September 22, 2023

Hi everyone. My name’s Taylor St. Germain with ITR Economics, and welcome to this episode of TrendsTalk. Today, I wanted to discuss what we see as an area of opportunity. I know on past episodes, I’ve talked a lot about this downturn coming in 2024, this mild recession, and we’re seeing many markets and businesses that we work with slowing down and really on the backside of the business cycle at this point.

So we’re all looking for opportunities out there, and there are certainly some bright spots. And one area that I found intriguing, especially given its relationship to the economy and its lack of recessions throughout this last decade, is the data center market. We live in a data-driven world today, and with this data-driven world that we live in, data processing, data storage, all very important to our operations. And so it makes a lot of sense in terms of why we’ve seen this very attractive growth in data centers throughout this last decade.

Now, there’s a few relationships that I want to call out here. Now, when I say data centers, we refer to one of our subject series, which is US Data Processing, Hosting and Related Services Revenue. So we’re looking at the revenue related to data centers, and we overlay that revenue figure, that annual growth rate, with the GDP 312 rate of change. And what’s really interesting is that even back during the financial crisis of 2008, 2009, when GDP contracted, data processing revenue slowed, but it did not contract. So even in one of the worst recessions the US economy has seen in history, we still saw growth, albeit at a slower pace, in data center revenue.

We fast-forward as we go throughout the decade post-2008, 2009 post-recession, and there’s some cyclicality in the data center service revenue, but it never dropped below that zero line. And then we see another recession with the pandemic, the COVID-19 impact in GDP in 2020. And again, that caused a slowing in the pace of growth for data center services revenue, but there was no contraction. So I think that’s the really important point here, is that not have data centers service revenue been growing over time, but in these times of financial trouble, of economic trouble, these recessions, data centers are still growing just at a little bit of a slower pace.

There’s a lack of cyclical relationship between GDP and data centers, which I think provides everyone with a real area of opportunity here as we move forward, especially given this digital transformation that’s occurring in our lives and in our businesses. Now, one indicator though that does have a much better correlation with the data center services revenue is computer and software personal consumption expenditures. This indicator, when you look at it on an annual growth rate, leads that data center service revenue by about five months, almost two quarters. And when we see a slowdown in consumption expenditures for computers and software, we do see a slowdown culminate in the data center services revenue as well. But again, even in times where personal consumption expenditures for computer and software dropped below zero on a rate-of-change basis, typically, we haven’t seen that data services revenue drop below zero.

So, I am cautious to call anything a recession-proof indicator, but when you look at data centers throughout the last 10 to 12 years, it has been a recession-proof indicator. It’s never contracted on an annual basis, even in times where GDP and computer and software expenditures are. So, I think it’s a real area of opportunity moving forward. We do expect to see a slowdown in data center service revenue as we see GDP slow down as we see personal consumption expenditures slow down, but it’s still up at about 14.6% on a 1212 on an annual growth rate. So, will we see some slowing? Yes. But are we still poised for growth in this digital world that we live in now? That seems very likely.

So there’s an area of opportunity for you. I wanted to end this week with a little bit of good news as it relates to what’s coming our way. So, really look to that data center tech side of the economy as we look into 2024. I hope you found this information helpful. Thanks for joining me on this episode of TrendsTalk. I’m Taylor St. Germain with ITR Economics, and I’ll see you on the next one.