Can the iPhone 5 really boost US GDP?

21st September 2012

Will the iPhone 5 really provide a significant boost to the U.S. economy? Or is everyone getting a bit carried away that something as innocuous as a phone will make that big a pop?

In a research noted entitled "Can one little phone impact GDP? Michael Feroli, JPMorgan's chief economist, proceeds to explain how the iPhone 5 will deliver a well-timed stimulus to the US economy:

"We believe the release of iPhone 5 could potentially add between 1/4 to 1/2%-point to fourth quarter annualized GDP growth. Our equity analysts believe around 8 million iPhone 5's will be sold in the US in Q4, even while sales of previous generation iPhones are maintained at a solid pace. While we have no idea how much these will retail for, if it is similar to previous launches it would be around $600."

"This estimate seems fairly large, and for that reason should be treated skeptically. However, we think the recent evidence is consistent with this projection."

In response to the note, Princeton University economist and New York Times columnist Paul Krugman says the implications of the JPMorgan's analysis are wider than most people realize because the stimulus effect of the new iPhone underscores how dependent the US economy is on consumer spending.

"To believe that more spending will provide an economic boost," he writes, "you have to believe – as you should – that demand, not supply, is what's holding the economy back."

"We don't have high unemployment because Americans don't want to work, and we don't have high unemployment because workers lack the right skills. Instead, willing and able workers can't find jobs because employers can't sell enough to justify hiring them. And the solution is to find some way to increase overall spending so that the nation can get back to work."

In addition, he says, "Over time there will be more equipment that needs replacing, more iPhone-like innovations that boost spending, and, in the long run, we will exit this economic trap."

National Public Radio's Jacob Goldstein, however, says Feroli's predictions are based on the "ridiculous assumption" that every single dollar people spend on new iPhones would not otherwise have been spent on anything else during the last three months of the year.

Goldstein argues that in order for him to purchase an iPhone 5, he'd have to spend less on childcare, restaurant food, movies and Christmas presents (all that spending would have contributed to economic growth). Therefore, his purchase of an iPhone 5 would contribute "precisely zero to economic growth."

"The JPMorgan note doesn't account for this at all. It assumes that no one is cutting back on anything in order to pay for a new iPhone."

Meanwhile, First Post says that there is one other factor to consider: Apple, already one of the most cash-rich companies on this planet, holds even more than the US government does. "All that cash hoard is proving to be a headache for the company, which means that in the interest of parking it safely, it will get invested in low-yield avenues, like US Treasuries – and may not be invested in the economy."

"In that sense, iPhone 5 may not have a turbocharge effect on the US economy in the way that the JP Morgan analyst claims."

 

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18 thoughts on “Can the iPhone 5 really boost US GDP?”

  1. forbin says:

    hi Shaun,

    I guess we’ll see the level of what real market activity there is .

    expect U turns if the markets start to tank – its all expectations.

    so another bubble might pop , or lucky if it slowly deflates

    still does nothing for the debt issue and those costs rise…….. oooh er missus!

    Forbin

    1. Anonymous says:

      Hi Forbin

      The UK got a tweak of the nose on its national debt today. We issued some 5 year Gilts at a yield of 1.42% which is the double the yield it was trading at as recently as the beginning of May.

      Last summer our five year yield dropped below 0.5% for a bit…

  2. Drf says:

    Hi Shaun,

    “Will that reverse any nascent recovery and plunge us back into the gloom?” Yes, of course that is utlimately now inevitable, eventually; but no one can predict when it will occur. The only thing which can be predicted with certainty is that the longer it is before that occurs, the greater will be the eventual collapse and the velocity of that collapse.

  3. Mike from Enfield says:

    Shaun,

    Notwithstanding the reaction of the markets, I don’t see these announcements as being very significant in themselves. Far from providing any insight into what is really in the minds of the policy-makers, they serve merely as little dabs on the brake as a complement to the simultaneous acceleration provided by money printing/debauchery.

    It will only get really interesting when/if the whole thing ever goes into reverse. With so many zombies feeding on all the fresh blood, it isn’t going to go down well when it stops!

    1. Anonymous says:

      Hi Mike

      To my mind it would have been much simpler for the Federal Reserve to have changed its policy. It could have said the economy is showing signs of recovery so we will reduce our QE purchases from US $85 billion to say 75 billion. The so-called QE Infinity had that option..

  4. Joe says:

    Hi Shaun, what about the possibility of letting the QE bonds run to maturity and then just cancelling the debt? Wouldn’t that be just a small extenson on what the BoE has already done, when it gave the interest on the bonds, the so-called profits, back to the Treasury?

    1. forbin says:

      actually can they do that ?

      seems wonderful if they can – but inflationary ,

      oh come come , Forbin, inflation has not really been an issue , has it now?

      Forbin,

      1. Anonymous says:

        Is it? QE has been used not to build a mountain of credit but to fill in a mountain of debt that could not be paid. I’d argue we have seen the inflationary phase under Labour with house prices trebling. Now we are seeing the absence of genuine wealth creation biting as the credit expansion slows.

        The credit is already out there and has been spent. The debt remains. It’s asymetric – injecting mortgage/education debt into the economy has an immediate effect, then we see the drag over 25 years as it’s slowly paid back.

        So you get all the benefit in the current electoral cycle and most of the pain in the next guy’s.

    2. Anonymous says:

      Hi Joe

      That is certainly a possibility and some have argued for that. There are enough issues with that for a post on its own! So let me give you a taste of the main one.

      In the UK there is £375 billion of cash (strictly speaking liquidity) which has been added to the monetary system by the Bank of England as it has paid for the Gilts it has bought. Because our monetary system is broken (very low velocity of money) that does not have anything like its full potential impact right now. However in a recovery……

      Those who argue for cancelling the Gilts claim that the surplus liquidity could be mopped up easily. The economic history of the UK reads quite differently.

  5. Justathought says:

    Hi Shaun,

    Excellent article,

    Our policies makers are, at last realising, that to borrow from the future is to cut the branch they are sitting on….Thanks to their cleverness, but also thanks to insightful commenters such as you Shaun… We had
    few years to organise and protect ourselves (Indeed Sir Mervin King your new title as Lord is well deserved!). The saddest part is for the “losers”,
    unfortunately the proverbial horse lead to the river but refusing to drink from it… The storm might finally be at sight, how strong and destructive would it be? That’s the question?

    How grateful I am to my grand Dad (A very simple but wise man) for having followed his advices all my life…”Never trust any governments and banks…”, “Always live with less than what you earn” and the most important one; “Think for yourself! Read everything, listen to everything, but believe nothing no matter where you read it or who said it, not even if I said it, until you’ve researched it yourself and it agrees with your own reason and your own common sense!”

    1. Anonymous says:

      I agree with your sentiment and practice what your dad preaches, but I’m not sure on the conclusion. Those living on debt have enjoyed far superior lifestyles over the past 15 years, relative to comparable earners who exercised restraint. That may not continue but they can only go bankrupt once and most, living hand to mouth, have nothing to lose.

      Meanwhile those who saved have obtained scant reward. The one thing it has bought me is piece of mind – I find being indebted rather stressful.

  6. Noo 2 Economics says:

    Hi Shaun,
    An interesting piece to think about – Thanyou. I suspect Bernanke could yet reverse direction as Forbin says if markets fall too far, so uncertainty still rules. The CB’s are bent on stopping the equity markets falling and ensuring their respective Governmants continue receiving cheap funding so this could be a very very long taper.

    They can’t give definites because they are calibrating their measures according to information flows re unemployment and inflation. That’s only to be expected and I think it’s good they do this, rather than setting out a plan and then slavishly sticking to it no matter how events change and how much damage it does a la the boy George at No 11.

    1. Anonymous says:

      Hi Noo2

      We are in a subsection of game theory with central bankers on one side and the “markets” which these days often have major central bank involvement on the other. I do not find that entirely reassuring!

      This may well turn out to be the most dangerous episode of the credit crunch.

  7. Midge says:

    Hi Shaun and thanks for this excellent blog which I read after seeing the latest employment figures in US missed expectations.
    Has anything changed? In a way no has it has always depended on the unemployment figure being 6.5%.I think your Churchillian quote after the end of fighting in North Africa however fits the bill.I believe “tapering” will begin this year as Bernanke will be desperate to start this process before the end of his tenure at the end of January.Of course it will be still adding to the Fed’s balance sheet which is estimated to be around $3.5 trillion,Will bond purchasing end mid 2014? Only if projections for the economy were to come about and that’s a big if.When will the “exit strategy” be concluded I will leave that to Johnny Mathis- Until 12th of never and that’s a long,long time.

    1. Anonymous says:

      Hi Midge

      It was quite a day and I note that US Treasury yields which had the opportunity to drift back after yesterdays post-Fed surge instead rose….

