Will 'Cash for Clunkers' Bring the Feared Double Dip?

Could “Cash for Clunkers” be a net political negative for Obama?

One analyst thinks that by moving forward sales via the program we’re setting ourselves up for a robust third quarter GDP number and a negative growth rate for the fourth quarter - the dreaded W or double dip recovery.

The Wall Street Journal’s Real Time Economics blog has the rationale on Douglas Lee’s theory:

His math: Auto sales were running at 750,000 to 850,000 units per month, and the $3 billion program would fund an additional 200,000 to 250,000 per month for three months. (The calculation includes a small allowance for cars that would’ve been purchased anyway.) That sends the annual selling rate for one quarter from between 9 million and 10 million to around 11.5 million to 13 million. It would add an annualized $50 billion to third-quarter consumption, or more than two percentage points to consumer spending growth. (That may understate the impact, he notes, because even people who do not qualify are being drawn into auto showrooms and buying new cars anyway through other incentives.)

But, as many have noted, the program also leads to speeding up many sales that would’ve happened anyway in late 2009 or early 2010. After adding $50 billion to third-quarter consumption, Lee says, you can subtract about $25 billion in the third quarter. The end result under his forecast: third-quarter growth of 2.5% to 3.5%, followed by a fourth-quarter decline of 1.5% to 2%. In other words, more fodder for talk about a double-dip recession.

Not everyone is buying into this concept. Morgan Stanley admits it's front loading growth but doesn’t think that it will lead to negative growth in the fourth quarter. Credit Suisse is absolutely gushing about the program and even talks about multiplier effects in other parts of the economy. We haven’t heard the M word bandied about for some time!

I suspect that when we look back at the history of this whole period in a couple of years, C4C will be a footnote. It might cause an embarrassing slide backwards in the fourth quarter but I doubt that would have any real impact on the eventual climb out of recession, though it would be politically dicey.

The most enduring legacy of the program may be that it came at this time of the year and furnished a lot of us with something to write about in an otherwise news starved environment.

Comments

[jeandit75:]

Don't you worry that this government will find a way to manipulate things and save the too big to save to give the illusion that this a V shape recovery. Obama's first councellor should actually be David Coperfield.

Aug 04 07:52 AM

[Tony Petroski:]

The author: "I suspect that when we look back at the history of this whole period in a couple of years, C4C will be a footnote."

You are correct.

What will be noted by historians is the continued slide towards government actively managing outcomes while allies in the media slant the news to put the best gloss on things.

I'm one of those who doesn't need a car and I own a "gas guzzler," a Ford Explorer that I like a lot. I get to watch other people get part of my tax money to get freebies while I get nothing. Living the free life becomes a game of finding out what the latest subsidies are and making those purchases in a timely manner to game the system. Within a few months we will be hearing about all the re-sold vehicles from those who got a big subsidy to buy their KIA and now are reselling the vehicle they never used for a tidy profit.

The march of Progressivism rolls on.

Aug 04 08:31 AM

[Tim H.:]

I have totally lost all respect for Seeking Alpha's website. As it has been infiltrated by the same viewpoints as those on CNBC. Why isn't Seeking alpha pumping up gold miner stocks and Gold? Those were all going to be such big winners. the commodity market bullish run would never end. i support President Obama, I also have made 25% return last 3 weeks. Rest assured their will be more pullbacks. But recession will be over by next Summer. So you just keeping posting your comments clouded by your political ideology. Wall Street and the finnacial markets in their greed brought us this awful recession. Anyone reading my comments must NEVER EVER FORGET THAT FACT!! These people writing on Seeking alpha were same one's pumping up price of oil and commodity's market as having a bullish run for many more years.... DO NOT FORGET THAT FACT. BTW yes I invest but I also have my eyes wide open. Use your own Due diligence and research when investing. Also take a grain of salt with any investing advice you read or hear and use it as just one small percentage of your investing tool. Best advice I ever read is from Buffett and huge retired money manager. It is: Buy into the markets that wall street is negative on but has real long term growth. Then be patient. The markets will return. Second part is when buying... Always buy on dips. Momentum trading is how to lose money. Always buy on the dips in a market you like. Follow those 2 basic ideas and you will make money in the stock market.

Aug 04 08:55 AM

[John Galt:]

It's not called a $4,500 car subsidy program... It's called "Cash for Clunkers. Who would be against that? What, you like junker clunkers?

