Monday, May 25, 2009

The Coming IT Jobs Recovery: Who, When,Why?

The current state of the IT job market is, by historical standards, very weak. However, recently there have been a few signs that the situation is improving, with a few healthy companies upgrading the quality of their staffs because of the high quality skills possessed by some of the unemployed. But as is the case in the rest of the economy, the enthusiasm is based mostly on the fact that we went through an almost unprecedented panic phase from October 2008 until March 2009, which appears to have somewhat abated. However,the general unemployment rate has not yet hit bottom, and the estimates of cyclical low point are from 9.5 to 12%. This is well above the current 8.9% with the highest point of unemployment not expected till,at least, the fourth quarter of this year. Our concern here is to further analyze the current employment situation, focusing primarily on the IT related jobs, making some predictions regarding the return of a healthy job market.

Another significant government statistic is the rate of unemployment for college graduates that are currently between 4 to 5%, while high school graduates, or drop- outs, are experiencing rates north of 12%. Of course, these statistics do not reflect the quiet desperation of chronic underemployment, significantly overworked employees, or those individuals who have given up looking for work altogether. Add all these factors together and we can bring the employment misery index to over 20%, which is approaching the 25 to 30% unemployment rate of the great depression. Moreover, this doesn’t even include the majority of the population anxious about their job stability. The panic in the job market is by no means over yet.

IT and related technology sectors, things may not be quite as bad. However, older employees and individuals without degrees are getting decimated by both layoffs and by future prospects. The layoff trend among non degreed IT workers is mirroring the national trend mentioned above, and the situation of older IT employees is being exacerbated by cost cutting and productivity concerns. Underlying this is the continued trend, and possible escalation, of the outsourcing of jobs. However, a mildly positive contrarian indicator, which is at least better than a panic phase, involves the insourcing segment of the job market that is starting to show an initial return to hiring health.

Nevertheless, the technology, and particularly the software/IT related, sector is expected to show a quicker rebound. The arguments here consist of the following: (1), staffing levels in the IT and computer related fields were so reduced during the post “ bomb” period from 2001 to 2005 that they never fully recovered; (2), during this period there was a consolidation of previous products and installations, which only recently led to the potential adoption of new, or at least replacement, IT related products and services, and (3), in a deep recession individual and company productivity improvement is critical, and that IT solutions can accelerate productivity.

So when will the jobs start coming back? Actually in a few areas we are seeing a small pickup in hiring. For example, the Boston and New York financial services sector are seeing some rehiring because of a small increase in their trading and mergers and acquisition business. Also defense IT, which never stopped growing, has seen a mild pick up due to the huge defense budget. However, most companies still have hiring freezes, and there will be more lay-offs, particularly in mid to large sized companies that view “cost cutting,” (a code word often meaning significant lay-offs) as a way to return to profitability. Perhaps the most troubling continued trend influencing the IT, and other, labor markets is the lack of new business formation, which is seen as the “engine” of new job creation. Nevertheless, many companies remain open to hiring what they perceive to be as the ideal job candidate, which for most companies rarely, if ever, occurs.

To speculate on the timing of a broad based pick up in hiring activities, we must consider some employment forecasting indicators. The first is the stock market. Generally, a sustained upturn in the equities market foreshadows an economic pickup by 6 to 9 months. Although it appears this upturn may have begun in April 09, it is not certain that it is sustainable. But given this indicator, it means that the economy may start to experience a small to medium pick-up in the October to January time span. However, based on the severe, systemic, and global nature of this downturn I don’t see a pickup of the US economy till the first quarter of 2010.

If one accepts the hypothesis that a broad based economic pickup will ensue roughly sometime between January to April 2010, then it is typically thought that any meaningful hiring will occur at least six months later. This is due to the company’s general reluctance to begin volume hiring until an economic recovery is firmly in place. This is due primarily to fiscal concerns (e.g., how a new hire impacts the bottom line, the cost of hiring and potentially laying off a new hire…). Prior to this the only serious full time hiring initiatives will generally only involve replacement hiring of key employees due to attrition.

This brings us to the time period encompassing the fourth quarter of 2010 till the first quarter of 2011 for the potential for any significant hiring of full time employees. In my experience as an IT recruiter through five previous recessions (i. e.; 1979-1980, 1982-1983, 1986, 1989-1991, and 2001-2003) the hiring of full time employees has always returned in the September-October time frame or the January to March time frame. This usually is similar to peak hiring periods in a good economy, and involves concerns related to staff planning, budgeting, and periods following end of the year holiday’s and summer vacations. The latter are periods when workers, and people in general, are more likely to consider life a change, including starting a new job, after a period of personal reflection and reassessment that time off allows. Of course for the unemployed, there is no calendar related to starting another job accept as soon as possible

In conclusion, I don’t see a meaningful increase in full time IT hiring until September 2010 at the earliest, and this hiring turnaround may not occur till early 2011 or later. Significant hiring of lower cost, insourced contract employees may commence as early as the beginning of 2010. Next companies that don’t want to increase their payrolls directly will, based on previous recoveries, hire domestic contract employees. This could occur in early to mid 2010. Now the fact that technology and IT related services could be a strong sector might move up the onset of full time hiring to early in 2010. However, the escalation of both insourcing and outsourcing could mean that available jobs to green card holders and, in particular, US citizens could be reduced due to their higher total cost including benefits. Moreover, the constitution of the future IT staffs will probably be younger, degreed, with a higher percentage of individuals with green cards, EAD’s, and H1-B’s. Unfortunately, some of the older and/or non-degreed IT employees may, depending on their skills, find themselves forced out of the IT sector, which many of them helped to create.

There are many factors that could, but hopefully won’t, derail these predictions. These factors include: the huge amount of government spending that could somehow forestall a job recovery due to unmanageable debt; a “W” or “L” shaped recovery that doesn’t offer enough time to start the rehiring process; a decision to make a significant increase in outsourcing; and, finally, an economic recovery that leads to little or no hiring (i.e. the so called “jobless recovery” scenario). Finally, if this has been the most severe economic downturn since, or rivaling, the great depression of the 1930’s, then is it at all reasonable to expect a jobs recovery, when it took over 10 years, and a world war, to lead to an economic and jobs recovery in the 1930’s and 40’s? My view here is that specific economic sector growth capacity potential may play a pivotal role. In Sectors such as IT/technology, health, education and energy may rebound the quickest given their high near to midterm growth potential and government support and incentives. However, the glutted housing and consumer discretionary, plus the struggling automotive, sectors may not regain many jobs for quite some time till demand catches up with supply.