Clunkers Program Helps Boost Retail Sales in August

By Ylan Q. Mui
Washington Post Staff Writer
Tuesday, September 15, 2009; 5:05 PM

The popular Cash for Clunkers program helped propel retail sales to the highest level in three years last month, but those gains will likely be unsustainable in coming months as consumers -- now saddled with new car payments -- continue to grapple with mounting unemployment and tightened credit.

The Commerce Department reported that August sales jumped 2.7 percent from the previous month, beating many economists' expectations. Auto sales led the way with a 10.6 percent increase from July as consumers rushed to trade in their old vehicles and receive a federal credit toward more fuel-efficient ones.

But prospects for the rest of the year may not be so rosy. Economists believe the clunkers program encouraged consumers simply to buy new cars sooner, perhaps at the expense of other major purchases. In addition, August is the peak of the back-to-school shopping season, and several states held sales-tax holidays last month to encourage spending.

"This tapped out consumers to some extent," said Brian Bethune, chief U.S. financial economist for IHS Global Insight. "There's no way that the consumers can really fire on all cylinders here."

Arlington resident Erin Slattery, 26, has cut back on dinners out since moving from Kansas City earlier this year. But she and her boyfriend, who live together, decided to take advantage of the Cash for Clunkers program and turn in his 1998 Jeep Cherokee for a new Jeep Patriot.

The deal resulted in a roughly $200-a- month car payment, and Slattery said she has put off thoughts of a big vacation in favor of a less-expensive road trip, especially now that they have a car with air conditioning.

"For us to take on a huge new payment was kind of an interesting situation, I felt," Slattery said. But she added that she is hopes the savings in gas will help make up some of the difference.

Similar programs have been underway in Europe, proving particularly popular in Germany. Passenger car sales in that country were up 28 percent in August compared with the previous year. But other sectors have suffered, and the head of the wood and furniture industry reportedly blamed at least part of that industry's declining sales on the clunker program.

Though the 5 billion euros dedicated for car rebates in Germany have been wiped out, thousands of sales are still being processed and will likely boost spending for the next several months. In France, a comparable program has been so successful that the government is considering extending it into next year.

The long-term effects of clunkers programs abroad and at home remain unclear. In the United States, building supply stores and home furnishing stores were the only two sectors last month to post declines, though they have long been struggling. But shoppers still seemed willing to make smaller discretionary purchases -- at least for now.

Clothing stores reported a 2.4 percent increase in August sales from the previous month, and department stores saw a similar gain, according to the Commerce Department figures. Sales at sporting goods and book stores rose 2.3 percent, and electronics retailers had a 1.1 percent increase.

Excluding the impact of autos, gas and restaurants, retail sales increased 0.7 percent in August from the previous month, according to an analysis by the National Retail Federation, a trade group. That is the first gain in six months, and the industry welcomed the news with cautious optimism.

"Shoppers were a bit more comfortable digging into their wallets last month, and retailers are hopeful that we've turned a corner," said Rosalind Wells, chief economist of NRF. "It is encouraging to see some momentum building as retailers anticipate the all-important holiday season."

The results are the latest of several encouraging signs that the recession is easing and the freefall in consumer spending -- which accounts for about two-thirds of the gross domestic product -- is over. Consumer confidence rebounded in August after two months of declines, according to the Conference Board. Research firm ShopperTrak reported foot traffic at the country's shopping centers was up 5.9 percent in August compared with the previous month.

But compare retail sales with last year's, and it is clear that consumers remain strained. Total retail sales fell 5.3 percent compared with August 2008, according to the Commerce Department. And despite the big monthly jump in auto sales, they were still down 1 percent from last year.

The next few months will be crucial in assessing the health of consumers. Retailers are worried that the popularity of cash for clunkers could hurt sales at malls and shopping centers this holiday season as many families budget for new monthly car payments. In addition, economists point to the continued rise in unemployment and the tight credit market as sustained pressures on shoppers.

"The recovery in the consumer sector is lagging behind that in other parts of the economy," said Paul Dales, U.S. economist for Capital Economics.

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