Wednesday, 12 September 2012

iPhone 5 set to save the World

Apparently, the anticipated release of the iPhone 5 later today is going to boost the US economy, possibly by as much as 0.5% of GDP. As the Washington Post claims, "That could mean the difference between a disappointing economic expansion and a half-decent one". This story originated in a JP Morgan analyst report and now appears to be have spread like wildfire. The analyst calculations are speculative as the retail price of the device, the release date, new features, and the components that will count as imports (and thus not contribute to GDP) are all unknown at this time. The boost scenario also relies on zero substitution - i.e. the belief that people won't spend the money they've been carefully collecting in their piggy-bank on something else. The money has been earmarked for a new iPhone so only a new iPhone can produce the increment in GDP. The analyst report even posits a "hedonic premium", the idea that because the new phone will have better features, this will make people happier and more productive, leading to greater GDP growth. It's utter cobblers, of course.

The significance of this is not that it might be true but that so many are willing to believe it, or more accurately to suspend disbelief. There is a palpable desire for good news, and specifically for a story that has an element of "market-making" about it. While this will be the first big product announcement (assuming the iPhone 5 actually is announced) since Steve Jobs's death, there remains an expectation that this will be the same old time religion, a fanfare followed by the waving of a magic wand. This is what Keynes termed "animal spirits", an "urge to action rather than inaction" that is "characteristic of human nature". Personally, I've always thought that this urge was driven as much by boredom as positivity, but "spontaneous optimism" sounds nobler than "I'm bored, let's do something", which calls to mind the Scouse vultures in Disney's The Jungle Book.

When companies retrench and reduce expenditure, a point eventually comes when their operational management find that they have finished the "cutback" project and start to look around for what to do next. A certain amount of maintenance and housekeeping will keep them occupied for a while, but this quickly palls. Gradually, the gripes and suggestions start to filter up: "we need to do something about X", "we've been meaning to do Y for ages; now would be a good time" etc. If the suspicion that businesses have been hoarding skilled labour during this recession is true, then the bounce-back to launching new projects may happen quite quickly. However, by the same token, this may not lead to a rapid expansion in employment because there is plenty of spare capacity.

Boredom also affects the way the economy is reported. Analysts get bored of worrying about a Chinese hard landing, journalists get bored of the Eurozone crisis. A "good news" story (and Apple product launches have been the acme of this over the last decade) is doubly attractive in the current climate because it provides variety. The iPhone story is indicative of two beliefs. First, the idea that if we could all be positive then we might beat this recession. This is the "confidence fairy" criticised by Paul Krugman, but it also echoes the modern notion that positive thinking alone can beat cancer. It's the power of secular prayer. Second, the failure to account for substitution shows a belief that many of us, i.e. individual consumers as well as businesses, are sitting on a (modest) cash pile. Demand is latent and just waiting for the right product to come along.

Household debt levels have dropped in the US following the sub-prime shakeout (i.e. due to defaults and foreclosures), however this is not grounds to believe that people have spare cash or are willing to incur debt to get a new phone. In the UK, household debt has not come down, in no small part due to bank and building society forbearance as property prices have remained high. Again, there is no evidence that people have money burning a hole in their pocket or are keen to cane the credit cards once more. It is possible that a seriously innovative and desirable iPhone 5 might perk up demand a bit, but it would have to be a game-changer to produce the sort of boost being talked about. A replacement for Google Maps isn't going to rock your world.

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