Stimulus Not Enough to Jump Start Car Sales

On February 17, President Obama signed a controversial and massive $787 billion economic stimulus package into law, and hailed the action as a stepping stone towards turning the economy around, as it will lower taxes, incentivize home buying and, according to the Administration, create or save millions of jobs.

Another key part of the stimulus revolves around the automotive industry: anyone who buys a new vehicle in 2009 will be allowed to deduct the sales tax paid on the vehicle from their taxable income.  In a typical scenario laid out by USA Today (see the previous link), an “average” car purchase would reduce an individual’s taxable income by roughly $700 according to a tax estimator.

Not exactly a ton, but in today’s economy, every little bit helps, right?  Well, apparently it does, just not enough to spur car buying.

According to a recent poll, the provisions in the recently passed stimulus bill will not be enough to get most Americans to go out and purchase a new vehicle in 2009.

When asked, “Will the tax breaks included in the stimulus package be enough to get you to purchase a new vehicle in 2009?” roughly two-thirds of the nearly 200 respondents stated the tax breaks would not be enough.  Here’s the breakdown:

• 67% said, “No, I still won’t be buying a new car in 2009.”
• 16% said, “Yes, I previously did not plan on purchasing a new car in 2009, but will do so now.”
• 9% said, “Not applicable.  I was planning on buying a new car in 2009 regardless.”
• 8% said, “Unsure.”

This clearly isn’t good news for the auto industry in America, nor is it good for the economy in general.

As I see it, there are three main drivers — no pun intended — behind why the tax breaks included in the stimulus will not be enough to get Americans to buy new vehicles:

1. EMPLOYMENT.  Since the recession began, the economy has shed nearly 4 million jobs, unemployement has spiked to 7.6% and there’s still no end in sight.  When consumers fear that their single largest source of disposable income — their job — may disappear, they tend to not make big ticket purchases.
2. SINKING HOME VALUES.  Many of the car purchases made during the recent real estate boom were financed by people taking out home equity loans.  However, with real estate values plummeting across the country, less and less people are able to use this particular financing to go on a car shopping spree.
3. TIGHT CREDIT.  Couple the decline in home equity loans with generally tight credit conditions, and you get a situation where even credit worthy individuals are having a tough time getting the necessary financing to go out and buy a new car.

Long story short, while the tax breaks included in the stimulus (in theory )should have helped move cars off of dealers’ lots, the fact that the economy — specifically the job market — is in shambles is going to cause this plan to end up being an exercise in futility.