IT Employment May Start Growing Again

Here is a summary of a recent analysis of the IT industry by Economy.com.

U.S. information technology employment continues to fall, despite steadily improving demand for IT equipment, software and services. IT job growth is lagging sales because of robust productivity gains, a pronounced shift in IT manufacturing to lower-cost countries, off-shore outsourcing of IT service workers, and an ongoing focus on cost-cutting. Nevertheless, IT production is reaching the point where producers will have to stop cutting jobs, and some industry segments will likely see moderate job growth soon.

After a collapse in 2001, IT spending has staged a moderate and steady rebound (see chart). Businesses have started replacing antiquated computer hardware and updating software as profits have risen and confidence has improved. Consumer electronics spending has also staged a rebound following a decline in 2001. However, mounting IT job losses remain a massive impediment to the labor market and broader economy.

The U.S. has lost roughly one million jobs in IT industries since early 2001, accounting for roughly one-third of total job losses over the period. IT manufacturing jobs represent about half of the lost IT jobs. U.S. IT manufacturing jobs continue to fall for several reasons. First, since the late 1990s, there has been a structural shift in the production of IT hardware to lower-cost countries overseas. The U.S. trade balance in computer equipment has swung from a monthly surplus near $500 million in the mid-1990s to a deficit of almost $1 billion currently.

IT hardware manufacturers have found great cost savings by moving production to Asian countries, primarily China. This trend is also evident in global semiconductor sales data, which are broken out by purchasing region. The share of global chip sales going to the Asia Pacific region has doubled since the mid-1990s, to almost 40%. Alternatively, the share of chip sales going to North and South America has fallen sharply from one-third in 1999 to less than 20%. Chips are inputs into a multitude of electronics products.

Second, the very strong U.S. dollar last year also favored imported IT goods. As such, imports have satisfied a substantial portion of the recent rise in demand for IT hardware. While U.S. demand for IT hardware has climbed since the start of last year, U.S. computer and electronics equipment shipments have only recently been on the rise.

U.S. factories are now clearly benefiting from rising IT demand. Shipments at U.S. computer and electronics manufacturers have climbed for two consecutive quarters on a year-ago basis, after falling for eight consecutive quarters. Gains are stemming primarily from computer equipment and semiconductors. Nevertheless, neither of these industries has started to hire on net since they are managing to increase productivity enormously with their reduced workforces. Economy.com estimates that revenue per production worker hour is increasing at over 30% year over year for computer equipment and semiconductor producers

In conclusion, IT demand is accelerating thanks to strong consumer spending and budding business demand. U.S. IT producers are starting to benefit in the form of higher sales and profits. The factors currently driving business IT spending, namely improving cash flow, replacement demand and tax incentives, will persist in the near term, and expansionary IT spending will soon pick up with economic growth. In aggregate, IT producers will soon have to stop cutting workers to respond to higher demand. Productivity gains and off-shoring will continue to restrict employment growth, but declines in labor should soon subside.

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