J.P. Morgan got lots of headlines for a recent note suggesting that sales of Apple’s new iPhones in the last three months of 2012 could add 0.33% to America’s overall economic growth for the whole year, but a blind spot in the analysis makes this prospect highly unrealistic.
The bank’s analyst calculated the domestic economic boost by subtracting the cost of imported components from the price of each new iPhone, and multiplying that by estimated unit sales from the launch date to the end of the year. He then compared that total to annual growth figures for the whole economy:
Thus… sales of iPhone 5 could boost Q4 GDP by $3.2 billion, or $12.8 billion at an annual rate. This would boost annualized GDP growth in Q4 by 0.33%-point.
With total U.S. growth for 2012 projected at only 2%, that would be a huge impact, and to be fair, J.P. Morgan analyst Michael Feroli did include the caveat: “This estimate seems fairly large, and for that reason should be treated skeptically.” NPR’s Planet Money blog obliged, with a skeptical treatment that pointed to a critical flaw in the bank’s analysis:
JPMorgan assumes 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.
Say I want an iPhone 5. And to pay for it, I’m going to cut back on other spending.
My wife and I won’t get a babysitter one Saturday night. Instead of going out for a nice dinner and a movie, we’ll have mac and cheese and watch cable. (Sorry, honey!) Instead of buying my dad a fancy Christmas present, I’ll buy him a book. (Thanks for teaching me to love reading, Pop!)
My purchase of an iPhone 5 has contributed precisely zero to economic growth. I have simply decided to spend less on childcare, restaurant food, movies and Christmas presents (all that spending would have contributed 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.