Use access key #2 to skip to page content.

Edmunds' analysis of the C.A.R.S. program is the real Clunker aka don't believe everything that you read

Recs

23

November 02, 2009 – Comments (5)

I'm one of the biggest bashers of government spending there is and I know that Uncle Sam is one huge, inefficient beast.  As a taxpayer I was offended by the government's recent Cash for Clunkers program (I'd be lying if I said that the part of me that works in the industry didn't like the program after seeing billions of dollars wasted on the financial sector). 

Having said this, one always has to consider the source of the information that when they see a report like this in the news:

Cash for Clunkers Results Finally In: Taxpayers Paid $24,000 per Vehicle Sold, Reports Edmunds.com

There is no doubt that the true per unit cost of the C for C program was more than the average base government credit, but trust me the Edmunds.com estimate is flawed (it's way too high).

Edmunds isn't exactly known in the industry for its fantastic analysis.  They like to squawk about how they have PhDs working there, which doesn't surprise me because anyone with familiarity with the industry and any common sense would look at some of the things that come out of Edmunds and say huh?

Look at the numbers logically.  Using Edmunds' light vehicle sales figures from this press release, which quite possibly are wrong knowing them, light vehicle sales jumped by nearly 540,000 in the two month period after the program was introduced.  Let's say that there was a 113,000 unit negative pull-ahead factor in the month after the program ended.  That leaves a sales increase of approximately 425,000 from Clunkers.  Even if one assumes that the industry was recovering prior to the introduction of the Clunkers program, and I believe that it was, and that sales would have improved, they would not have improved by nearly as much as 425,000 over that two month period.  Looking at the program objectively it generated nearly double and possibly triple the number of sales that Edmunds.com claims it was responsible for.

Furthermore, When assuming that sales were pulled forward from the final months of 2009 by the program Edmunds used their own internal sales forecasts for those months, which are most likely wrong.  There was a month or two hangover from the program because dealer inventory was depleted, however no one knows for certain what sales would have been like if the program did not exist.  Edmunds.com is making an assumption.

One could just as easily assume that the Clunkers program generated consumer excitement and made people more interested in buying a new vehicle.  This sort of thing happens all the time when an innovative, major new incentive program is introduced.  For example, when General Motors introduced 0% financing for up to 5 years for the first time after September 11th, or when it introduced Employee Pricing for everyone the sales of the entire industry rose, including the sales of manufacturers who weren't running similar programs.  All of the talk about buying new vehicles in the news, commercials, etc... increased consumer awareness and got people thinking about buying a new vehicle who might not normally have done so.

One could also assume that the Clunkers program made the economy look better than it really is, boosting consumer confidence, which in turn boosted auto sales.

I don't know which, if any of these things happened.  My point is that the Edmunds numbers use assumptions, which are the optinion of an organization that has been wrong a million times in the past.

Edmunds is taking a hot political issue that is receiving all sorts of press, making some weak assumptions, and using the headlines that it is generating from this statement for its own gain.  Geee, I wonder if Edmunds.com's site traffic has increased since it published this report.  I bet you a dollar that it has.

My $0.02.

Deej

5 Comments – Post Your Own

#1) On November 02, 2009 at 10:54 PM, rofgile (99.33) wrote:

It bugs me that before we had a reported 3.5% growth in GDP for the 3rd quarter, estimates of 3% growth in the 3rd quarter were mocked as pie-in-the-sky thinking of economists who didn't have a clue.

The cash-for-clunkers program (even after exhausting its first bolus of money due to the huge stimulating effect it had on car sales) was also said to not really be stimulating, and its effect on car sales might be overstated (these comments by Edmunds).  

Then, after it became clear that it had a positive effect on sales, it was said that it was a bad idea because it resulted in a drop off of sales after it was done.  It was just a sugar rush effect.

Then, the GDP came out to 3.5%, and analysts noted that the Cash-for-Clunkers was a part of why the GDP growth had been so excellent for the 3rd quarter.  Talk about a stimulus - it had near a 1% gain in GDP.

My quote from July 30th:

"A 4:1 gain is truly awesome.  If we had spent 50 billion on this program and that resulted in equivalent car sales - that would have been a whopping 1.7% increase in our total GDP.  Not that I think it would work on such a scale (there's probably a limit to the number of people wanting to buy a new car at about 2-5 more buyers more than got in on than this small run), but just to give a comparison about how positive an effect this has been, economically."  - Its amazing, we ended up getting that 1% GDP growth with only 3 billion dollars spent by the government.  That's not just good, thats a miracle in stimulus.

What's my point?  3.5% GDP growth this last quarter was good.  People need to admit that.  The recession is ending.  Cash-for-clunkers had a stimulating effect.  Its not bad to be surprised that the government a) is providing accurate economic forecasts or b) can actually come up with a good economic stimulus.  We can all be surprised sometimes that things work out well.  The good news is we've still got 2/3 of the stimulus money to spend, if the 1/3 we've spent has been helping grow our GDP, we have another 2-4 quarters that might be ok ahead of us.  New unemployment is falling every month, this is looking good too.  And we still have record low inventories of companies that need to be restocked.  There are a lot of things looking very positive right now.  Hell, Ford just annouced that they will have a profitable 2010.  That's great.

 -Rof  (Don't listen to the end of the world folks..) 

Report this comment
#2) On November 03, 2009 at 11:08 AM, PeteysTired (< 20) wrote:

rofgile

What's my point?  3.5% GDP growth this last quarter was good.  People need to admit that.  The recession is ending.  Cash-for-clunkers had a stimulating effect.

I agree.  Do you think we should quadrupile the Cash For Clunker's stimulas? 

It seems to me that if the current CFC program helped the US to 3.5% growth, then quadrupaling would have a bigger impact.

Report this comment
#3) On November 03, 2009 at 11:25 AM, whereaminow (42.76) wrote:

It's always amusing when the arguments of Keynesians and government interventionists sound the same as heroin addicts. 

"See the heroin is working. I have energy now. Look, I just ran a mile. Without this heroin stimulus I would have died.  But now I'm all better!  It was just temporary, I promise.  It's only when I really need it.  I swear."

And they call us crazy.  

The Soviets had rising GDP for decades.  

David in Qatar

Report this comment
#4) On November 08, 2009 at 12:01 AM, edbbear (< 20) wrote:

I grant you that Edmunds is trying to drive traffic.  In the first sentence they gratuitously describe themselves as the premeir resource for online automotive information.  That said, I don't see why their estimates are any worse than the government's. 

On its face, the increase of 125,000 seems plausible.  The whole point of cash for clunkers was to encourage people to buy now rather than wait--that's what happens when you target people who own clunkers. It's not like this program was going to increase the number of car owners in America (in fact, the program ensured that would not happen because for each car sold one was destroyed). 

It seems that the entire program is going to essentially pull in future demand--except for stimulating buyers who were not part of the program and who spent their disposable money on new cars. 

I'm not sayng on Edmunds as a bastion of integrity, but to me the whole concept of the program was absurd and was just designed to pull demand forward--which is what car makers have been doing as you mentioned since at least 2001 (and perhaps before). 

As for the first commenter, I'm not sure why I should be impressed by a GDP figure that was largely the result of a one-time stimulus (not to mention the copius amount of stimulus the government has provided in other ways such as unemployment insurance, tax rebates, etc.). 

Report this comment
#5) On January 20, 2010 at 8:14 AM, TDRH (99.76) wrote:

Where did you go Deej?   You are sorely missed.

Report this comment

Featured Broker Partners


Advertisement