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Cash for Clunkers a Victim of its Success

Car Allowance Rebate System
Car Allowance Rebate System

When I first heard the $1 Billion set aside by the Federal government for the "Cash for Clunkers" program was about to run out, I chuckled and thought, "well that didn't take long."

It also has brought up a question as to whether or not the quick evaporation of money means the public is ready to buy cars and trucks again, or if this is a one time "flash point" of demand sparked by Federal money.

My gut says it's the latter.

Don't get me wrong, I do think there is a pent up demand because so many people have gone so long without buying or leasing a new car as they normally would. I can't blame them. With unemployment at 10% and the economy on the skids the last two years, taking on a car loan payment was the last thing many people wanted to do. And I'm sure the chance to get $3,500 or $4,500 probably spurred some of those people to buy.

That's why I think Cash for Clunkersis a "one-time" event and not a sign all is well with the economy and auto sales.

The headlines saying consumer demand "burned through the $1 Billion set aside for the program" are misleading.

Dealers have been taking pre-orders for the last 3-4 weeks, so while it looks like Cash for Clunkermoney went fast, much of that was already "earmarked" from sales that went through a few weeks ago. It's that pulling forward of sales that we are seeing right now.

When you give people a taste of honey in the form of $4,500 or $3,500 for a rusted out car they've been wanting to ditch, people are going to take advantage of the situation. It was a great offer, and it's helped a lot of people and to an extent, many dealers.

But what happens next?

I suspect the administration will find another billion or two to keep the program going for a few more weeks. And when July auto sales come out Monday, we'll see a decent pop in sales relative to where they've been. If the program continues, more people will drag their old beater in to be sold. But at some point, the spigot will run dry. When it does, we'll see if the economy has improved to a point where we truly see auto demand picking up, and not simply benefiting from being goosed by Federal money.

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