The Effects of “Cash for Clunkers” on the Auto Industry
As of October 1, the “Cash for Clunkers” program has processed 670,557 reimbursements totaling $2.8 billion dollars. The program has received rave reviews in the media for its short-term success, but the open question is whether short-term successes facilitate long-term growth. Will the program jump start the restructured auto industry or will it result in mere transitory demand shifts, “stealing” from future consumption?
There is no doubt that the “Cash for Clunkers” program—known officially as the Car Allowance Rebate System (CARS)—provided a much-needed shot in the arm for the ailing auto industry. From July to August, total auto sales increased 25.4 percent. Passenger car sales grew 29.7 percent, lightweight truck sales 20.2 percent. As expected with a program that was intended to improve fuel efficiency, sales of medium and heavy truck decreased 5.6 percent. In dollar terms, auto sales increased 10.6 percent—for comparison, total retail sales increased 3.0 percent over the same period. Note though, that removing the government contribution of $2.8 billion drops the increase in auto sales to 5.7 percent and total retail sales to 1.9 percent.
Thanks to the “Cash for Clunkers” program, auto sales have increased markedly relative to this same time last year—total sales are up 3.6 percent, and passenger car sales are up 17.4 percent. On the other hand, lightweight truck sales remained negative (−9.6 percent), as did and medium and heavy truck sales (−33.5 percent). In dollar terms, auto sales and total retail sales decreased year over year, 1.0 percent and 6.0 percent, respectively. Removing the $2.8 billion government contribution from the calculations knocks down auto sales to −5.3 percent and total retail sales to 6.9 percent, year-over-year.
Another benefit of the CARS program can be seen in the continued decline in domestic auto inventories. In August, inventories decreased 16.3 percent to 708,700 units, a new record low even in the age of lean inventories. August also saw auto and light truck production continue increases off of historic lows seen in June. Sharp inventory declines point to further increases in auto production, as automakers will need to rebuild inventories. However, automakers face the difficult task of determining the optimal production schedule to obtain the best mix and level of inventory in the face of uncertain consumer demand.
The inventory-to-sales ratio is one measure to keep an eye on as automakers rebuild inventory levels. The ratio hit an all-time high of 4.6 in January 2009, after a year of falling sales and elevated inventories as the consumer pulled back. Auto production shutdowns over the spring and summer have helped bring the ratio down amid weak sales. The “Cash for Clunkers” program caused the ratio to slide from 2.4 in July to 1.6 in August.
It would be naive to expect the level of auto sales to continue at rates seen in August, which makes managing the inventory rebuild that much trickier. Even with the “Cash for Clunkers” program, auto sales accounted for only 20.5 percent of total retail sales, breaking the 20 percent mark for the first time since May 2008. Moreover, auto sales as a percentage of total retail sales are well off of the 2000-2007 average of 25.2 percent.
In the end, the CARS program subsidized total auto sales, decreased inventories, and increased production, providing temporary relief to an ailing and restructuring domestic auto industry. However, the risk going forward is that long-term health of the automakers relies on a debt-burdened consumer, who may pull back on auto sales in the near term because of a government-enacted policy that basically “stole” from future demand. Under these circumstances, automakers must be careful when ramping up production in the fourth quarter to avoid building up inventories in the face of declining sales.