Not only do we get to "help" poor people buy brand new cars, but we get old cars off the road and we are saving the planet by combating global warming! It's a greeeeeat plan.

PLUS, when people keep buying government motor cars, we get to say that we turned around the auto industry and turned them into a profitable company. I mean, who cares if we take 4500 from one pocket and put it into another pocket.

Look, there are more cars than drivers in this country. People consumed TOO MUCH auto, buying more than they can really afford. That puts downward pressure on auto demand compared to past years.

There is a bumper sticker... "honk if I am paying your mortgage". Now they can make a new one... "honk if I subsidized your car".

Aug 04 09:00 AM

[Tim H.:]

I think I will run out and turn in my clunker just so I can stick it to you. Ford Explorer... Hah watch out for the rollover. If your too stupid not to trade it in for say the new FORD FOCUS which has gotten rave reviews... Compared to the Ford Explorer. Who's freaking fought is that? Not the government but your dumb_ss!


On Aug 04 08:31 AM Tony Petroski wrote:

> The author: "I suspect that when we look back at the history of this
> whole period in a couple of years, C4C will be a footnote."
>
> You are correct.
>
> What will be noted by historians is the continued slide towards government
> actively managing outcomes while allies in the media slant the news
> to put the best gloss on things.
>
> I'm one of those who doesn't need a car and I own a "gas guzzler,"
> a Ford Explorer that I like a lot. I get to watch other people get
> part of my tax money to get freebies while I get nothing. Living
> the free life becomes a game of finding out what the latest subsidies
> are and making those purchases in a timely manner to game the system.
> Within a few months we will be hearing about all the re-sold vehicles
> from those who got a big subsidy to buy their KIA and now are reselling
> the vehicle they never used for a tidy profit.
>
> The march of Progressivism rolls on.

Aug 04 09:00 AM

[Per:]

The cash for clunkers program has nothing to do with a greener environment as it main focus is to drive SUV, Minivan and truck sales. It's disguised auto industry support to keep the failing US auto industry alive. Let two out of the three die and we'd get better cars and a stronger economy.

Aug 04 09:06 AM

[The Geoffster:]

From Mike Shedlock (Mish):
The recession is starving the government of tax revenue, just as the president and Congress are piling a major expansion of health care and other programs on the nation's plate and struggling to find money to pay the tab.

The numbers could hardly be more stark: Tax receipts are on pace to drop 18 percent this year, the biggest single-year decline since the Great Depression, while the federal deficit balloons to a record $1.8 trillion.

Other figures in an Associated Press analysis underscore the recession's impact: Individual income tax receipts are down 22 percent from a year ago. Corporate income taxes are down 57 percent. Social Security tax receipts could drop for only the second time since 1940, and Medicare taxes are on pace to drop for only the third time ever.

Aug 04 09:26 AM

[randy thurman:]

what happens a year from now when gm and chrysler are still under water? they've already screwed their debt holders and the unions. the gov. is selling their over-priced cars for them. how many rabbits can you pull out of one hat? this really does seem like 2007 all over again.

Aug 04 10:43 AM

[Old Trader:]

Fwiw, as I've read many of the articles dealing with the C4C program, I've seen more than a few commenters mentioning that they had a second (or third) car that would have probably been traded in over the next year, or so, due to mileage/condition. They admitted it was pretty much a no-brainer to take advantage of the program.

Based on that, I'd have to agree with those who argue the program will pull sales from the next couple of upcoming quarters.

Aug 04 11:10 AM

[Craig W:]

The Cash for Clunkers plan is idiotic in every respect. They would pay me $3500 to crush my perfectly good 2000 Ford Windstar mini-van with only 82000 miles on it for a new Honda Odyssey mini-van that gets a whopping 2 mgp better. How is destroying perfectly good cars good for the environment? How would saving 2 mpg ever offset the depreciation on the new car? What business person with would ever do this? How is it in my economic self interest? Last winter when they were discussing this plan, the KBB interparty value of by Windstar was $2000 . . . now the KBB interparty value is $3500. I’m seeing a 75% increase in the value of my car in just six months even without the government plan! With all the idiots having their old cars destroyed the value of my car should continue to increase . . . why would I want to sell an appreciating asset? Even if I wanted a new car now, I would just sell it to someone else for $3500 so as to avoid having the car destroyed for no reason. Does it occur to anyone that it is more energy intensive to build a new car than it is to use up one that is already built? It takes energy to build new cars you know. Look, the number of new cars being sold is down around 50% and people are driving their old cars longer which is far more economical than constantly paying the depreciation on new cars. People making wise choices to drive their cars longer is good for American in the long run.

