Deflation and Growth in the Communications Sector

Operating with limited funding, the Bureau of Labor Statistics does a great job tracking prices in most of the economy.  However, the BLS understandably has a hard time keeping up with innovative industries which are rapidly changing. 

Case in point: The communications sector. The producer price data for November were released on Tuesday. According to these numbers,  prices for the telecommunications industry were up 0.6% compared to a year earlier.

But is the BLS correctly tracking the prices charged for the delivery of video by content delivery networks (CDN) such as Akamai ? In a post titled “Deflation? Akamai Will Show You Some Deflation” Paul Kedrosky writes:

Check these deflationary statistics from a note on Akamai tonight by Citi’s Mark Mahaney:

  • Pricing declines:
    • 2009: 40-45%
    • 2010: 20-25%
    • 2011(f): 15-20%
  • Volume increase
    • 2010: 40-45%

 In short, Akamai has grown revenues in a market sporting 20-25% price declines by increasing volumes by 40-45%.

  Dan Rayburn reports that

For the average customer delivering video via a third party CDN they saw their pricing decline by 20-25% in 2010. Compared to 2009, when pricing fell on average of about 45%, 2010 was a good year for the CDNs. The rate of decline for pricing was much more stable and traffic volume on average grew about 50% in 2010

These sorts of declines show up nowhere in the BLS telecom stats.  The more general question is whether the telecom companies in general are being  given full credit for the vast improvement in bandwidth and capabilities over the past few years.  If not, then the government is undercounting the contribution of the communications sector to economic growth.

Where Americans Are Spending More..

Since the recession started in the fourth quarter of 2007, the common theme has been about Americans cutting back on their spending. But the latest numbers from the BEA show aggregate personal consumption expenditures are up 2.9%, or $285 billion.  So we must be spending more on something!

So here is a table of winners: Some goods and services which have shown an increase in spending since 2007IV.

Right there up at the top is America’s love affair with mobile devices, where spending has soared almost 17% since the recession started.  Also supporting my thesis of a communications boom–spending on wired, wireless, and cable services have risen by 5%.

In addition, Americans still care about their pets, their children, their hair, and their guns.

Of course, the data also shows a big gain in spending on education, healthcare, and housing, but it’s impossible to know how much of that increase is actually coming out of the pockets of households. Education spending includes government tuition aid and spending by private nonprofits out of their endowments and contributions; healthcare spending including Medicare, Medicaid, and employer-paid insurance; and housing includes a huge imputation for owner-occupied housing, which may or may not correspond to an actual increase or decrease in out-of-pocket spending.

Once we take those three huge categories out of the data, the remaining PCE has actually gone down by 0.6% since the recession started.  So now let’s look at a table of losers: Selected categories of spending that have gone down.

Americans are spending a little bit less on clothing and hotels; a lot less on foreign travel, video and audio equipment (think televisions), and furniture. The big drop, though, has come in motor vehicles and associated goods and services, like gasoline.

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