Cash for Clunkers Plays Havoc with New Car Sales Numbers

When the U.S. government decided it needed to help the auto industry, it unveiled a controversial program colloquially known as "Cash for Clunkers," but officially known as "Cash Allowance Rebate System." This program was meant to jump start the economy while improving the average fuel economy for the motor vehicles in the United States.

Decrease in sales, year on year

As with any well intentioned plan or program, there are always unintended consequences. One of those consequences, in this case, happens to be that auto sales for August 2010 compare to August 2009 to result in the largest drop in year on year sales since 1983. So how big of a drop are we talking about? Well, according to MotorIntelligence.com, over 300,000 fewer light vehicles were sold in August 2010 than in August 2009, or a 21% drop, year on year.

The immediate thought is that the drop in sales is an indicator of a weakening economy, or at best, a struggling economy. However, the Cash for Clunkers may have more to do with than a passing glance.

Scarce resources used earlier

Each household has a limited amount of resources, whether these resources are money or food or building materials, there is always a limit. These resources will be used to meet the needs of the household, regardless of what they are. When it comes to buying a car, there is a significant number of resources consumed in the purchase of a said vehicle.

What the Cash for Clunkers program did was accelerate the expenditure of these resources.

The program created an environment where a household could either spend the money on a car now, or they can wait until next year and spend more money on the same car. Since a rational person, so economists assume in their calculations, will always act in a manner that benefits them most, the behavior can be estimated. In this case, the household will opt to turn in their "clunker" for the shiny new car at a significant discount.

What this creates is acceleration in the spending habits of those who are affected by the program. If, for instance, 100 families determined that they would need to buy a car within the next year, they would take advantage of the program's discount from turning in their current vehicle. By buying car during the program, July-August 2009, initially, the negated the need to buy a car in the future.

So a drop in sales for August 2010, should be expected. All of the 300,000 people who would have bought a car already have. It could easily be surmised that sales in September 2010 would also be similarly low. These numbers are not indicators of a weakening economy, especially when the scope is broadened a bit. For the calendar year to date, according to the same report, new light vehicle sales are up over 8% from this point last year. If anything, that would be a sign of an improving economy.