Cash for Clunkers Boosted Economy, Prompted Lower Car Prices

By Michelle Krebs September 17, 2009

New government data shows Cash for Clunkers had a significant impact on the U.S. Cash for Clunkers car - 255.JPG  economy and caused average vehicle prices in total to drop in August.

Cash for Clunkers triggered a 1.3-percent decline in the new vehicle price index - part of the monthly Consumer Price Index, the U.S. Labor Department reported Wednesday. The decline was the steepest in nearly four decades.

Behind the government numbers, data from Edmunds.com shows just why vehicle prices were pushed lower, an event not evolving into a trend.

Forced Downsizing

The requirements of the government's officially named Car Allowance Rebate System (CARS) program forced buyers to purchase mostly smaller - and thus less expensive - vehicles. Consumers received either a $3,500 or $4,500 voucher if they traded in their older vehicle for a more fuel-efficient one. The program was capped at $45,000 on the new car's price.

2010 Ford Focus - 225.JPGAs a result of these requirements, share of the U.S. car market for compact and subcompact vehicles soared 40 percent in August compared with August 2008, according to Edmunds.com's calculations. Vehicles like the Ford Focus, Honda Civic and Toyota Corolla topped the chart of favorite buys.

And the average transaction price on new vehicles purchased in August fell to its lowest level since May 2008, when it was skyrocketing gas prices - not a government incentive that pushed buyers toward smaller, fuel-efficient, less expensive  vehicles.

However, individual transaction prices went up, according to Edmunds.com data. "Consumers paid more for the same vehicle when compared to one month prior. But overall, the mix changed so the average dropped," noted Edmunds.com CEO Jeremy Anwyl.

Lower prices should not be seen as a developing trend; quite the contrary. "Since Cash for Clunkers ended on Aug. 25, we've seen transaction prices creep back up," noted Jessica Caldwell, Edmunds.com' senior analyst.

Longer term, vehicle prices are likely to climb due to the expense involved for automakers to install new technologies and more expensive lightweight materials that will get them to future fuel-economy and emissions standards.

Less Vehicle, Less Associated Costs

The lower transaction price of August vehicle purchases pushed the average monthly payment, downpayment and amount financed by consumers to their lowest levels of the year. In addition, consumers got an added bonus with the year's lowest average interest rate on their loans with an average of 5.63 percent.

In August, the average monthly payment on a new car was $409, the average downpayment was $2,780 and amount financed was $21,897.

auto-financing-profile.gifMore and Older Trade-Ins; Fewer Upside Down Traders

Not surprisingly, the percentage of new car sales that included a trade-in soared to the year's high at 56.6 percent, surpassing the 49.0 percent in July when Cash for Clunkers launched near the end of the month. Earlier months ran in the range of 37 to 40 percent.

Also not surprising, the trade-ins - living up to their clunker definition - were the oldest seen by dealers all year with an average age of 10.69 years. In this recession, trade-in ages have been edging up. Still, the nearly 11 years-old of August's typical trade-in was significantly higher than the five- to six- years old of trade-ins typical throughout this year.

Due to the higher vehicle age and the fact that many vehicles traded in likely were paid off or paid down, the percent of new vehicle sales in August that involved a trade-in with a negative equity plummeted to 7 percent in August, down from 13.7 percent in July but about a third less than the 20 to 23 percent seen throughout the year. The average negative equity of a vehicle trade-in fell to $3,858 in August from $3,997 in July but far less than the $4,737 high seen in January.

trade-in-profile.gifClunkers Causes Hike in Production Output, Retail Sales

U.S. industrial production rose for the second month in a row and by more than analysts expected as factory utilization rose to its highest level since February, the Federal Reserve reported Wednesday.

Economists say the ramp up of auto production contributed to the hike. General Motors and Chrysler, having emerged from bankruptcy, put their mothballed plants back to work in August. Other automakers began increasing production to re-build vehicle inventory, drawn down by the Cash for Clunkers program.

On Tuesday, the Commerce Department reported a surge in August retail sales that surpassed forecasts and represented the largest monthly increase since January 2006.

Sales at automobile dealerships and auto parts stores rose 11.9 percent in August from July due to the Cash for Clunkers program. Higher energy prices from July to August -- though down from a year ago - also contributed to the increase in retail sales.

The surge in sales at car dealerships wasn't happy news to other retailers who worry people who spent $20,000 on a new car now will cut back spending in other areas in the months ahead.

And even though Federal Reserve Chairman Ben Bernanke this week declared the worst recession since the 1930s as probably technically over, economists warn continued tight credit, high unemployment and slipping wages suggest consumers aren't ready to spend big yet to revive the economy.

Already, the auto industry is paying the piper for August sales that hit a Seasonally Adjusted Annual Rate (SAAR) of 14.1 million last month. Car sales began dropping off as soon as the Cash for Clunkers ended Aug. 25. Edmunds.com forecasts, at the current pace, September will see a SAAR of 8.8 million, the lowest this year.  - Michelle Krebs, Senior Analyst

Photo by Ford

The Ford Focus was the bestseller under Cash for Clunkers, according to Edmunds.com's data.

 

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LEAVE A COMMENT

olddlr says: 2:55 PM, 09.16.09

If you read the methodology behind the New Vehicle CPI you will see that it is not suppose to affected by mix shifts (i.e. fixed basket)

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