Silicon Valley's economy faces a steep climb out of the recession and the perception of perpetual reinvention is beginning to be questioned.

The economic recession has stalled Silicon Valley’s vibrant innovation economy and left its global competitive standing at risk as never before, according to the 2010 Silicon Valley Index released Wednesday by Joint Venture: Silicon Valley Network and Silicon Valley Community Foundation, which represent local businesses, government agencies and philanthropies. The annual study on the economic strength and overall health of Silicon Valley reveals that rapid economic growth in other countries, coupled with California’s legislative gridlock, is draining the lifeblood of funding and foreign talent from Silicon Valley, leaving recovery in a "new phase of uncertainty."

"Silicon Valley’s innovation engine has driven the region’s prosperity for 60 years, but at the moment we’re stalled,"said Russell Hancock, CEO of Joint Venture. "What’s hard to say is whether we’re stuck in neutral, which has happened before, or whether it’s time now for a complete overhaul."

About 90,000 jobs have been lost between the second quarter of 2008 and the second quarter of 2009, according to the study and total employment here back to 2005 levels. The local unemployment rate, currently at more than 11 percent, is above the national average of below 10  percent.

Real per-capita income fell 5 percent between 2007 and 2009 to $62,003, compared with a 4 percent decline in both the US and California in the same period, according to the study. However,  income levels remain higher here than most other places in the nation.  percent

Patent filings have dipped over the past two years, according to the the study, while venture-capital investments plunged last year.

The migration of new talent into the area fell last year for the first time in several years.

"This year’s Special Analysis is a call to action for all of us," said Emmett D. Carson,  CEO and president of Silicon Valley Community Foundation. "On the heels of the worst economic year since the Great Depression, our region has entered a new era of uncertainty in which our ability to attract top talent, fund innovation and preserve a decent quality of life is no longer guaranteed."

While total investment has been down in 2009 (with an uptick in the third quarter), the distribution of investment across industries offers valuable insight into how Silicon Valley’s industry mix is changing. Since 2002, the software industry has continued to attract the largest percentage of total venture capital investment in the region; however, it has dropped from 25 percent to 20percent as opportunities in other industries grow. Venture capital investment in networking and equipment has been on a downward trend since 2002, when the industry ranked second behind software; however, investment in networking and equipment did increase by 13 percent between 2008 and 2009.

Over most of the period, semiconductors attracted the next largest investment share following software. In 2008, it was displaced by biotechnology and medical devices, while in 2009 industrial/energy took the second spot behind software. Venture capital investment in the areas of industrial/energy, medical devices, and biotechnology have now outpaced investment in semiconductors.

After peaking at $1.9 billion in 2008, cleantech venture capital investment dropped to $1.2 billion in 2009, a five percent increase over 2007values. In 2009, Silicon Valley accounted for 55 percent of California investments and 19 percent of United States investments. While the region accounted for the same percentage of California investments as it did in 2008, its share of total U.S. investments decreased 12 percent. The bulk of investments were in energy generation (41%) and energy efficiency (26%) with values increasing in energy efficiency by 121 percent over last year.

Highlights of the 2010 Index and Special Analysis include:

• Foreign Talent - -  With increasing global partnerships, Silicon Valley grows ever more dependent on foreign talent - -  particularly for filling science and engineering positions. However, actions in the wake of 9/11 and the rise of other global regions have made Silicon Valley less accessible and less attractive than it once was. Inflows from China and India continue to rise, as does investment and collaboration between the Valley and those two nations, but China and India are both experiencing rapid economic growth. As they do, opportunities in those countries will slow the flow of talent here.
• Investment Capital - -  Silicon Valley’s traditional ways of funding innovation - -  through locally-raised venture capital and public offerings - -  can no longer be taken as a given. Major structural shifts are underway in the funding community, and the federal government has re-emerged as the major investor in innovation and basic research. However, Silicon Valley is not attracting significant shares of federal funding, and has not for some time.
• Venture Capital - -  Investment is shifting away from software and semiconductors and into biotechnology, energy, medical devices, and media. The level of investment continues to decline, and venture capitalists generally have not realized significant returns for the past decade.
• California Government - -  Silicon Valley is "slammed" by forces beyond its control, most notably the "malaise" in the state government. California’s budget crisis and the political dysfunction in Sacramento has direct and debilitating effects on the region’s ability to prepare the workforce, provide crucial infrastructure, maintain quality of life, and keep pace in the talent race with other regions.
• Higher Education - -  U.S. and California investment in higher education is declining at a time when talent becomes still more important to Silicon Valley.
• Jobs - -  Between November 2008 and November 2009, employment in Santa Clara and San Mateo Counties dropped 5.8 percent, compared to 3.8 percent nationally. Silicon Valley lost 90,000 jobs between the second quarter of 2008 and 2009, bringing total employment down to 2005 levels. The "green" economy accounted for 12,000 jobs in the region.
• Housing - -  Residential foreclosure activity dropped by 39 percent in 2009 yet in some cities more than a third of sales are foreclosures. Housing affordability for first-time homebuyers is improving. New affordable housing units in the region doubled from 2008 to 2009. Average rents declined six percent from 2008, the first drop in rents since 2005.
• Commercial Real Estate - -  Office vacancy rates are at an all-time high since 1998 and were up 33 percent in 2009 over 2008.
• Transit - -  Silicon Valley continues to expand transit-oriented development. Newly approved housing averaged more than 20 units per acre for the fifth consecutive year. More than 60 percent of new residential construction is within walking distance of the region’s transit infrastructure.
• Fuel Consumption - -  Silicon Valley residents consumed roughly 50 gallons of fuel less per person than the rest of California in 2008, a reversal from 2000. Since 2002, vehicle miles traveled has decreased 14 percent while gas prices have increased 91 percent.