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Can a new iPhone really boost the U.S. economy? Add to ...

On the one hand, the U.S. economy is struggling with low employment growth, a recession in Europe and what looks like a sharp slowdown in China. On the other hand, iPhone 5.

Apple Inc. is gearing up for a major announcement on Wednesday, and expectations are for an updated iPhone – perhaps one with a larger screen and thinner body. That’s bound to make Apple enthusiasts drool with delight. But what has also been making headlines is the fact that an economist at JPMorgan believes that a new iPhone will make a significant impact on U.S. gross domestic product.

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On Tuesday, Michael Feroli made a big splash with a note that argued that the launch could add a quarter point to half a point to U.S. GDP in the fourth quarter, at an annualized pace.

He started with the assumption of 8 million iPhones sold in the United States in the fourth quarter alone, at about $600 (U.S.) a pop – even after accounting for lower “bundled” retail prices because of subsidies offered by wireless networks.

Next, subtract about $200 per phone due to import costs (the things are made elsewhere, after all) and you get $400 – or a $3.2-billion economic boost, or $12.8-billion at an annualized rate.

“In October of last year, when the iPhone 4s first became widely available, overall retail sales that month significantly outperformed expectations,” Mr. Feroli said in his note. “Given the iPhone 5 launch is expected to be much larger, we think the estimate mentioned in the first paragraph is reasonable.”

Now, Apple has been credited with many things – most recently, for single-handedly giving U.S. earnings growth a big boost. But is it really about to become an economic growth engine as well?

Paul Krugman, blogging in the New York Times on Wednesday, weighed in. Curiously (to me, at least) he doesn’t discredit the idea. However, he argues that the immediate economic benefits come from people liking the new phones so much that they junk their old phones.

“In other words, if you believe that the iPhone really might give the economy a big boost, you have – whether you realize it or not – bought into a version of the ‘broken windows’ theory, in which destroying some capital can actually be a good thing under depression conditions,” he said.

“Of course, it’s nice that the reason we’re junking old capital is to make room for something better, not just for the hell of it. But you know what would also be nice? Building useful stuff like infrastructure employing labor and cash that would otherwise sit idle.”

 

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