My point is, the press and the politicians should call this plan what it is . . . and attempt bail out the auto makers and encourage people to get further in debt. Claiming that it is good economics or pro-environment is moronic.

Aug 04 11:36 AM

[Mad Hedge F...:]

Other factors will do it, but not C for C. Perhaps it was the newspaper gene in me that made me screech my car to a halt when I saw a near riot in progress at my local Toyota (TM) dealer. The showroom was more jammed than the unemployment office, with eager salesmen recalled from vacations, manning card tables set up in every available space. I managed to grab one peripatetic salesman by a lapel, who gushed that they sold 45 cars yesterday, compared to ten for a normal Friday, and that 35 of these were the fruit of the “Cash for Clunkers” program. Sure I could get a $4,500 credit for my 1995 BMW (17 mpg), and apply it to a new Prius (50 mpg), taking the price down to $19,500 and the monthly payment to $450/month for five years. In fact, the government stimulus program was so successful, that it ran out of money in the first four days, and congress rushed to triple it to $3 billion on Friday. It was like the survivors of a ship torpedoed at sea were swimming frantically for the only piece of wreckage that floated. Assuming that the average car drives 10,000 miles a year, and the average swap generates a mileage improvement from 15 mpg to 27 mpg, junking 750,000 clunkers will save 30 million barrels of crude a year, 1.5 days of our total annual consumption, or three days of imports. I asked to see the cars that were traded in and was told that the lots for the dealer, the used cars, and the detailer were all full, but I could see some if I went to the Target nearby where they were renting extra spaces. There I saw the fleet condemned to clunkerdom, GM Safari’s, Jeep Cherokees, Buick Regals, Dodge Ram pickup trucks and vans, and Chrysler minivans by the dozen, all with “CFC” marked on their windshields, a certain death sentence. These sorry excuses for transportation will never belch blue smoke, nor drip oil on our interstates again. I can’t imagine a sorrier commentary on the management failure of the US car industry for the last 30 years.

Aug 04 11:40 AM

[MatrixSurfer:]

We own GM, so in effect the politicians are taking our own money from us, to give it back to us to subsidize buying cars from ourselves. My head hurts.

If they don't pull the plug on this sham, its just gonna turn into another never-ending government black hole program. Taking a lot of perfectly fine cars of the road that could have been purchased by first-time auto buyers too.

Aug 04 12:45 PM

[Jimbo:]

Tom H: I can't speak for the other denizens on Seeking Alpha but I think if you look at the players in this debacle, you might see that the bankster-gangsters that the Bushman helped through Hank Paulson's friends at "Government" Sachs are the same ones that have purchased major influence in The Prophet Obama's White House. These slimy characters always seem to buy a front row seat in ANY administration.

Aug 04 05:53 PM

[Fighting Yoda:]

Cash for clunkers is simply front loading the sales, so likely there would be a double dip. And guess what is selling Japanese/Korean with the exception of Ford Focus.

The auto bailout is unending - manufacturing is being subsidized (GM, Chrysler bailout), auto financing subsidized (GMAC bailout $13.5B), consumer purchases subsidized (cash for clunkers). What next - if and when electric cars or whatever comes out of Detroit - there would be subsidies on that too.

I think consumers (at least some) are being induced to buy cars that they perhaps do not need or can afford, and will simply incur more unaffordable debt. This debt is what got us into trouble in the first place - so more of it seems to be the prescription.

Aug 04 06:57 PM

[T-town Bob:]

They are not taking your money...they already spent that a while ago. They are borrowing the money from the Chinese and using your future financial wellbeing as collateral.

On Aug 04 12:45 PM MatrixSurfer wrote:

> We own GM, so in effect the politicians are taking our own money
> from us, to give it back to us to subsidize buying cars from ourselves.
> My head hurts.
>
> If they don't pull the plug on this sham, its just gonna turn into
> another never-ending government black hole program. Taking a lot
> of perfectly fine cars of the road that could have been purchased
> by first-time auto buyers too.

Aug 04 08:05 PM