Cash for clunkers: a bad idea and a false promise
David Rosenberg of Gluskin Sheff weighs in on cash for clunkers, the feel-good story of the Summer of 2009, and why it reminds him of a similar phenomenon earlier this decade (bold is mine):
In the aftermath of 9-11, the Big Three unveiled 0% financing to rejuvenate auto sales, which were moribund at the time. So what happened was that motor vehicle sales soared from 16.1 million annualized units in September 2001 to 21.7 million in October — a 3,643% surge at an annual rate! Retail sales skyrocketed 6.6% that month (+116% at an annual rate), a record that holds today. And instead of declining, as was expected, real GDP recovered at a 1.4% annual rate, with the consumer expanding 6.4%, at that time, the best performance in two years.
But what all these gimmicks do is bring forward consumption — they don’t “create” anything more than a brief spending splurge at the expense of future performance — the pattern gets distorted as opposed to there being any real permanent change in the trend. Auto sales dropped the next three months, following which they came right back down to around 16.0 million units; retail sales also fell each of the next three months.
Now there was also a production part to the story, and automotive output rebounded hugely in November (+4.2%) and December (+3.4%) of 2001, with the three-month trend finishing the year at a +25% annual rate. The ISM index jumped from the 40.8 low in October 2001 to over 50.0 by February 2002 and then to a peak of 54.4 in June.
Autos can be a really big swing factor and they are like motherhood to politicians but in reality, they account for less than 3% of spending and 2% of output in the U.S. economy. But even after a 3,643% annualized surge that got so many people excited over V-shaped recovery prospects back in late 2001 and early 2002, let’s have a look at what the GDP performance (percent change at an annual rate) actually was back then: