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."
More on Mindful Money
To receive our free daily newsletter sign up here.