The i-Stimulus

September chatter was all abuzz about a new economic stimulus—the i-stimulus. It isn't a boost handed down from the politicians, nor one that many talk-show pundits commented on, but it sure had various financial and economic organizations talking.

The Guardian,  Forbes and The New York Times all ran articles in mid-September touting the economic boost the US could expect following the release of the iPhone 5. The Telegraph even quoted former Federal Reserve governor Kevin Warsh saying, “The iPhone 5 is going to do more for the real economy than QE3.”

JP Morgan rallied around the idea, publishing an article that leads with this sentence:

"We believe the release of iPhone 5 could potentially add between 1/4 to 1/2%-point to fourth quarter annualized GDP growth."

The article goes on to say that based on the projected retail cost and previous retail trends, the trade-margins that figure into the US GDP resultant from iPhone 5 sales could boost the fourth quarter economy by $3.2 billion and the annual measure by as much $12.8 billion.

To JP Morgan’s credit, their numbers are sound. The math all adds up, and equals an exciting 0.33 percent figure that promises to boost the economy (0.33 percent is actually a lot considering that the total economic growth seen thus far this year is only about 2 percent). The problem, then, isn't in the numbers, it lies in JP Morgan’s logic. Something that JP Morgan initially seems to admit:

"This estimate seems fairly large, and for that reason should be treated skeptically."

And perhaps if they had stopped there we could give them the benefit of the doubt, but they continue:

"However, we think the recent evidence is consistent with this projection. The last iPhone launch was at a similar time last year. In October of last year, when the iPhone 4s first became widely available, overall retail sales that month significantly outperformed expectations….Given the iPhone 5 launch is expected to be much larger, we think the estimate mentioned in the first paragraph is reasonable."

The estimate, however, is only reasonable if we (like JP Morgan) assume that every single dollar people spend on the new iPhones would not otherwise be spent on something else throughout the remainder of the year. See the problem? Let me sketch it out with the following hypothetical.

Let’s say I want an iPhone 5—highly unlikely as I’m a Samsung Galaxy SIII guy myself, but remaining in our hypothetical situation, let’s say I actually do want an iPhone 5—now I must figure out a way to pay for it. If I’m like more than 43.1 percent of Americans who have extremely limited savings, odds are I’m not shelling out of my “rainy day” account for the iPhone 5. Rather, I’m going to cut spending elsewhere and reallocate the existing budget to pay for my new phone. 

It works like this, instead of taking my wife out to dinner on a Friday night, and then hitting up the latest movie we will stay home, eat Ramen and watch Prime Time. Instead of taking my daughter to Jumping Jack’s Bounce House Playland, I’ll take her to the free city park. Rather than get my secretary a poinsettia for the holidays, I’ll give her a 99 cent Wal-Mart card.

Taking all this into account, it becomes evident that my iPhone 5 purchase has done almost nothing for the economy. I've simply reallocated money I would have spent anyway.

In fact, other reports from early October seem to boost my argument. Check out the piece Business Insider ran titled, "The iPhone 5 is a likely culprit for bad retail sales last month." That headline pretty much sums it up, and lends even less credence to JP Morgan’s original projections. 

The utility of a real stimulus is that it gets capital to work in the economy that would otherwise sit stagnant, hiding in a bank somewhere. Even if iPhone 5 sales do pick up and provide some increase in the economy, the billions of dollars spent on the phones will most likely simply translate into more hours for Apple employees both domestic and abroad. There will be more work for the people who ship and deliver the product, and more work for the already overworked, underpaid, strike-prone Apple Chinese contractors. But if the money is most likely going to be spent anyway, wouldn't it be better spent closer to home? I think so, which is why I’m posting this quick analysis and then taking my daughter to play at Jumping Jack’s Bounce House Playland. 


Tyler said...
This comment has been removed by the author.
Tyler said...

I tend to agree that the iPhone plays a significant role in the American economy. If Apple is able to exceed sales forecasts, it is likely that they will contribute significantly to fourth quarter annualized GDP growth. This may be difficult due to several production problems that have arisen in the past few weeks that will affect supply.

There have been rumors that due to quality control issues, the new backing to the phone is getting scratched during production. This has forced Apple to slow production of the iPhone 5. There has also been talk of labor disputes over the new quality control measures. These disputes have created a disruption in supply.

There is one additional factor that was not discussed in the article. As a complement to the iPhone, iPhone app sales will also help add to the GDP.

I do think it is unlikely that a lack of savings will prevent most people from purchasing a new iPhone. Many will likely purchase the phone on credit or have it added to that month's phone bill. With carriers subsidizing much of the $600 price tag, they are relatively affordable at around $200.

Dave Tufte said...

Trever: 100/100. Tyler: 50/50.

I'm not sure that JP Morgan's numbers add up. A ballpark estimate for GDP is $15,000B. One tenth of one percent of that is $15B. Their claim for the annual change to GDP from iPhones is a bit less than that. They might get their 0.25 to 0.50 improvement in annualized growth if that all occurred in one quarter, but that's exactly what they aren't saying. It sounds fishy to me.

Trevor's overall point is the basic one from macro principles: Keynesian stimulus works through autonomous rather than induced spending. And for most of us, an iPhone is a form of induced spending, and therefore not very stimulating to the overall economy.