Connect with us

Markets in a Minute

Data Centers: Investing in the Infrastructure of the Future

Published

on

This infographic is available as a poster.

Data Centers

Data Centers

This infographic is available as a poster.

Data Centers: Investing in the Infrastructure of the Future

Digital transformation is one of the world’s most prominent trends today.

For evidence, consider the growth in internet users worldwide. By 2023, 5.3 billion people (66% of population) will be using the internet, up from 3.9 billion (51% of population) in 2018.

This growth has resulted in an incredible amount of data being produced each day, whether its from streaming music on Spotify or buying goods on Amazon. But how is all this data being processed?

In this Markets in a Minute chart from New York Life Investments, we shed light on the importance of data centers, and why they should be considered as core infrastructure.

The Role of the Data Center

A data center is a facility that stores, processes, and disseminates data. There are thousands of them around the world, and collectively, they’re referred to as the “cloud”.

This puts data centers at the center of nearly everything we do online: e-commerce, communications, storage and back-up, and even online gaming. To gain a better sense of what this all looks like, the following table breaks down the storage capacity of the world’s data centers.

Segment2016 Storage Capacity (exabytes)2021 Storage Capacity (exabytes) 
Compute160470
Collaboration170400
Database & analytics150380
Enterprise resource planning180420
Video streaming50180
Social networking60160
Search engine30100
Other consumer apps70190
Total8702,300

Source: Statista (2021)

One exabyte is equal to one billion gigabytes, which means the world currently has 2.3 trillion gigabytes of total storage.

The largest segment is compute instances, which are cloud-based workstations used by data scientists. At the lower end of the scale are segments like video streaming (includes Netflix and Hulu) and social networking (think Facebook or LinkedIn).

Cloud Spending Reaches a Historic Milestone

For businesses that create and use data, moving to the cloud (as opposed to maintaining their own servers) has plenty of advantages like cost savings, flexibility, and security.

This is driving exponential growth in cloud infrastructure spending, which reached a record $130 billion in 2020. At the same time, spending on data center hardware decreased from $96 to $90 billion. These results are partly attributed to COVID-19, which forced many businesses to switch to a work-from-home operating model.

A survey conducted by 451 Research found that 40% of businesses had increased their usage of cloud services during the pandemic. In addition, 85% of those who were impacted indicated that the move would be a permanent one.

Data Centers are Infrastrcture

The scope of an infrastructure investor has historically been limited to companies in construction, energy, and transportation.

But what defines infrastructure?

It’s any physical system that is vital for an economy’s development and prosperity—and in a world where over 5 billion people are expected to be online by 2023, the data center is the perfect embodiment of that.

Advisor channel footer

Thank you!
Given email address is already subscribed, thank you!
Please provide a valid email address.
Please complete the CAPTCHA.
Oops. Something went wrong. Please try again later.

Continue Reading
Comments

Markets in a Minute

Charted: Unemployment and Recessions Over 70 Years

Despite market uncertainty, U.S. unemployment is low, at 3.7%. In this infographic, we show unemployment and recessions since 1948.

Published

on

Unemployment and Recessions

This infographic is available as a poster.

Charting Unemployment and Recessions Over 70 Years

As of August 2022, the U.S. unemployment rate sits at 3.7%, below its 74-year average of 5.5%.

Why does this matter today? Employment factors heavily into whether economists determine the country is in a recession. In fact, in the last several decades, employment-related factors have some of the heaviest weightings when a recession determination is made.

In this Markets in a Minute from New York Life Investments, we look at unemployment and recessions since 1948.

Why Is the Unemployment Rate Important?

To start, let’s look at how unemployment affects the economy.

During low unemployment and a strong labor market, wages often increase. This is a central concern to the Federal Reserve as higher wages could spur more spending and notch up inflation.

To curb inflation, the central bank may increase interest rates. As the economy begins to feel the effects of rising interest rates, it may fall into a recession as the cost of capital increases and consumer spending slows.

Who Determines It’s a Recession?

A committee of eight economists at the National Bureau of Economic Research (NBER) in Massachusetts make the call, although often several months after a recession has happened. As a result, employment data often acts as a lagging indicator.

