Reports Indicate Economy Grew 3.5% in 3Q 2009

For a change, we have good news to report on the economy. It grew at a better than expected 3.5%. That's based on better than expected housing and car sales.

The problem is that I don't expect the 4th quarter to continue with those gains and other experts don't think we're out of the woods just yet, primarily because the impetus for those higher sales in both housing and auto sales will disappear; the homeowner credit ends November 30 (and essentially required sales to be consummated during the third quarter) and there isn't a cash for clunkers to increase car sales.

As for what the cash for clunkers program actually did with the $3 billion and the sales created by the program, Edmunds.com believes that the actual cost per additional vehicle sold by the program was nearly $24,000. That's not a lot of bang for the buck.

A study by Edmunds.com released Wednesday suggests that Cash for Clunkers mostly gave money to people who were going to buy a new car anyway.

American taxpayers paid a lot of cash for those clunkers: $24,000 for each new car sold, according to a study released Wednesday.

That’s a lot of money, especially when the so-called “cash for clunker” stimulus program offered only a maximum $4,500 in cash for each person who traded in an old gas-guzzler and bought a new car.

The government could have done almost as well by just giving away cars for free, instead of creating an elaborate incentive program, according to an analysis by the automotive information firm Edmunds.com in Santa Monica, Calif.

I've been saying this all along, all the cash for clunkers did was shift sales into July and August and weak sales for the rest of the year will bear silent testament to the folly of this program. Weak sales in the months following bear out the fact that people shifted their buying to take advantage of the "free money" when many would have bought vehicles anyway.

We paid $3 billion to shift sales around during the year, and there are dealers who have yet to be fully reimbursed for their participation in the program.

Then, there's the question of how many people are now taking on additional debt as a result of their participation in the program. An analysis by Edmunds or others should be able to figure that out - because you know that the cost of the new vehicles vastly exceeded the cost of the cars they replaced. Many of those had to have been paid for; particularly any car that was older than five years (which is high end limit on car loan duration). In particularly, it would be good to know the average age of the vehicles traded in, the book value of those cars, the book value of the cars bought, and the new debt incurred per vehicle. At a time when consumer debt is at near historic highs, taking on new debt to jump start the economy may spur the economy in the short run, but will adversely affect the national economy in the long run.

Meanwhile, GM is still in the crapper - GMAC is in talks to get a third round of bailout money because GM's credit arm is hemorrhaging money (because of exposure to the flailing auto markets and the real estate market). Chrysler isn't in much better shape, and that's even after the bankruptcy reorganization, shedding car divisions, and thousands of dealers have been forced out of business in the process. Chrysler also relies on GMAC for financing.