In our minds, the price of gas has an outsized impact. It’s hard to go more than a day or two without seeing what it costs to fill your car at a nearby station given the prominent price display. And lately that price has been headed in only direction — down. Thanks almost entirely to the roughly $30 drop in the price of a barrel of oil, with much of the decline in just the past few weeks, gas prices are at a multi-year low and many Americans have a little more to spend elsewhere. One popular place to put that money lately has been into a new Apple iPhone, which went on sale just over a month ago as the price at the pump started its recent free fall. Because economic effects are complex, neither of these is an unqualified win for the U.S. economy. But together they are likely to help the country finish 2014 with one of its strongest results since the 2008 financial crisis.
How big can a little phone be?
Michael Feroli, the chief economist for the U.S. at JPMorgan Chase, told the New York Times Apple’s smartphone matters a great deal. “The iPhone is having a measurable impact. It’s a little gadget, but it costs a lot and it seems that everybody has one. When you do the multiplication, it’s going to matter.” His estimate is that iPhone sales add 1/4 to 1/3 of a point to GDP.
Notably, Feroli had similar things to say back in 2012 when the iPhone 5 was new. Back then, he figured that 8 million of the new phones would be sold domestically in the fourth quarter with about $400 of margin. If anything, early reports this cycle and Apple’s CEO Tim Cook suggest demand is stronger than ever. Feroli actually is more cautious with his estimate of GDP contribution this time around even though Apple’s profit margin per phone is about the same and the iPhone’s popularity hasn’t waned.
But he sounds a cautious tone on the impact overall, too. People buying iPhones might have less to spend elsewhere. Last month, the Commerce Department reported electronics and appliance sales jumped 3.4% while clothing fell 1.2%. “People are buying iPhones, partly as a status symbol,” Feroli told the Times. “They’re not buying as much clothing.”
But it’ll never be oil?
The substitution effect of one good for another makes it seem like lower oil prices are nothing but a winner, then. For every penny you don’t pay at the pump, that’s one more you can put into purchasing something else. But oil and Apple have become opposites in a rather intriguing way that makes things less clear. When the iPhone maker was young and selling nothing but Mac computers in the 1980s, it was a mostly domestic company. All its profit was made here and stayed here. Today, most iPhones are sold abroad and the economic impact of them is felt there, which is why the prospect of Apple selling 60 million phones this quarter doesn’t have forecasters giddy about U.S. GDP.
Of course, the country was also importing the vast majority of its oil back then, too. When prices fell, the pain of that was felt mostly in the Middle East as oil revenues fell along with them. With imports down to 1/3 of oil supplies, lower prices now hit in our own backyard, across places like Texas, Oklahoma, and North Dakota. Although there are concerns that even lower prices could reduce investment in U.S. oil production and increase imports again, even $80-a-barrel oil means that profits fall for U.S. drillers. That leads to fewer new jobs created in an industry responsible for 2 million already, according to Daniel Yergin, the energy analyst and author of The Quest: Energy, Security, and the Remaking of the Modern World.
While Yergin didn’t put a GDP value on those lower oil prices, Andrew Kenningham of Capital Economics speculated for Quartz that oil below $90 a barrel for a full year could add 0.5% to GDP. That’s more significant than the iPhone’s single quarter of impact, but requires the low prices to persist for quite a while — an uncertain bet in an uncertain world.
In the meantime, a global phenomenon (the iPhone) and a global commodity (oil) are both working their magic on the U.S. economy, often together. Those lower gas prices mean upwards of $10 billion a month in the hands of consumers rather than oil companies. And $10 billion can buy a lot of iPhones.