This committee of academics looks at a number of variables beyond two consecutive quarters of negative GDP growth. Other factors include:

  • Nonfarm payroll employment
  • Real personal income less transfers
  • Real personal consumption expenditures
  • Industrial production
  • Wholesale retail sales adjusted for price changes
  • Real GDP

A widespread decline in economic activity across the economy, as opposed to just one sector, is also considered.

Unemployment and Recessions Over History

Over the last 12 business cycles, the unemployment rate averaged 4.7% at the peak and 8.1% during the trough. The below table shows how the unemployment rate changed over various U.S. business cycles, with data from NBER:

Peak Month Unemployment RateTrough Month Unemployment Rate
Nov 19483.8%Oct 19497.9%
Jul 19532.6%May 19545.9%
Aug 19574.1%Apr 19587.4%
Apr 19605.2%Feb 19616.9%
Dec 19693.5%Nov 19705.9%
Nov 19734.8%Mar 19758.6%
Jan 19806.3%Jul 19807.8%
Jul 19817.2%Nov 198210.8%
Jul 19905.5%Mar 19916.8%
Mar 20014.3%Nov 20015.5%
Dec 20075.0%Jun 20099.5%
Feb 20203.5%Apr 202014.7%

In 1953, following post-WWII expansion, the unemployment rate fell to 2.6%, near record lows.

During this time, the economy faced strong consumer demand and high inflation after a period of prolonged low interest rates. To combat price pressures, the Federal Reserve increased interest rates in 1954, and the economy fell into recession. By May 1954, the unemployment rate more than doubled.

In 1981, the unemployment rate was high during both the peak of the cycle (7.2%) and the trough (10.8%) by late 1982. This marked the end of the 1970s stagflationary era, characterized by slow growth and high unemployment.

More recently, at the peak of the business cycle in 2020 the unemployment rate stood at 3.5%, closer to levels seen today.

Unemployment Today: A Double-Edged Sword

As of July 2022, the number of job vacancies is at 11.2 million, near record highs.

To reign in the inflationary pressures of the current job market—which saw year-over-year wage increases of 5.2% in both July and August—the Federal Reserve may take a more aggressive stance on interest rate hikes.

The good news is that labor force participation is increasing. As of August, labor force participation was within 1% of pre-pandemic levels, offering relief to the labor market supply. Higher labor force participation could lessen wage growth without unemployment levels having to rise. Since more people are competing for jobs, there is less leverage for salary negotiation.

Going further, one study shows that since the Great Financial Crisis, labor market participation has had a greater influence on wage growth than unemployment levels or job openings.

Against these opposing forces of higher job vacancies and higher labor market participation, the outlook for unemployment, along with its wider effects on the economy, remain unclear.

Advisor channel footer

Thank you!
Given email address is already subscribed, thank you!
Please provide a valid email address.
Please complete the CAPTCHA.
Oops. Something went wrong. Please try again later.

Continue Reading

Markets in a Minute

How Closely Related Are Historical Mortgage Rates and Housing Prices?

With mortgage rates climbing, could housing prices drop? We explore the relationship between historical mortgage rates and house prices.

Published

on

Scatterplot showing the relationship between historical mortgage rates and house prices

This infographic is available as a poster.

Are Historical Mortgage Rates and House Prices Related?

Mortgage rates are rising at their fastest pace in at least 30 years. As mortgage rates climb, it becomes more expensive to finance a home purchase. This leaves many homebuyers with lower budgets. Could house prices drop as a result?

In this Markets in a Minute from New York Life Investments, we explore the relationship between historical mortgage rates and housing prices over the last 30 years. It’s the last in a three-part series on house prices.

Historical Mortgage Rates vs Housing Prices

To compare trends in historical mortgage rates and housing prices over time, we calculated year-over-year percentage changes. We used monthly data spanning from January 1992 to June 2022. Here’s a summary of movements over that timeframe.

Scenario# of Months
Mortgage Rate Decline, House Price Growth193
Mortgage Rate Growth, House Price Growth117
Mortgage Rate Decline, House Price Decline49
Mortgage Rate Growth, House Price Decline6

November 2006 has been excluded from the above tally as year-over-year mortgage rate growth was 0.0% at that time.

Mortgage rates and house prices have a weak positive correlation of 0.26. This means that when mortgage rates increase, house prices typically also increase. What could be contributing to this trend? Mortgage rate increases are associated with periods when the Federal Reserve is raising its policy rate in response to inflation that is higher than desired. Often, this coincides with strong economic growth, low unemployment, and rising wages, which can all strengthen home prices.

