Can iPhone 5 Really Boost Economic Growth? [Not much]
JP Morgan analyst Michael Feroli made some news this week with a three-paragraph research report claiming that the introduction of the iPhone 5 could boost U.S. economic growth by as much as half a percentage point. It would be really great if Apple could get the U.S. economy out of the doldrums just by releasing popular new products, but Feroli seems to missed the part of Econ 101 where they discussed how economic growth is actually calculated.
The problem with his argument is breathtakingly simple: He fails to consider the possibility, actually the near certainty, that a fair amount of the spending for new iPhones–$200 per qualified consumer with an extra $400 or so of subsidy kicked in by the carrier–will merely displace other spending. Only the spending in excess of what would have occurred otherwise makes any difference. For purposes of juicing the economy, if not of improving anyone’s balance sheet, it would be best if all the money spent on new iPhones were borrowed by consumers and carriers.
Borrowing, through a process far too complicated to be explained here (but here’s a very simplified explanation), creates money out of thin air. That’s how John Maynard Keynes could famously suggest that the government might boost the economy by paying workers to dig holes and fill them up; he assumed that the government would create the money to pay them.
In the real world, consumers mostly will buy those iPhones by forgoing the purchase of something else. And some portion of the subsidies the carriers will be paying Apple will be money that doesn’t go to Samsung or Motorola for Android phones.
Initial indications based on pre-orders are the the iPhone 5 launch will be very strong, but the overall economic impact will be muted. The U.S. economy is vast, and it’s going to take more than the sale of a few million iPhones to make much of a dent. In the end, the indirect effects of the new iPhone could be stronger than the direct impact. To the extent that iPhone 5 upgrades drive AT&T, Sprint, and Verizon to boost capital investment in their LTE networks, the effect would be far more significant. Expanding consumption is nice, but capital expenditures drive a lot more bang for the buck.