Dispelling the Hype Behind Cash for Clunkers

The much talked about cash for clunkers program has always had serious drawbacks to it; it was robbing from future auto sales and it created a one-off increase in production for Detroit.

There was no doubt that the robust sales generated from this program would sputter out as few consumers were willing to increase their debt loads during times of uncertainty. We are now getting a report from GM stating that sales from the program, in just one week, are starting to slow.

I guess they were the only ones who had no idea that this would be a one-off run with limited longer term appeal given people are losing their jobs at a rapid rate. Not only are the sales slowing, but this program, which was further boosted by additional incentives from the dealers of up to another $4,500, is robbing from future sales. In fact, one could argue that those who took advantage of this program were more than likely going to buy a new car anyhow. Regardless, it was a spectacular event which is sure to boost GDP for 3Q09, but do not expect this program to give a boost to GDP after that.

Not to mention that it is more than likely that this program, since it is removing older cars from the road, will have a ripple effect through other car industries. Firms like AutoZone (AZO) or Pep Boys (PBY) will likely have slower sales or, worse yet, mechanics might get laid off adding to the unemployment rate.

There is also the obvious problem: Japanese models have a better reputation, even if it is not so much the case anymore, of being more fuel efficient and reliable which may have directed sales away from US automakers, even with additional rebates.

Essentially, this program, along with cyclical restocking, will add positive growth to the GDP in 3Q09, possibly to a positive figure, but there will be little carryover to 4Q09 unless unemployment drops. The other hindrance to the economy is the consumer who has been contracting their credit for 5 straight months which means they will spend less. Lending to consumers is still very slow and down significantly year-over-year and when added to consumers reducing their debt this means there is less hope for the biggest portion of our GDP to come back anytime soon.

I do not recall who said it, but I liked the quote: We are going to have a jobless, revenue-less, profitless, income-less, and consumer-less recovery which would be a first. Of course, the media wants you to believe this is actually going to happen and maybe it will, but I highly doubt it.

I think the best we can hope for is a stabilization of between 0 and 1.5% GDP growth in the near future. This also dispels the hype that cash for clunkers is some kind of miracle program when it is really government subsidized auto purchases.

Comments

[messengerva:]

With all due respect - nonesense. The car sales slow down in the past two years has created a backlog of demand from millions who who simply lacked the courage (or cash) to pull the trigger and get that new car. The 750,000 deals assisted by CFC is just the tip of that demand. Sure, they would have bought eventually. But few of us would be indifferent given the choice between a dollar today or a dollar tomorrow. Call it priming the pump - it is a wakeup call that credit is again available and it is a good time to move toward more efficient vehicles. Removing the old vehicles may have a modest effect of helping to firm used car prices while improving the overall safety and efficiency of the vehicle fleet. As for the clunkerless mechanics - that's the price of progress towards a more modern and reliable mix of vehicles on our roads. All I can say is wow - a government program that helps individuals and works as advertised. What could be wrong with that?

Aug 11 08:10 AM

[User 469747:]

We have a clunker that needs repairs, so we went to the Ford dealership (we can get an employee discount at Ford) and checked out the available cars and deals available for the cash for clunkers deal. They had very few eligible vehicles available for purchase, as they are sold out. As of August 7, the day we checked, there were no Ford Escapes nor any kind of Ford hybrid available in the state of Alabama. The dealership had one Fusion to show us, and five Focus. The closest hybrid Fusion was in Kentucky. There were no 2009s available in any model. Everything else was sold out due to the cash for clunkers program. Sounds great?
The dealerships do not know when they will get their $3500 to 4500 back from the government. They have to fill out 17 pages of paperwork for each car sold, send in the application, and hope the government approves it and sends them a check. The dealerships don't know how long this will take, so they are floating the $3500-4500 per car, which is $35,000 to 45,000 when selling just ten vehicles. So, if they sell 50 vehicles, they could be floating up to $225,000! and at what interest rate with all the credit tightening going on? How many dealerships can afford to float that kind of $$ for, say, six months?
The automobile plants have been slowing down production for several months. They have trimmed costs drastically by laying off workers and support personnel, cutting back final inventory and parts inventory, and their suppliers have slowed down in the same way. It takes at least six to eight weeks to get parts and ramp up to increase production to send out a final product. The cash for clunker program is over in less than three weeks and the dealerships not only have no idea when they will get cars, they are not sure they want to continue participating because they don't know when they will get their money back. And no one has a clear idea of about how much $$ is actually owed by the government for the cars for clunkers program.
Additionally, cars are very expensive. If you are in the market for a car anyway , or like the idea of getting a discounted vehicle and going into debt yourself for $23,000, this is a deal for you. Personally, we weighed our options, and made a decision not to take on another automobile loan, as it would be more than our house payment! This is based on our personal situation only.
But is this a good deal for the dealerships? I have serious doubts.