      Also as I type this there are developments in Greece where the ruling coalition looks as though it will carry on but only just with a thinner majority. Ironically PM Samaras cannot go on live tv because the live feeds were processed by ERT. What irony!

  8. David Lilley says:

    Shaun,

    I hope that I’m not being a little eccentric but tell me if I am.

    I was very keen on QE four years ago, but coordinated QE, following coordinated interest rate cutting at the first G20, which saved the world from a great depression. My cute/naive solution at that time was that the G20 central bankers agree coordinated QE and then meet three months latter, put their negative chips on the table and agree how many chips can be put in the bin. The PIGGS debt would be significantly reduced and those with sovereign wealth funds would have them increased. Global inflation would rise affecting the G20 countries equally and also contribute to reducing debt.

    The first great contraction cost 55m lives and a second must be avoided.

    Returning to an other idea, World 5 ( where World 1 was the introduction of matter, World 2 life, World 3 mind, World 4 Objective Knowledge and World 5 the limited liability company, the entity that puts World 4 to use and has created enormous benefits for mankind. For the last 20 years China has benefited from “naked capitalism” whilst the west has been immersed in “Big State” or “state interventionism”. China has been building Worlds 4 and 5 that are the wealth creating entities whilst we have been taxing World 5 with “big state interventionism”, peaking with the UK state spending 51p in every £ and currently 46p.

    Go to a graduation congregation anywhere and see the Chinese taking all the engineering and science degrees and taking home World 4. See China buy Rover and Volvo and get all the intellectual property overnight, more World 4.

    But the cutest thing has been what Niall Ferguson calls Chimera. The Chinese save, buy US Treasuries, provide the credit to the western debt laden consumers and then our smart investment bankers return the money to China to fund their World 5. A UK textile worker costs £10 per hour versus 50p per day in China and a US car worker costs $36 per hour versus £2 per day in China (my numbers are a little old).

    You get into debt due to a combination of bad money management and not being able to make ends meet. The west is mired in massive debt and QE is contributing to the perception that debt is not problem.

    The UK successfully turned off QE some two to three years ago. Funding for Lending is QE but it is better targeted at World 5. The US should do the same instead of floating non-World 5 entities such as the big state and house prices.

    I didn’t think Ben Bernanke would turn off QE (and he hasn’t) because it would drive up the cost of massive US state borrowing. A rise from 1.6% to 2.4% is a 50% rise when the US has to borrow 50% of every state employee’s salary. Their QE now stands at $3.3t.

    The good news, however, is that World 4 is growing exponentially and therefore World 5, wealth creation, will grow exponentially. But not in the “Big State” western world.

  9. GusBmth says:

    Hello Shaun
    Firstly a big thanks for your excellent commentary, which I have enjoyed reading for several months.
    A couple of points on QE. It has been been my opinion for some time that QE would be a permananent feature of UK monetary policy, because it is inconceivable that the BofE (and indeed the Fed) could be large sellers of government debt for anything more than short, exceptional, periods. ‘Exceptional’ monetary policy has become the new normal and variance from it will be the new exceptional.
    Second, the new governor of the BofE wants the economy to reach ‘escape velocity’. The big risk is that real growth picks up a little, to say 2% per annum, but inflation reaches escape velocity. Given the fact that the Bank has been comfortable with inflation at 5%, we can be guaranteed that they will be late to react. Tight monetary policy would cause a severe downturn and most likely a property crash. I hope I am wrong about inflation, but the BOf E’s own surveys show that people’s assessment of actual inflation is already above 4% – and that is after 3 years of virtually no growth!

    1. Anonymous says:

      Hi Gus and welcome to my corner of the blogosphere

      I agree that an exit from QE involving selling Gilts for the UK is likely to be problematic. I argued from the beginning that the danger is that you end up selling into a falling market which presents a real problem as you mention. The last couple of days where Gilts have fallen heavily (the 10 year Gilt yield has risen from 2.28% when I wrote this post to 2.4% at the week’s close) have given an illustration of this concept.

      It has been easy also for the Bank of England to figuratively bask in capital profits from its QE but they have shrunk and the last £100 billion will be at an outright loss right now.

      Going forwards we wait to see what Mark Carney does. The view of Andrew Baldwin who comments on here and follows Canadian economics and statistics is that he is much less keen on nominal GDP targeting than the UK media have so far assumed.But QE has raised he dangers of inflation for any recovery in the UK and could choke it off.

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