Could “Cash For Clunkers” Lead To The Feared Double Dip?

Could “Cash for Clunkers” be a net political negative for Obama? One analyst thinks that by moving forward sales via the program we’re setting ourselves up for a robust third quarter GDP number and a negative growth rate for the fourth quarter. The dreaded W or double dip recovery.

The Wall Street Journal’s Real Time Economics blog has the rationale on Douglas Lee’s theory:

His math: Auto sales were running at 750,000 to 850,000 units per month, and the $3 billion program would fund an additional 200,000 to 250,000 per month for three months. (The calculation includes a small allowance for cars that would’ve been purchased anyway.)  That sends the annual selling rate for one quarter from between 9 million and 10 million to around 11.5 million to 13 million. It would add an annualized $50 billion to third-quarter consumption, or more than two percentage points to consumer spending growth.  (That may understate the impact, he notes, because even people who do not qualify are being drawn into auto showrooms and buying new cars anyway through other incentives.)

But, as many have noted, the program also leads to speeding up many sales that would’ve happened anyway in late 2009 or early 2010. After adding $50 billion to third-quarter consumption, Lee says, you can subtract about $25 billion in the third quarter.  The end result under his forecast: third-quarter growth of 2.5% to 3.5%, followed by a fourth-quarter decline of 1.5% to 2%. In other words, more fodder for talk about a double-dip recession.

Not everyone is buying into this concept. Morgan Stanley admits its front loading growth but doesn’t think that it will lead to negative growth in the fourth quarter. Credit Suisse is absolutely gushing about the program and even talks about multiplier effects in other parts of the economy. We haven’t heard the M word bandied about for some time!

I suspect that when we look back at the history of this whole period in a couple of years that C4C will be a footnote. It might cause an embarrassing slide backwards in the fourth quarter but I doubt that would have any real impact on the eventual climb out of recession, though it would be politically dicey.

The most enduring legacy of the program may be that it came at this time of the year and furnished a lot of us with something to write about in an otherwise news starved environment.

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