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Auto Sales Up Sharply, Higher than Cash for Clunkers Period

Automobile sales in the US surged in February, up 14% year-over-year and sharply above expectations. This is perhaps the best economic indicator of the year. As Mike Konczal points out, the number is almost 1 million cars (on an annual basis) above the most recent high back in August 2009, during the “Cash for Clunkers” program.

Remember the Car Allowance Rebate System, or what was known as ”Cash for Clunkers”? Here’s a White House report discussing its impact on GDP, summarizing the program as follows: “The program provided $3,500 or $4,500 bonuses to buyers who traded in light motor vehicles with mileage ratings of 18 miles per gallon or less, who purchased a new car or truck with an improved mileage rating, and whose trade-ins and new purchases met certain other criteria. In order to get the maximum amount of $4,500, the mileage had to improve by 10 mpg for new cars and 5 mpg for new light trucks.”

The program ended up selling a number of cars, 14.2 million, that we haven’t seen since. Until this month’s 15.1 million. The economy appears to be capable of sustaining auto sales at Cash for Clunkers level, provided no sudden changes are made to aggregate demand.

So what’s driving this? I would argue that it’s cash for clunkers of a different kind. Specifically, people are trading into more fuel-efficient vehicles. I haven’t done a full statistical analysis here, but looking at the Calculated Risk chart, you can see pockets of solid vehicle sales at times when oil prices spiked, at least for a short period of time. It’s probably not significant to look at this during the recession, because there are other economic factors. But when the economy is in recovery, and when gas prices rise, people only have a few choices. Some of them can stop driving and maybe take mass transit to work. But for the most part, the best way to reduce your monthly expenses during an oil price shock is to trade up for a more efficient model. The fact that abundant natural gas has kept this price shock limited to transportation gives families more of an ability to do this. So over time, you can save hundreds of dollars a year with a more efficient vehicle.

This probably has something to do with the fact that demand for oil in the US is actually at a 16-year low. People are trading up, and car companies are under a mandate to create cleaner and more efficient vehicles. The demand for autos goes up, and that generates more economic activity.

This spike in car sales correlates with a large drop in the unemployment rate. We won’t know if that came to pass until next Friday. But it’s a good sign nonetheless.

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David Dayen

David Dayen