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Fed Spends Yet More Taxpayer Money To Probe Impact Of Artificial Pull Forward Subsidies In Form Of "CARS"
Presented without commentary, although we fully expect yet another taxpayer funded study to calculate societal impact that this piece by Kyle Fee of the Cleveland Fed has had. And so forth.
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.
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Bigger waste of money: C4C or this report?
This is similar to the $250,000 grant received by the University of Colorado to determine if a bear shits in the woods.
They weren't able to determine with any degree of certainty if the bears actually shit in the woods or if they use the public restroom facilities at the nearest national park.
So they asked for another $500,000 to continue the study and to purchase 10 cases of toilet paper to test a pet theory of one of the students, who'd just seen a Charmin TV commercial of the bears with toilet paper........
Stay tuned.
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.
File that under "No shit Sherlock". I wonder how much he got paid for that sage tidbit.
In the world of business, someone must state (in writing) the obvious, thus making it officially the obvious.
All I can say is "duh".
Totally OT, can't believe it wasn't mentioned here today, but I HATE the new Bloomberg TV format. Fucking awful.
here, here. I second the bloomberg comment. Although then I realized it is basically the same info that you would see on the screen at any one point in time (a headline, one or two indicies for the day, and a scroller of stocks). so it works for a glance...but not if you're going to stare at it.
Yeah, the content is basically the same, but the formatting sucks. I liked the old look because it looked more like the terminal screen I stare at all day. Doesn't assault the eyes to move from one to the other with the old format.
Future demands will always be destroyed with these kind of stimulus, cash for clunker, housing cash back, etc. They pull forward demands to the present and that is a big no no.
In the case of auto makers, don't expect demand to come back for at lease 3 to 4 years.
This id off the subject, but I purchased "Dear Mr. Buffett..." by Janet Tavakoli on Sunday after seeing the ZH promotion. I have read 77 of the 224 pages and will finish it, but it is a terrible book. She may know a considerable amount about credit derivatives, but she should not author anything on investing, especially value investing. It is not even coherent. Oprah's book club would have had a better finance recommendation.
Why was it that most of "us" were able to understand the future drag on demand C4C would cause the imploding auto industry? Are these brilliant Ivy Leaguers who have destroyed our financial system so stupid drunk on Keynes that they need graphs and charts to explain what knew before the first $4500 check was ever issued?
Where's Chance the Gardner? We need him to give a little practical advice to these idiots.
I like to watch. Mmmmmm Well, OK. LOL
correction: "...what we knew..."
Anyhow, based on Chance's aversion to the seasons when discussing economics, I wonder if he was a student of The Kondratieff Wave.
Is it better to have dope in times of no money than have money in times of no dope?
Another Ponzi scheme with a printing press
Another Ponzi scheme with a printing press
Another Ponzi scheme with a printing press
Another Ponzi scheme with a printing press...Oh yea
T.S. Eliot meets the Fabulous Fury, Freak Brothers...
Thank you Miles an astute observation, Ahh someone I can relate to. Ill throw in some ZAP Comix allusions too "I cant see shit Miles,Me eyes is full of broken shades"
From "Captain Pissgums and his Pervert Pirates" Obviously an observation on the part of Captain Pissgums relating to his inability to read market direction.
"Anyhow, based on Chance's aversion to the seasons when discussing economics, I wonder if he was a student of The Kondratieff Wave."
Here you go:
1) Mr. Gardner, do you agree with Ben, or do you think that we can stimulate growth through temporary incentives?
[Long pause]
2) As long as the roots are not severed, all is well. And all will be well in the garden.
1) In the garden.
2) Yes. In the garden, growth has it seasons. First comes spring and summer, but then we have fall and winter. And then we get spring and summer again.
I can save us tax payers a bunch of money by presenting to you the conclusion of the study right now.
Everything the Federal government touches, that it should not be touching, turns to shit.
I'll be sending the feds a bill for my brilliant research.
for this you get a 20 year grant worth $10m
congrats
You would think any extra public money would be spent on looking for new sources of demand rather than connecting dots (dots my 4 year old could connect).