Over the last 30 years, it was quite rare for mortgage rates to rise while house prices simultaneously dropped. This only occurred in the early stages of the Global Financial Crisis and during the recovery.

DateMortgage Rate YoY ChangeHouse Price YoY Change
Aug 20070.8%-0.6%
Oct 20071.1%-1.9%
Jan 20101.6%-2.9%
Apr 20106.3%-1.5%
May 20103.3%-1.4%
Jul 20110.4%-3.8%

While mortgage rates saw some upward movement in the wake of the Global Financial Crisis, it took the housing market longer to recover. In fact, housing prices didn’t see a positive year-over-year change until March 2012.

Is There a Lag Effect?

A change in mortgage rates may not be immediately reflected in housing prices. To test whether there was a lag effect, we also explored the relationship between historical mortgage rates and housing prices two years later.* For instance, we compared the annual percentage change in mortgage rates in 2020 to housing price growth in 2022.

Here’s what the data looked like with this two year lag of housing price growth.

Scenario# of Months
Mortgage Rate Decline, House Price Growth190
Mortgage Rate Growth, House Price Growth97
Mortgage Rate Decline, House Price Decline37
Mortgage Rate Growth, House Price Decline17

*We tested for a lag effect using house prices six months later, one year later, two years later, and three years later. The data using house prices 6 months later and three years later revealed no correlation between mortgage rates and housing prices. The data using house prices one year later revealed the same correlation as using house price data from two years later. November 2006 has been excluded from the above tally as year-over-year mortgage rate growth was 0.0% at that time.

The pattern was similar, albeit with a slightly negative correlation of -0.15. In other words, mortgage rates and house prices tended to move in opposite directions.

For example, this occurred in 2020 when mortgage rates were dropping and the Federal Reserve had not yet begun to raise its policy rate. Two years later in 2022, house prices were seeing record high levels of growth amid strong demand and low supply.

Compared to our first analysis above, there were also more instances where mortgage rates increased and house prices decreased. This activity all related to mortgage rates rising from 2005-2007 amid inflation concerns, with housing prices crashing in the following years due to subprime mortgages and the Global Financial Crisis.

Historical Mortgage Rates: One Piece of the Puzzle

Could the current rising mortgage rates cause housing prices to drop? In the last 30 years, there is no historical precedent for this apart from the Global Financial Crisis. Of course, subprime mortgages—mortgages to people with impaired credit scores—contributed to the housing market collapse at that time.

While researchers believe it’s unlikely housing price growth will turn negative, the pace of growth is slowing down. We can see this in the below chart showing trends between historical mortgage rates and housing prices over time.

Changes in historical mortgage rates and house prices over time. When the year-over-year mortgage rate changes has been above 20% for more than two months in a row, the pace of house price growth has slowed.

Historically, a slowdown in house price growth has occurred when mortgage rates increase rapidly. Since 1992, there have been four instances when mortgage rates rose over 20% year-over-year for more than two months in a row. Each of them has been accompanied by a deceleration in house price growth.

Time PeriodHouse Price YoY Change at StartHouse Price YoY Change at End
Sep 1994-Feb 19953.1%2.9%
Aug 2013-May 20147.2%4.7%
Sep 2018-Dec 20185.8%5.5%
Jan 2022-Jun 202218.4%16.2%

Note: House price data only available until June 2022 and does not reflect any fluctuations since that time.

In the first half of 2022, house price growth slowed by over two percentage points. However, it’s important to keep in mind that while mortgage rates and affordability can play a role in the housing market, there are other factors at play. The current market is buoyed by high demand as millennials reach their prime home buying years, coupled with a housing supply shortage.

Advisor channel footer

Thank you!
Given email address is already subscribed, thank you!
Please provide a valid email address.
Please complete the CAPTCHA.
Oops. Something went wrong. Please try again later.

Continue Reading
New York Life Investments

Subscribe

Are you a financial advisor?

Subscribe here to get every update, including when new charts or infographics go live:

Thank you!
Given email address is already subscribed, thank you!
Please provide a valid email address.
Please complete the CAPTCHA.
Oops. Something went wrong. Please try again later.

Popular