The federal "Cash for Clunkers" program has opened a floodgate of car sales that President Obama says is a much-needed boost for the economy. But retailers may feel the negative effects of America's collective investment in new cars, predicts a Purdue Retail Institute researcher.
Formally called Car Allowance Rebate Systems, the clunkers program pays drivers $3,500 or $4,500 to trade in a gas-guzzling vehicle for a new fuel-efficient car. The first $1 billion allocated to the program lasted less than two weeks, and the federal government is considering a $2 billion extension of the subsidy.
Because more Americans are taking on new car payments, they're likely to have less money to spend on other retail items, Purdue University's Richard Feinberg said in a news release today.
"The fact is that if the 'Cash for Clunkers' program induces people to buy a car when they weren't expecting to buy a car, that money is not going to be available for retailers," he said. "Retailers don't have a fighting chance, and there is nothing to be done."
Feinberg said with about 750,000 new cars in American garages with an average monthly payment of $400, retailers counting on back-to-school and holiday-season windfalls could be disappointed.
"Retailers are still in pain from a very poor 2008 Christmas holiday retail season," he said. "After suffering from the worst holiday sales season since 1970, retailers will be facing an even more dismal 2009 in part because of the 'Cash for Clunkers' program."
Credit Suisse economist Jonathan Basile told The Wall Street Journal yesterday that it is "very possible ... there could be some kind of substitution effect," as consumers invest their money in cars rather than clothing and other retail.
But Jim Kittle, CEO of Indianapolis-based Kittle's Furniture, said despite the new car subsidies, he is expecting a better holiday season than 2008.
"Actually, I think it ['Cash for Clunkers'] is getting people back in the spending market," he said. "I think we will have a better Christmas than last year. We are coming out of the recession or whatever we are in."
"I think the fourth quarter is going to be pretty good," he said. "I would like cash for broken furniture too, but I don't think we are going to get that."
Kristin Kohn, owner of Mass Ave stores Silver in the City, At Home in the City and Nurture, said she is planning for a Christmas season equal to last year's. Even if her stores see a decline, she wouldn't attribute it to the CARS program.
"Even if I thought that I saw a decrease in sales, maybe we would take a little bit of a loss for a greater good. I personally think it's a great program," she said. "If I feel like it is going to limit people spending in our stores, then I will look for other ways to make up for it through marketing and other variables."