This analysis is by Sheena Martin, Contributing Editor, Investment U
Monday, December 7, 2009

On the surface, the headline news from the much-vaunted Cash For Clunkers auto program looks pretty good:

• August car sales were the highest all year – a 26.5% spike from July’s figures.
• By the time the program ended on August 24, it had accounted for 700,000 new car sales, worth a total of $2.8 billion.

But I’ve got news for you: Aside from the short, sharp jolt to the economy, the program made little difference. In fact, it flopped…

Credit Suisse Chief Economist, Neal Soss, says at least some of the purchases came from people who’d have replaced their cars in the coming months anyway. So this wasn’t an increase in demand… it was just squeezed into a tighter timeframe.

In addition, what helps one industry hurts another. And some sectors and industries aren’t seeing as much profit now because consumers used what money they had to purchase new cars.

Simply put, while Cash For Clunkers looked pretty on the outside, it was ugly on the inside. Not to mention its $3 billion price tag.

Worse yet, with the unemployment rate at 10%, President Obama is entertaining the idea of revisiting the Cash For Clunkers format for another area. The administration is mulling over “weatherization” incentives for homeowners and small businesses, modeled after the auto program.

And while it would benefit home improvement retailers like Lowe’s (NYSE: LOW) and Home Depot (NYSE: HD) and manufacturers such as United States Steel Corp. (NYSE: X), would it be successful in creating jobs and stimulating the economy in whole? Not likely.

Short-term fixes might look good for a while, but they rarely yield long-term gains and the weatherization plan looks like another Band-Aid job.

Sheena Martin

View original at: Investment U

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