Senate Debates "Cash for Clunkers" Program After Car Sales Accelerate

By Bob Blandeburgo
Associate Editor
Money Morning

While politicians in Washington continue to debate the merits of the Obama administration's "cash for clunkers" legislation, the Big Three U.S. auto companies are reporting better-than-expected July sales, in part because of the program's success.

The program, formally dubbed Car Allowance Rebate System (CARS), began on July 1 and was expected to last until November. To qualify for CARS, the "clunker" must be 25 years old or less and have a combined fuel economy of 18 miles per gallon or less. The new car purchased must have a combined fuel economy of 22 mpg. Those who do qualify can receive $3,500 to $4,500 from the U.S. government for their older, less fuel-efficient cars.

However, a strong response from consumers exhausted almost all of the $1 billion in funds allotted to the program, with an estimated 250,000 cars being sold last month.

Now, with the program running on fumes, U.S. President Barack Obama served notice to the Senate to approve an additional $2 billion to keep the program going after the House of Representatives gave the green light on Friday. But resistance from both Republican and Democratic senators could lead to a filibuster.

"I not only wouldn't vote for the extra $2 billion, I was opposed to the initial billion," U.S. Sen. John McCain, R-Ariz. said yesterday (Monday) in an interview with Fox News. "I can't imagine that any taxpayer of America would have thought that the [Troubled Asset Relief Program] TARP, the financial recovery money, would be used now to subsidize the sale of automobiles in America."

U.S. Sen. Jim DeMint, R-SC, also believes there's too much of a rush to devote another $2 billion of the $787 billion in stimulus money.

"This is crazy to try to rush this thing through again while they're trying to rush through health care, and they want to get on to cap-and-trade electricity tax," DeMint told Fox. "We've got to slow this thing down."

And McCain and DeMint may have Democratic allies. U.S. Sen. Claire McCaskill, D-MO, posted a message on her oft-updated Twitter page stating she didn't want any new spending for the program unless the money was already appropriated and there was a clear path to eventually halt it.

Some senators feel a savings of four mpg isn't enough. "Any extension of the 'cash for clunkers' program must go further in advancing the goals of better fuel efficiency and greater emissions reductions," wrote U.S. Sen. Dianne Feinstein, D-CA, in a joint statement with Sen. Susan Collins, R-ME. "We will not support any bill that does not meet these goals."

Still, one unnamed official in the Obama administration said the average fuel economy of the vehicles purchased through the program was 25.4 mpg and the average fuel economy of trade-ins was 15.8 mpg, representing a 9.6 mpg increase, The Associated Press reported.

It's unclear how much of the original $1 billion in the program is left, but as of yesterday afternoon the CARS Web site said it was still operating.

The chances of the Democratic-controlled Senate approving the extra funds for the program appear likely, but there is considerable pressure to get the deal done before Friday, the last day before the Senate takes a month-long recess.

A Shot in the Arm

Ford Motor Co. (NYSE: F), the only U.S. automaker to refuse bailout money, saw a 2% year-over-year gain in its July sales, citing customer demand for fuel-efficient vehicles and CARS. This was the first increase from any U.S.-based automaker since November 2007.

The company's most fuel-efficient, non-hybrid car, the Focus, was the bestseller for the company with 21,830 cars sold, a jump of 44% from a year ago. Ford's hybrid line, which includes the Fusion, Milan, Escape and Mariner, grew 323% from the same period last year.

"We're past the worst in the auto market, and I think we're going to have a gradual improvement here," said Maryann Keller, president of consulting firm Maryann Keller & Associates, in a Bloomberg Television interview. "Ford is coming out of this recession as a brand winner."

Analysts were expecting a decrease of 6.1% in Ford's sales, according to a Bloomberg poll.

Shares of Ford closed $8.33, up 33 cents or 4.12%.

General Motors Corp.'s (OTC: MTLQQ) year-over-year sales were down almost 20% in July, but rose 12% compared to June. Chrysler saw its sales for the month fall 10%, but gained 30% on a monthly basis. Both companies said the monthly sales gains were attributed in part to CARS.

Both companies have said their costs are so low that they can break even if their sales total 10.5 million vehicles per year.

"There's no question that the clunkers are going to help us get above the 10 million unit mark this month," said Erich Merkle, president of the industry consulting firm autoeconomy.com, told The AP.

News and Related Story Links: