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.