Economics Web Note


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Can one little phone impact GDP?

 
 
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.* Likewise, if the imported cost component is similar to previous leading generation phones it would imply around a $200 per phone addition to imports (which is a subtraction from GDP). The difference between these two figures, $400, would represent the trade margins, which figure into GDP.** Thus, calculated using the so-called retail control method, 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. If hedonically-adjusted constant quality prices of phones declined due to newer or better features -- a reasonable conjecture -- then the lift would be even greater, though past iPhone releases don't bear a visible impact on the relevant CPI components. The third of a percentage point lift would limit the downside risk to our Q4 GDP growth projection, which remains 2.0%.
 
This estimate seems fairly large, and for that reason should be treated skeptically. However, we think the recent evidence is consistent with this projection. The last iPhone launch was at a similar time last year. In October of last year, when the iPhone 4s first became widely available, overall retail sales that month significantly outperformed expectations. Essentially all iPhone sales occur either on-line or in retail stores. Over half of the 0.8% increase in core retail sales last October occurred in two categories: on-line sales and computer and software sales, which combined had their largest monthly increase on record. The incremental growth of Q4 sales at those stores over Q3, if due to the iPhone, would have added between 0.1% to 0.2%-point to Q4 growth, after subtracting the import drag. Given the iPhone 5 launch is expected to be much larger, we think the estimate mentioned in the first paragraph is reasonable.
 
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* Out-of-pocket retail prices may be lower if bundled with service plans, with wireless networks often absorbing around a $350 subsidy. The phone-selling companies often report such sales as the best estimate of what the product would sell for on a stand-alone basis. Census officials averred that such was likely how bundled phone sales are reported to them in the retail sales survey.
** Account needs to also be made for changes in inventories, but we believe that Q3 and Q4 end-of-period iPhone 5 inventories will be very lean, implying little addition or subtraction to GDP.
*** iPhone 5's may start retailing in late September. However, the general principle in the retail sales report is that sales should be recorded when the product is delivered, which in the case of iPhone 5 is more likely in October.


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