|"Only dull people are brilliant at breakfast"
|"The liberal soul shall be made fat, and he that watereth, shall be watered also himself."
-- Proverbs 11:25
ere's a sobering sign that firms are robbing the future to pay for short-term profits: Over the past year, US employment of scientists and engineers – the people who create the next generation of products and make the US more competitive in the long term – has fallen by 6.3 per cent. Yet overall employment has fallen just 4.1 per cent.
That's a big problem, because the output of such well-educated workers has become a more important part of the American economy in recent years. New research by the University of Maryland suggests intangible business investment came to roughly $1.6trn in 2007, compared with about $1.2trn spent on tangible assets such as machinery and buildings. In 1995, the two were roughly equal. Going back further, tangible investments in 1985 were about 40 per cent larger than intangibles.
America's Bureau of Economic Analysis is taking steps to deal with the new realities. Software has been treated as investment since 1999, and the BEA plans to include R&D in the official GDP statistics in 2013. But the agency acknowledges that other areas of intangible investment still need to be worked into the numbers. "We think it's important not to ignore the fact that R&D is only part of broader innovative activity," says BEA director Steven Landefeld. For now, though, the US is navigating through the downturn with fragmentary information.
While the statistics don't account for it, there's good reason to suspect intangible investments are falling. Companies are under pressure to cut costs by reducing R&D expenditures and deferring other crucial intangibles.
At the same time, companies, especially those in the pharmaceutical industry, are moving more research to China, India, and elsewhere. They don't want to commit to costly investments if the economy remains weak.
One clear sign that GDP growth is being over-estimated is the sharp drop in venture-capital investment, which goes directly to new businesses. VCs invested about $12bn in the first three quarters of 2009, barely half the $22bn invested during the first three quarters of 2008. Some of this shortfall would have been spent on computers and other physical equipment, which would have been picked up in GDP. But most of the drop in VC money would have gone to pay for scientists, engineers, and new product development.
Similarly, many companies have taken a deep axe to reported R&D spending, which doesn't show up in GDP. Adding to the uncertainty, firms report their R&D only on a global basis. So, even though some are adding to such spending, there's no way to know how much of the increases take place in the US.
The stimulus package passed in February did include extra government funds for R&D. But even with this bump, a just-released analysis by the Democratic Leadership Council suggests total real spending on US R&D is falling for the second straight year. The labour market in particular shows the effects the fall in intangible investment is having, and it's not a pretty sight. In the manufacturing sector, non-production jobs – which include engineers, scientists, and other knowledge workers – declined at a 7.6 per cent annual rate in the third quarter, almost twice as fast as the loss of production workers.
Another big problem not reflected in the GDP statistics is that firms are retreating from development of new products, especially in stressed industries. Richard Shellabarger, 59, was a product development engineer. Before being let go in February he was working on the "next-generation air bag". He says: "I was trying to anticipate what the customer needed." In retrospect, Shellabarger worries that product development wasn't a good place to be in a downturn. "I suppose if you are looking to cut personnel, you don't want to short an area where you are delivering to customers right now."
Labels: economic death watch