The annual Silicon Valley Index, produced by Venture Silicon Valley Network and Silicon Valley Community Foundation, says there is no recovery in Silicon Valley economy.

Silicon Valley enters 'new phase of uncertainty,' groups warn - San Jose Mercury News

The groups said the valley's long road to recovery from the recession is complicated by state budget gridlock, decreased education funding and competition from other regions. There are "clear warning signs" that the valley has entered "a new phase of uncertainty" in which its standing as a tech center is at risk, the report said.

There are big problems with the education system:

Total state funding for higher education declined 17 percent last year, even as the cost of education continued to rise, the index noted. Yet the valley will be increasingly dependent on homegrown talent for future innovation.

Kim Walesh, chief strategist in San Jose's Office of Economic Development, said the report "really nailed" the valley's increasing need for a healthy educational system. Because of post-9/11 restrictions on immigration and increased opportunities in India and China, the valley can't rely on foreign talent as it has in the past 25 years.

Report Warns Silicon Valley Could Lose Its Edge - NYTimes.com

The region, the center of the global technology industry, lost 90,000 jobs between the second quarter of 2008 and the same quarter in 2009. Unemployment is higher than national levels and the worst in the region since 2005, when technology companies were still recovering from the dot-com implosion.

Venture capital funding of new start-ups sank 37 percent between 2008 and 2009. And vacancies in commercial real estate jumped 33 percent.

Other economic indicators are also gloomy, the report found. "We show no evidence that the recovery has arrived," said Russell Hancock, chief executive of Joint Venture.

Bad news indeed. And this is likely not a cyclical issue related to the broader economy. There have been fundamental changes in the ways companies employ people.

Collaborative technologies produced in Silicon Valley now enable Silicon Valley companies to more easily make use of independent contractors rather than employees.

Judy Estrin, former CTO at Cisco:

"Silicon Valley is both a barometer of the rest of the country and a spark for the rest of the country, and if we don't protect that innovation culture here, it's going to be hard to sustain an innovation culture in the country," she said.

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Silicon Valley's Judy Estrin warns we are running out of innovation | Tom Foremski: IMHO | ZDNet.com