Fake Recovery through Cash for Clunkers

“US economic power is declining as a result of the financial crisis,” said the head of the World Bank Robert Zoellick. And continued saying: "One of the legacies of this crisis may be a recognition of changed economic power relations."

The US, the world's biggest economy, has been in recession for almost two years, while emerging economies like China and Brazil have grown. This may help bring about a long-term rebalancing of the world economy.

The US economy is a 14.15 trillion dollar train wreck waiting to happen. House prices are tumbling deflation is despite the feds efforts not diminishing; meanwhile they are creating the threat of (hyper) inflation in the (near) future. Unemployment is at 16.8%. And the massive debt burden will eventually crush all of us people.

"Consumer confidence not only surprised to the downside in September but the Conference Board index actually fell to 53.1 from 54.5 with both the 'present situation' and the 'expectations' component failing to build on the August cash for clunkers rebound.

To put those figures in better perspective: During an economic expansion, the consumer confidence averages 102.0 in a recession, it averages 72.4. In other words it's still a recessionary economic climate. “The only categories [that] actually saw their confidence level rise in September were the ones in the lowest income brackets - less than $25,000 - their confidence rose two points. After all, they're the only ones really benefiting from all the government intervention into the economy and the markets."

Manufacturing shrank again after the effects of “Cash for Clunkers” faded. In August the ISM Manufacturing Index for new orders registered at 64.9% anything over 50% signals expansion. Most of this gain was due to car manufacturers like GM, Ford, and Toyota boosting manufacturing to meet Cash for Clunkers (CFC) demand, 750,000 cars were sold in a month’s time thanks to this stimulus.

But for September, the index dropped to 60.8%. Car manufacturers are left with too much supply on the lots. Yesterday, they announced sales results for September. Ford saw sales drop 5.1%. And Chrysler announced a 42% plunge in sales.

Consumer spending fuelled the US economy and was 70% of GDP. If the economy returns to the days before 2.007 of 0-2% savings rate, then a strong V-shaped recovery could be seen. But it just doesn’t look like that. Consumers are doing the rational thing: paying down debt and saving. The savings rate for August came out yesterday as well and showed a temporary decline to 3%, as a result of CFC impulse. With government stimulus “helping” consumers were taking once more debt by buying a new car, or even a new home thank to the stimulus to buy new houses.

What happens after most of the wasteful stimulus programs end?  Savings rates may rise into the highs of 14.5%, like in 1970s. Because people continue paying down their debt revaluing the dollar in the process again.

When that is the case it will hurt retailers who are hoping that consumers return to buy things they don’t absolutely need.

This will set off a chain reaction. Retailers stop buying from suppliers, suppliers stop buying tools from manufacturers, workers get laid off, and ultimately the economy crumbles.

This analysis is not made to scare people, but just to better understand where the economy is ultimately heading.

The just released shocking unemployment numbers are another offensive in the process of this fake recovery. “The number of U.S. workers on payrolls fell by 263,000 in September — much worse than expected — and the unemployment rate rose to 9.8 percent, a 26-year high. To make matters worse, the average workweek fell to a record low of 33 hours.”
In Europe are 16 million unemployed representing 9.9% of the workforce.

By the middle of next year (2010), jobless number in the US will be close to 8 million jobs, wiping out all the jobs created since the middle of 2004. Unemployment is likely to be more than 10%, if statistics aren’t manipulated.

And as long the jobless rate doesn’t improve no upturn in real wages can be expected, needed for reigniting a new consumer economy, consequently it is going to take much longer than commonly anticipated before this crisis is over. Wisdom is required that governments aren’t following Japan’s recovery attempts, otherwise after even twenty years there won’t be a recovery.