Aug 11 08:51 AM

[john s. gordon:]

agreed, dealerships will have a lot of accounts receivable from the govt for a while. the program was not very well thought out and many of the provisions were arbitrary.
> jack

Aug 11 09:04 AM

[jrauhauser64:]

And how many of these CFC cars were sold to those who could not afford a new car otherwise or had the downpayment without Federal Aid? Just another government created "bubble" created in the name of "helping the little guy". Sound ANYTHING like the housing fiasco which started this mess?

Aug 11 09:12 AM

[Otter451:]

To Messengerva

I think you fail to understand that the previous demand that resulted in those car sales numbers of 2 years ago, no longer exists. It won't suddenly re-appear with the rebound of consumer confidence either. The credit window is now closed. If you don't already know it, banks aren't lending anymore. Sure, a 700 to 800 FICO score will get you a car loan, but if those are the only people able to buy we end up with a long term demand shift.

In my opinion, we are simply subsidizing car companies by creating the illusion of long term demand. What program will we need to replace cash for clunkers when it is gone?

Aug 11 10:26 AM

[Auto Guy:]

This is a short term blip in demand. The entire US$3 billion accounts for only a few weeks of sales if applied to every sale at the current annual sales rate. I see this as a GDP move more than anything that will help the car companies.

Did anyone see the comments from Europe on their Cash for Clunkers program. The European OEMs are starting to complain that they can't make any money on small cars. This could get interesting.

Expect the Cash for Clunkers program to be a pull ahead vs. establishing a new demand level. After it ends, sales will drop off considerably (although it will be at holiday season, so there will be some cover to hide behind).

The replacement rate that everyone references has in it several assumptions that have to be recalibrated. The first is how many cars families have (1, 2 or 3), the second is how long they keep these cars on average (5 year, 7 years, 10 Years?). Most people are still using the averages from the last 10 years, which may be optimistic give the current economic/jobs climate and the leasing/credit climate, this math gives you about 13 million annual sales. If you use fewer cars and longer life for them, you get something closer to 11 million and the "pent up demand" gets to be a considerablely smaller number.

I am in the parts supply industry. I hope I am wrong, but I see something more like 10-11 million cars sold vs 15-17 million in the near future.

Aug 11 11:22 AM

[rps:]

This program should've been called "It Sucks to Be You Conscientious Consumer." I purchased fuel efficient cars 9yrs. and 7years ago and would like to trade in and purchase a new car via the "cash for clunkers" but I'm not eligible. Instead, my hard-earned tax dollars are rewarding the Hummer/SUV Road Hog owners. The Clowns-In-Charge-Congress share one commonality; half a brain on loan from Bozo.

Aug 11 11:44 AM

[Glen L.:]

@rps: You shouldn't insult Bozo, he's a hard-working clown who never took a government handout.

Aug 11 12:23 PM

[Dubious Bro...:]

I haven't been able to find the answer to this question: Are non US citizens eligible for the Cash for Clunkers program?

Aug 11 01:08 PM

[User 467580:]

I love this comment. It perfectly demonstrates the American attitude: "What's in it for me?"

First of all, the program is called "Cash for Clunkers," not "Cash for Fuel Efficient Cars" program. Be happy that you don't have to pay for a gas guzzler nor needed to for the last few years. Your cars are getting older, but it may make more sense for you to maintain them.

I just recently bought a used car myself. I did not want to trade in my paid for car (2002 Ford Escape -- not eligible anyhow), but I'm not upset that others can utilize this program. Let's be honest, I'm clearly a liberal because I believe in the greater good even when it doesn't benefit me DIRECTLY. There are indirect benefits here for everyone.

As I see it, this program is designed for two purposes:
1. Improve fuel efficiency for outstanding vehicles, thereby reducing demand on oil/gas. Will this have a large impact? Who knows? But it's a step in the right direction.
2. Help car companies move languishing inventory.

Not to mention, this may help many families obtain reliable, fuel efficient transportation without breaking the family budget. Also, for all the conservative (haters), as far as I know, this was not an income restricted program, so it provides equal access to this stimulative program provided you meet the requirements.

Other points:
- Mechanics will always be in demand because they have a skill.
- Dealerships can fill out 17 pages to get their money. Working with contracts and filling forms is part of their business.
- Yes, dealerships may need to float the up front savings, but they are better equipped to handle this then the consumer.

