The cash-for-clunkers program may have pushed retail sales into a higher gear, but the momentum will be fleeting and the road to recovery is likely at times to be a bumpy one, say economists.
Retail sales climbed 2.7 percent in August, the most in three and a half years, led by a 10.6-percent-increase in sales of motor vehicles and parts. Without that, sales rose 1.1 percent.
“You have a modest improvement in reality and an outsized, robust statistical improvement, “says Richard Hastings, consumer strategist at Global Hunter Securities
Economists generally agree that the surprising strong response to the government buyer’s incentive program tapped a lot of the pent-up demand for autos, but there’s sizable debate about what it means for consumer spending overall.
“There's definitely going to be some cannibalization of future sales, “says Brain Bethune, an economist at Global Insight. “It’s very difficult to know how much who says there’s anecdotal evidence that some people in August wound up buying autos even after they learned they didn’t qualify for the trade-in, fuel efficiency program.
And in this case, what’s good for GM may not be good for America.
“I don’t buy into the idea that cash for clunkers didn't take away from other categories,” says Bethune.
August data suggest there may be some causality there. While auto sales jumped, other big-ticket categories, such as furniture, fell.
That dynamic is a critical one, given the erratic pattern of retail sales thus far this year and the cloudy outlook for the economic recovery and labor market, particularly since consumer spending accounts for some 70-percent of economic activity.
The great consumer belt-tightening of 2008-2209 has been both voluntary and involuntary. The steep decline in housing and stock prices in recent years erased enormous wealth and severely damaged the so-called feel-good factor.
Even the wealthy have cut back, in some cases because they were advised to shun displays of immodest, extravagant consumption—as was the case with bonus money at Goldman Sachs .
“There's been some voluntary pull back, “ says Robert Brusca of Fact & Opinion Economics, who has one of the more optimistic economic forecasts at the moment. He says people are past the knee-jerk reaction” of the Lehman Brothers collapse and the prospect of losing their jobs.
Brusca says the recent improvement in various measures of consumer confidence “predict an upswing in spending,” as they typically have in the past.. “We’re seeing some signs of life.”
That may be true, but others say headwinds still exist. The credit crunch that predated the recession and now threatens to also outlive it has made it hard for consumers to borrow, which made continued spending possible for many.
Best Buy's latest quarterly results, which fell short of analysts forecasts, underscored the fragile balnce. Though sales increased slightly, consumers spent less on their transactions.
Hastings doesn’t expect to overall sales to rise more than 1 percent this year. “There's no credit to push it along at a faster growth rate.”
“When you look at the state of household finances, the downward pressure on wages and salaries, it’s really going to be tough, tough sledding on consumer spending,” says Bethune. “It’s just not going to be a spark plug for this recovery once we get beyond the third quarter.”