What are the job prospects for an engineer with a PhD?

It all depends on the research topic of the Ph.D. graduate. For Ph.D.s in electronic design automation, integrated circuit design, and computer architecture, Ph.D.s are required or strongly preferred. Yes, the job opportunities are small, since the number of companies that can do these are small. However, the supply of Ph.D.s in these fields are also small, so Ph.D.s in these fields are highly valued. For Ph.D.s in civil engineering, they may have a harder time. Ultimately, can the Ph.D. graduate enter an industry that has corporate research labs or is doing R&D that favors/requires Ph.D.s? If not, can the Ph.D. graduate switch to a new field/topic that exploits her/his skill set and help high-tech companies make money? A couple of examples: Microsoft Research hires Physics Ph.D.s. Who would have thought that statistical mechanics is so relevant to complex systems, including social networks, and computational complexity (e.g., the category of NP-complete problems)? Likewise, Yahoo! Research hired a physics Ph.D. (Dr. Duncan Watts) to look at social networks. MIT has a professor (can't remember her name right now) who did her physics Ph.D. in Germany (or somewhere in Europe), a postdoc at the legendary research lab of Prof. Albert-Laszlo Barabasi, and is now a civil engineering professor at MIT; she is from Latin America. So, yes, Ph.D.s do have good opportunities. They just have to be aware of the markets that require their expertise or create new markets for the world.

In some very specific areas, there is no truth at all to those rumors, especially if you come from a reputable school and have a reputable advisor.  It's a low supply, high demand (and high wage) situation for those areas. I studied computer microarchitecture and compilers while pursuing my PhD, with a focus on performance. Finance companies pay dearly for expertise, with some friends making well over $500k annually (mostly bonuses, and I can't speak for bad years).  I have also seen recruiters still reaching out even when their companies have a general hiring freeze.  What surprised me is that even some VCs made note of PhDs, so it can be helpful in the start-up world. I have also noticed that employers will hire high quality PhDs when the problem they're facing is very open ended and has no prescribed solution, since this mirrors the PhD experience.

It depends on the type of engineering, but in general, there are plenty of jobs for engineers with a Ph.D. outside of academia.

I was recently at a conference where a panel was discussing about the future prospects of PhD. You have heard it right, PhDs have a hard time finding a job outside of academia (or even in academia!), but that's because the expectation of someone with a "Dr." title is that he/she will be absorbed as soon as the PhD is over. Most of the times, candidates don't know how to search for the right job, how to brand themselves. Its a common saying "Don't oversell your PhD card". People won't hire you because you have a PhD, they will hire you if they see the right potential in you. An example to illustrate my point: Suppose you are a recruiter of a big company and you need someone to work in your R&D section. Whom will you prefer, someone with a Bachelors who is yet to figure out what he/she wants in life, or a dedicated researcher, who knows how to get the job done? There are no points for guessing the answer! It can be tough to get a job, because there may not be the right opening. But once you find it, its worth it!

In India, The scenario is totally different.Better to settle down for a Good Government Job, Rather than wasting your precious young life in books. Because the output of PhD (Except IIT's/IISc) is a waste.

At least in Electrical engineering, I can safely say that this is not the case. PhDs are highly valued in top companies.