sides" of MCAD and EDA, as a user and as a vendor. He's a veteran corporate executive from Cincinnati Milacron, SDRC, Schlumberger Applicon, Gould Electronics, ATP, and Mentor Graphics. Henke is a Fellow of the Society of Manufacturing Engineers (SME) and served on the SME International Board of Directors. He is also a member of the IEEE and a Fellow of ASME International. An affiliate of the HENKE ASSOCIATES team since 2001, LA-based Dr. John R. (Jack) Horgan co-authored this article. Jack's career has included executive positions at Applicon, Aries Technology, CADAM and MICROCADAM, as well as a stint at IBM. Since May 2003 the authors have now published a total of thirty-six (36) independent articles on MCAD, PLM, EDA and Electronics IP on IBSystems' MCADcafe and EDAcafe. Further information on HENKE ASSOCIATES, and URL's for past Commentaries, are available at