[Brucelee]

Warning over US cash-for-clunkers scheme
By Simone Baribeau in New York and Bernard Simon in Toronto

Published: August 13 2009 18:51 | Last updated: August 13 2009 18:51

The popular US cash-for-clunkers programme may be drawing money from other consumer purchases and could also undermine future car sales, US economists have warned.

Motor vehicle and parts sales, down 8 per cent on the year, jumped 2.4 per cent from June, according to data from the US commerce department on Thursday, but other retail sales fell 0.6 per cent in July.
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“With income flows very constrained and household balance sheets over- leveraged, any incremental increase is likely to weigh on non-automotive sales,” said Joshua Shapiro, chief US Economist at MFR, a consultancy, noting that fading interest suggests current car sales are borrowed from the future.

“Anyone thinking about buying cars in the next several months might as well do it now when the government is giving away $4,500.”

Ford, whose small Focus saloon and larger Escape have proved popular under the scheme, on Thursday announced that it was increasing North American production to meet demand. General Motors is also considering following suit.

The cash-for-clunkers programme, in which buyers trade in old gas guzzlers for vehicles that consume less fuel and receive a rebate of up to $4,500 (€3,150, £2,700), was dubbed by Barack Obama, US president, “a much-needed boost” to the US economy.

After exhausting its $1bn funds in July, Congress last week allocated an extra $2bn to the programme. In total it is expected to fund up to 750,000 car purchases.

George Pipas, Ford’s sales analyst, said that dealers’ new-vehicle sales are currently “eye-poppingly high” compared to a year ago.

But Ford on Thursday rejected the suggestions that the scheme was drawing significant consumer spending from other items.

“This is a drop in the bucket compared to overall purchases of goods and services”,“This is exactly what fiscal stimulus is supposed to do,” said Ellen Cromwick-Hughes, Ford Motors’ chief economist. But a post-clunkers dip in car sales would come as the rest of the US stimulus is fading.

“It’s a nice success, but there’s a macroeconomic risk going forward,” said Joseph Brusuelas of Moody’s Economy.com. “[In] the first quarter of 2010, the stimulus will begin to wither, and consumption which would have otherwise occurred next year will have occurred in the second half of 2009.”