How much did 'Cash for Clunkers' drive economic growth?

The White House is claiming victory with the auto-sales program, saying its positive impact on the economy is measurable.

By , Staff writer

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    A Cash for Clunkers sign is displayed at a dealership in Detroit Friday. The Obama administration will bring to an end the popular $3 billion Cash for Clunkers program on Monday, giving car shoppers a few more days to take advantage of big government incentives.
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"Cash for Clunkers" – it KO’d the recession!

Well, maybe it did not do that much. But as the popular federal program phases out, the White House is claiming that it stimulated the economy in an immediate and measurable way.

That may be an important point for the Obama administration to make as it struggles with public doubts about increasing the government’s role in another big sector of the economy – healthcare.

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“In a short period of time, what we’ve seen is a single, small program become an overwhelming overnight success and really drive positive outcomes across the industry,” said a senior administration official during an Aug. 20 background briefing for reporters.

Cash for Clunkers, so called, is a $3 billion program that gives consumers as much as $4,500 toward the purchase of a new vehicle if they turn in an older car or truck with worse gas mileage.

The Department of Transportation announced Thursday that the effort will end Monday, Aug. 24, at 8 p.m.

The reason for its demise is its own popularity. Transportation officials figure that given the applications they already have in the pipeline, one more weekend of sales will exhaust the money Congress has approved for the purchase subsidies.

All this activity has already had benefits for the nation’s employment rate and overall gross domestic product (GDP), according to the White House.

Ford has announced an 18 percent increase in production due to strong third-quarter sales, according to the senior administration official at the background briefing. More than 10,000 General Motors workers will receive overtime checks they otherwise would not have gotten.

“Major economic forecasting firms ... have increased substantially their third-quarter GDP projections and actually reduced their unemployment rate projections as a result of the overall macroeconomic impact of this program,” said the official.

IHS Global Insight, a global economic, financial, and political forecasting company, indeed has just raised its growth forecast for US GDP in the second half of 2009 to an average 2.2 percent pace, up from the 0.9 percent it forecast in July.

The main driver of growth will be the need for companies to replenish inventories, according to Nigel Gault, chief US economist at IHS. Cash for Clunkers may be just one component, albeit a large one, of this overall trend.

“The success of the Cash for Clunkers program is accentuating the [inventory] cycle in the autos sector, as the surge in demand is depleting supplies of popular vehicles and manufacturers are raising their production plans in response,” writes Mr. Gault in an analysis dated Aug. 19.

But there may be a catch.

Some of the sales incurred under the program might have happened anyway sometime soon, so IHS suggests there may be some “payback” with a weaker auto sector in the first half of 2010.

And – excluding Cash for Clunkers – consumers may still be sitting on their wallets. Take away the effect of autos, and consumer spending for the third quarter will edge up just 0.6 percent, under the IHS forecast.

“It remains difficult to make a case for a robust consumer economy,” writes Gault.

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