Hi all, long time lurker.
I suspect the banks may have qualified people that weren't the best credit risk.
I'm going to pick up a low mileage 9 mo old repo in the spring at a bank auction for pennies on the dollar.
Or maybe one of those new vehicles that were sold with the explicit guarantee that if you lose your job... your new car is returnable... should be quite a few of those around as the unemployment rate keeps climbing :-)
FTFA: "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."
May pull back? Try will. Zero job growth across all education strata (fuck you, I'm going to milk that one for as long as I can), an aging population not willing to leave because they financially can't afford to retire, plus the new entrants coming in from the successive baby booms doesn't spell much hope for a new wave of new-car demand. Not with the used-car market as bloated as it is. Ironically enough, probably driven (hah!) by the piss-poor employment figures. Yes, give me a brandy new Toyota Prius in all its $30k+, FWD, 110hp, only has enough room for me and my massive ego glory financed at 13% instead of that 2 year old, 300hp sports sedan sitting right next to it with a $15k tag because the bank's been forced to eat the note on it after the previous owner walked away. Or the gazillion fully-optioned extended cab trucks that were oh so popular with the construction demongraphic.
Any first-year entry-level analyst could have told you as much, and I'm dead positive there isn't a single supply manager that's going on a roid rage through his facility hiring warm bodies on the spot. Whatever spike you saw in production was probably due to spare parts inventory for warranty claims (fed mandated now that they've officially guaranteed it?). If the Impala I rented last week is any indication, they'd be better served just waiting for the parts to fall off and sending a crew out to collected them off the side of the road.
Agreed, there is no "may pull back" about this, there will be a pullback without question, and any auto maker taking the rising sales of C4C to bring more production online will be dissatisfied with sales for the remainder of the year.
Any time you get involved with incentives, the benefits vanish once you quit, and not only do they vanish, but the aftermath is always worse, and Detroit has been involved in pricing fiascos before, always with the same result. The consumer vanishes until the next special deal arrives. And in this case I truly believe there are consumers waiting for C4C V2.0, where there are no restrictions on the trade in, to appear at the showroom. I'm sure there are those in Congress who have (sadly)already begun discussions.
Yet in the world of reality we already know that the last quarter of the year will likely be abysmal for auto makers.
I sincerely hope there aren't any companies that decided to "ramp up" production like some n00b RedShirt headed to the surface only to be separated from the rest of the Away Team and plucked by a giant condor or Venus Flytrap.
Interesting point on what consumers will want and what they're waiting for. I don't know that they're waiting for another opportunity like CARS. Annecdotally I heard a LOT of folks were walking in, cash-cold-skrilla in hand buying cars, not unemployed Jack & Dianne. However, the name of the car sales game is /cashflow/, or getting that payment as low as affordable through leasing, extending the term out, or lowering the interest payment. The two big strategies used so far have /not/ been on the financing end, but with the principle: large rebates and guaranteed buybacks in the event you lose your job.
I would argue that the consumer has shifted the valuation of a vehicle less in terms of the incremental cashflows and more in terms of the actuals amount owed. They are, in fact, buying a $30k or $40k vehicle and not a $400/mo payment/lease. And that principle is what is /owed/, not what it is /worth/. So either the lending is going to have to get cheap enough to make people forget the principle amount owed, the car is going to have to get cheap enough to get people to buy (in which case you'll probably see production shift overseas), or we own up to the fact that, much like houses, there's a glut of oversupply on the market that will take a long, long time to depleat and people will realize that $30k NOW is a hell of a lot more expensive than the repair schedule on a fully paid-off car. Forget taking the stock market back to 2001. We just pushed manufacturing and production to the halcyon pre-TQM days of the early 80s, repleat with domestic companies getting their asses handed to them by their foreign counterparts. We're in for a rough next-decade, bro.
Unless of course Barry and the Gang decides to make gasoline the devil's creation. Which is possible.