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5 Reasons a Recession will be Good for American Programmers

Posted by Andy Singleton on Tue, Nov 20, 2007
  
  
In the recession of 2001-2002, American programmers were being hammered by hundreds of thousands of job losses, with companies disintegrating, shares worthless, and jobs eliminated or headed offshore.  But that recession, the worst in the history of the software business, wasn't bad for everyone.  Money flowed freely into real estate, and homebuilders and other real-estate professionals were looking forward to the best years of their careers.  The coming US recession will have the reverse effect, with money flowing out of real estate and sloshing back into techie pockets.

After 2001, a year in which nobody bought enterprise software, venture investors fired me from the enterprise software company that I had founded, and implemented a calculated plan to strip me of my financial assets.  At the same time, my family assets were expanding nicely.  I got married and acquired three stepchildren and a new baby.  I needed a house.  I was surprised to discover how expensive it would be, and how rapidly the prices were increasing.  As a career entrepreneur I was unemployable in the stable lines of work normally appreciated by mortgage lenders.  That was a tough squeeze for us tech workers, not shared by our neighbors who were lawyers and bankers.  Let's look at 5 reasons the tables have finally turned.

1) More capital
When there is a recession, the Federal Reserve makes extra money available to boost demand.  It is currently flooding the market with money in response to the mortgage credit crisis.  That money goes to someone.  But whom?  If you are like me, you are thinking "Send it over to me.  I'll look after it."  It didn't work that way last time.  In 2001, the technology investment bubble collapsed, and investors pulled their money out of tech-related businesses.  At the same time, the Federal Reserve pushed a lot of money into the system to fight recession.  That money went to real estate and created a price bubble there.  Now the opposite is happening.  Money is coming out of real estate, and the new money is going into technology.

Real estate assets are much bigger than software assets.  The good news about this disparity is that even a small allocation away from real estate looks like a vast flood of money from the technology side.  And, it represents a wise move by investors, because technology is a good business.

2) Global demand
While the US economy struggles, developing economies are booming.  This is generating strong demand for software talent in every corner of the globe, and rising prices.  The software business has evolved to use one worldwide talent pool - more so than other industries that employ Americans.  This was terrible for American programmers in 2002.  Collapsing demand, expanding supply, and the high dollar meant that prices for talent were low, and prices for American talent were plummeting.  The same talent is now benefiting from globalization, and feeling the increased demand and pricing, independent of what happens in the US economy.

3) Cheaper dollar
The dollar is down sharply since 2002, and down 50% against the Euro.  That's tough for me, since a majority of my employees work outside the US, and I have to give them dollar raises.  But, this increases pricing and competitiveness for American talent.  A recession will lower interest rates and depress the dollar even more.

4) Energy efficiency
High oil prices are hurting the American economy, but the pain is not equally shared.  If you work in an energy-intensive business like construction or transportation, you get hurt a lot more than someone who uses less energy - such as a programmer working at home.  Software businesses use electricity, but it amounts to a small amount of energy per dollar of revenue, and it includes very little oil.  Profits, and stock market money, are shifting to oil producers and technology.

5) Lower costs
House prices are finally declining.  If there is a serious recession, other prices will also decline.  That lowers costs for an American worker, and if they work in a globalized business, increases their standard of living.

All of the trends described here are already happening..

Is there a recession?
The official numbers show the US with 3.9% annualized growth last quarter.  However, this rate is based on an inflation calculation that is clearly wrong.  The amount of goods and services (nominal GDP) went up by 4.7% annualized, and was adjusted for inflation at the amazingly low rate of 0.8%.  3.9% GDP growth after inflation = 4.7% nominal growth - 0.8% inflation.  However, in that same period, prices for the things that Americans spend most of their money on, such as food, gas, health care, education, and anything imported, rose at rates that are closer to 10% annually.  The inflation number is just wrong.  I can't say if it's wrong because of a conspiracy by government economists to push down the number they get measured on (and the number that increases their social security bill), or if it's an honest statistical mistake to be made up by a later "adjustment", but it's wrong.  If we assume that inflation is closer to 5%, then growth is near zero already.  Enjoy it, techies.

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COMMENTS

So what's the best investment that can be made now that will profit you when the recession stops? Or will it, or will it stop at all? With rising oil prices, the decline real estate,the decline of the dollar, the war, the loss of jobs due to outsourcing to other countries and foreign trade how can the United States recover? The way I see it, large financial corporations will only invest but so much to help their customers but after a certain point they will cut thier losses, downsize and take what they can get without going bankrupt which is good for the owners but bad for all the workers and customers. More jobs will be lost, and people wont have anywhere to turn for help because there wont be any help available. The government had money but they don't have enough to help everyone.

posted @ Saturday, November 24, 2007 8:58 AM by Kwame Manu-Anno


I'm not attempting to provide investment advice, but I am observing that economic flows are cyclical. The last money flow was out of tech and into real estate. Now, the money flow is back to tech. It seems likely that other problems afflicting the US economy will change direction at some point. The decline of the dollar will reverse the net job loss (if there is one) due to outsourcing, the rising oil price will eventually lead to conservation and substitution, and the incompetent government administration will be replaced.

posted @ Saturday, November 24, 2007 4:17 PM by


And what about offshore development? How do you feel recession will affect them?

posted @ Monday, November 26, 2007 11:41 AM by Michael Dubakov


I don't think an American recession will have very much impact on offshore (non-US) software developers. They will continue to do well. By my calculation, they have on average doubled their income in the past 4 years. Much of this increase was driven by growth in demand from "offshore" economies, which should continue.

posted @ Monday, November 26, 2007 11:57 AM by


I just left a job working with one of the largest India offshoring companies (Infosys); basically, the rise of the Indian Rupee vs. the US dollar is helping American tech workers as there are less cost advantages in offshoring. Infosys is more heavily dependent on US companies (versus European) than are many of the other big Indian firms (Wipro, Tata, etc), and is now desperately trying to limit its dependencies on the US. See the following on article for a bit of info (http://www.forbes.com/markets/feeds/afx/2007/10/11/afx4210157.html). OTOH, I've heard reports that other US companies will begin (or increase) offshoring to save money in the event of recession, so it works both ways. Nonetheless, after spending six months in India, I know that wages are rising quickly, and the high-talent was limited, while there is a huge glut of mediocre workers joining the IT boom. Lastly, it is less likely that Congress will increase the H1-B quota during a recession, though one should never underestimate Congress's ability to pander to corporate America even when job growth is negative and wages are already declining... Should be interesting.

posted @ Monday, November 26, 2007 11:59 AM by bill


Serious IT work went out of the window when the dot com nonsense started. Suddenly everyone was a "genius", all problems were "trivial", and all that mattered was a willingness to go along with three step business plans. In the last ten years the delusional credit bubble has removed the need for anyone to produce value. The best effect of the recession for *real* IT workers that have... like... read some books, will be a wonderful regrounding in reality. I wonder if there are enough people left to now recreate the IT industry. I'm 47 now, and I'm amongst the youngest people to remember experience gained before ISO9001 helped replace results with excuses in the early 1990s.

posted @ Monday, November 26, 2007 12:55 PM by Alan Carter


This also forces people coming to US on H1b visa. I am from india and i came in 2005 ,every $ converted to 48 RS .Now since $ weekend it went down to 38 Rs for every $$ . a 15% decrease !! . At the same time salaries in india skyrocketed to 30-50% more over the last couple of years!!!.Many of my ex-collegues/friends do not want to come to US because it makes no sense to come to US now

posted @ Monday, November 26, 2007 1:39 PM by Ajith


nice article.

posted @ Tuesday, November 27, 2007 10:03 AM by Norlan Mumar


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