On Aug 11 11:44 AM rps wrote:

> This program should've been called "It Sucks to Be You Conscientious
> Consumer." I purchased fuel efficient cars 9yrs. and 7years ago and
> would like to trade in and purchase a new car via the "cash for clunkers"
> but I'm not eligible. Instead, my hard-earned tax dollars are rewarding
> the Hummer/SUV Road Hog owners. The Clowns-In-Charge-Congress share
> one commonality; half a brain on loan from Bozo.

Aug 11 02:02 PM

[messengerva:]

The credit window may be open more than you realize. How else did they manage to clear the lots (according to other messages here) of fuel efficient cars in a week or so? CFC gives people a reason to act now by essentially giving them a respectable downpayment. For some folks, once their old car passes a certain point, rounding up the cash for a downpayment on a new car can be difficult. I doubt the folks rushing to take advantage of this opportunity all have high credit scores. The new model year season begins soon. Seeing a new car in the neighbor's driveway is also a gentle nudge towards the showroom, so I doubt we'll see a big plunge this Fall. CFC is not a cureall, but it is more helpful than most government programs. All we hear about is the "Unemployment Rate". Why? Why not talk about the "Employment Rate"? Over 140 million people are working in this country now. According to the Labor Department, in July of 1999 there were 134.8 million people working. The auto industry sold 16.9 million cars in 1999. Once the credit window is fully open and the gloom and doom prophets are back in their holes, I don't see why we can't do 13 million new cars over the next 12 months. The country has more people now, so even though the unemployment rate is high, the number of people working is also high. The number of people working is key to the number of cars sold, I would imagine. CFC helps clear excess inventories, removes a lot of junk from the road and gets people thinking about new cars again. Paperwork and credit float are dealer problems. I don't see a lot of dealers opting out of the program.


On Aug 11 10:26 AM Otter451 wrote:

> To Messengerva
>
> I think you fail to understand that the previous demand that resulted
> in those car sales numbers of 2 years ago, no longer exists. It won't
> suddenly re-appear with the rebound of consumer confidence either.
> The credit window is now closed. If you don't already know it, banks
> aren't lending anymore. Sure, a 700 to 800 FICO score will get you
> a car loan, but if those are the only people able to buy we end up
> with a long term demand shift.
>
> In my opinion, we are simply subsidizing car companies by creating
> the illusion of long term demand. What program will we need to replace
> cash for clunkers when it is gone?

Aug 11 05:56 PM

[Gregman2:]

Overpaying for clunkers amounts to a subsidie, Wilbur. It's never good to be a slave to an asset...or to an ass.;-)

Aug 11 06:49 PM

[schnickelfritz:]

You're looking at the world in the typical upsidedown mode. We, who have made the appropriate choices 5, 7, and 10 years ago to purchase fuel efficient cars, are now subsidizing with our tax money those who chose to purchase gas guzzlers. My 1997 Honda Civic with 295,000 miles is certainly a clunker. Maybe I don't understand the new Obama administration definition of "clunker" as you and the beltway elitists do.
Re-name the entitlement program more appropriately, "Taxpayer Cash For Making Bad Choices."


On Aug 11 02:02 PM User 467580 wrote:

> I love this comment. It perfectly demonstrates the American attitude:
> "What's in it for me?"
>
> First of all, the program is called "Cash for Clunkers," not "Cash
> for Fuel Efficient Cars" program. Be happy that you don't have to
> pay for a gas guzzler nor needed to for the last few years. Your
> cars are getting older, but it may make more sense for you to maintain
> them.
>
> I just recently bought a used car myself. I did not want to trade
> in my paid for car (2002 Ford Escape -- not eligible anyhow), but
> I'm not upset that others can utilize this program. Let's be honest,
> I'm clearly a liberal because I believe in the greater good even
> when it doesn't benefit me DIRECTLY. There are indirect benefits
> here for everyone.
>
> As I see it, this program is designed for two purposes:
> 1. Improve fuel efficiency for outstanding vehicles, thereby reducing
> demand on oil/gas. Will this have a large impact? Who knows? But
> it's a step in the right direction.
> 2. Help car companies move languishing inventory.
>
> Not to mention, this may help many families obtain reliable, fuel
> efficient transportation without breaking the family budget. Also,
> for all the conservative (haters), as far as I know, this was not
> an income restricted program, so it provides equal access to this
> stimulative program provided you meet the requirements.
>
> Other points:
> - Mechanics will always be in demand because they have a skill.<br/>-
> Dealerships can fill out 17 pages to get their money. Working with
> contracts and filling forms is part of their business.
> - Yes, dealerships may need to float the up front savings, but they
> are better equipped to handle this then the consumer.
>
> On Aug 11 11:44 AM rps wrote:

Aug 13 12:06 AM