Friday, June 25, 2010

The iPad Economy

I love the iPad. It's great. But its huge success - 3 million sold in 80 days - doesn't represent a huge success for the average American. The news media just doesn't get it, so there is no chance for the American public to understand what is about to happen.

Back in April we treated to news stories about the first quarter growth in the Gross Domestic Product. And example is this one in the LA Times written by one of its own reporters headlined Nation's GDP grows at 3.2% rate in first quarter which told us:

The economy grew 3.2% in the first quarter of the year, the Commerce Department reported Friday, another indication a steady, though modest, recovery has taken hold.

The annualized rate of growth of the gross domestic product -- the nation's total production of goods and services -- was down from the 5.6% rate of the last three months of 2009. But that had been expected as the effect of the federal government's stimulus policies peaked during that period.

..."We're still running on the fumes of stimulus in the U.S. economy," said Diane Swonk, chief economist at Mesirow Financial in Chicago. "It's a recovery, but by any standard is still a muted recovery. But we're thankful to have what we've got," given the depth of the recession, she said.

..."I think its well in line with expectations," Swonk said of the first-quarter figure. "The recovery's more broad-based. Although the momentum slowed quite a bit from the fourth quarter, the consumer showed up and we had a lot of demand, which is good."

Yeah....

Except that today the LA Times offers a followup wire service story headlined Government lowers 1st quarter growth estimate that reports "Gross domestic product rose by an annual rate of 2.7 percent in the January-to-March period, the Commerce Department said Friday."

The article does ramble through some information. But it doesn't explain why the growth number was dropped 15.7% from the original estimate. Nor does it point out that the GDP grew less than the population - in other words, the per capita GDP is still a negative number. Nor does it note that the growth rate would have to be above 3.5% the rest of the year to meet the Federal Reserve's forecast for a start to an economic recovery.

That forecast coming to fruition doesn't seem very likely since:
  • retail sales in May fell for the first time in 8 months;
  • new home sales plunged 33% in May because the tax incentive stimulus expired in April;
  • the Republicans in the Senate killed the jobless bill which means that unemployment insurance will disappear for about 200,000 unemployed people each week for the foreseeable future;
  • state government, school, and local government spending will dramatically drop over the next 12 months, particularly without the funds that were in the jobless bill.
All of which brings me to the iPad economy. It is possible that sales of the iPad and the iPhone 4 could effectively distort the second quarter results. What's bad about that is the hidden truth of our economy, which the iPad as a product represents.

It is possible that during the April-June 2010 quarter American consumers will have spent $3 billion purchasing iPads and iPhones. That is very different than spending $3 billion on purchasing homes or even cars. The difference is that the multiplier effect of the $3 billion in purchases of Apple products won't be comparable. Nothing in the iPad is manufactured in the United States.

A home is constructed by American workers and the products and many of materials used in the home are manufactured here using raw materials from here. Each dollar spent multiplies in our GDP.

Sure, Apple in America employs the folks who develop a product like the iPad and sure a number of other companies and individuals will add to our GDP developing and selling accessories and apps.

But to be enthused about consumer spending growth as one might be if new home sales jump is not possible. When Apple turns on the production line, it is all in the ether of computerized accounting for Americans, it is money going to China and Chinese workers, it can be seen on the screen but not felt.

That is why people are failing to understand the truth of the report that also came out today telling us that corporate profits increased 8 percent in the first quarter and earnings were up 34 percent from the same time last year. In an iPad economy these numbers can never translate into a corresponding increase in employment. Nor does it mean that the federal state, school, and local government revenues will see a corresponding increase.

When something was designed and manufactured in the United States using materials mostly from the United States, every dollar spent by a consumer to acquire the item was multiplied in our economy. Not only did the store clerk get a piece of the dollar the consumer paid for an RCA TV in 1952, the American who made the cabinet for an RCA TV in 1952 got a piece of the dollar. So the dollar spent, plus all the pieces as they passed through various hands in the system, increased the GDP and became taxable income which helped to support the school the consumer's kids went to.

When I bought an iPad, the employee who made the metal back got a piece of my purchase price, but he or she is in China. My consumer spending just isn't comparable as a stimulus to the American economy as one might think. It most certain isn't comparable to spending on new home purchases.

The hard truth is the U.S. has reached a limit. We as consumers can't spend our way out of The Great Recession. We must start producing things here beginning with the raw materials, to the extent possible, and ending with the final product. And we need to find a way to represent our economy so that a dollar spent on an iPad purchase is not equated by economists and the media to a dollar spent on a new home purchase.

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