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If U.S. Car Sales Stall, Expect Cash-For-Clunkers 2

U.S. Consumer Confidence Slides, Prompting Sales Forecast Cuts
Previous Programme Said Relatively Cheap, Effective

The recovery in U.S. car sales is stuttering and if it does run out of steam, expect early action from the U.S. government to encourage buyers with another cash-for-clunkers programme.

That’s the prediction of investment banker Morgan Stanley, which said although it isn’t currently advocating such action, it recognises that the previous plan of rebates managed to boost sales with minimum expense from Washington.

Analysts in the U.S. are busily slashing their estimates for U.S. car sales for 2011 and 2012 because the possiblility of a double dip recession is weakening consumer confidence and keeping buyers out of showrooms. U.S. consumer confidence slumped in August, with the Bloomberg Consumer Comfort Index dropping to minus 34, the weakest since March 2009, from minus 22 in July. Automotive consultancy J.D.Power cut its estimate for 2011 U.S. auto sales by 300,000 to 12.6 million, and slashed next year’s prediction by 600,000 to 14.1 million. Investment banks and manufacturers also began cutting their forecasts. U.S. car and light truck sales averaged 16.8 million between 2000 and 2007, according to Autodata, until the 2008 recession brought the market to its knees.

If sales do fall back again, Morgan Stanley auto analyst Adam Jonas predicts a new and more aggressive round of scrapping incentives.

“It wasn’t supposed to happen this way. The U.S. economy was supposed to recover enough to allow the mixture of pent-up demand and improved credit availability to trigger a sharp cyclical rebound in U.S. auto sales from levels far below replacement demand,” Jonas said.

“There are certainly conditions of falling credit availability and consumer confidence that could potentially push demand to materially lower levels. Low enough to have a negative impact on U.S. employment and low enough to get the attention of lawmakers in Washington,” Jonas said.

Stimulate the market
Jonas said he was not advocating a new subsidy programme, but if sales began to fall back towards an annual rate of 10 million, this would be an effective way to stimulate the market.

Jonas said that the previous programme used $2.85 billion after July 2009 and triggered sales of new vehicles worth $15.2 billion and nearly 680,000 cars and light trucks were traded in with an average subsidy of about $4,200 per vehicle. Jonas pointed out that sales conditions today are much different than in mid 2009. Sales are 20 per cent higher now, inventories are 20 per cent lower, while credit quality and used car prices are significantly higher today.

Jonas said economic conditions would have to get much worse before Washington intervened, but the fact that a worse-case scenario would trigger quick and affordable action should reassure anxious investors in car manufacturers.

“The bottom line is that the economic environment and U.S. car sales likely will have to get materially worse before Cash for Clunkers 2.0 enters the picture. Investors should see it as a powerful stop-gap measure that could temporarily help auto sales with material, if not short-term, impact on share prices,” Jonas said.

Neil Winton – September 5, 2011

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