The Federal Reserve has reported that US consumer borrowing dropped for the fifth month in a row in June as people cut back on credit card spending. In fact, since the onset of the recession, we have become used to hearing that US consumers have been diligently reducing their debt burden and getting more savvy about spending. After all, June was the 16th month out of the past 17 that consumer credit in the US has fallen, with the only rise coming in January this year.
However, the latest snag in the US government's so-called cash-for-clunkers scheme launched 12 months ago paints a rather more troubling picture. It shows that some US consumers are still more than happy to take on monthly payments they cannot afford to fund big-ticket items and that the government has been more than happy to encourage them. Under the cash-for-clunkers scheme, created by the 2009 Consumer Assistance to Recycle and Save Act, government rebates were available to those who traded in their old gas-guzzling vehicles and purchased or leased new, more energy-efficient models costing less than US$45,000 (Dh165,280). To get the maximum rebate of $4,500, a customer had either to buy an eligible car outright or sign up for a five-year lease.
Twelve months on, many people who took the lease option are finding it has come back to bite them. Some are now suffering from buyer's remorse, having decided they do not like the cars after all, but many others are having trouble affording the lease payments now that they have spent the upfront rebate. As a result, thousands of them have been trying to transfer their leases to other people who are looking for leased vehicles, according to Leasetrader.com, a company that matches lease buyers and sellers.
This is a tough task, because those who lease in the US usually do so to drive the latest models, so they prefer short leases, which allow them to return the cars to the dealerships every two or three years. Finding a new lessee who wants, for example, a one-year-old Ford Focus or a Honda Accord for four years is a challenge. Finding several thousand lessees who are happy to be lumbered with year-old cars for four years will be even more difficult, and the alternative is not pretty. If they cannot find new lessees, those who cannot pay may well default on the terms of their leases in the months ahead, prompting a fresh wave of economic pain.
So the cash-for-clunkers scheme, hailed as one of the more successful efforts of the government to pump money into the ailing economy when it was launched 12 months ago, has already proved to be a double-edged sword. Yes, it stimulated the US economy during a critical period. Nearly 680,000 older vehicles were traded in for new, more fuel-efficient models, struggling car dealers offloaded their inventory, and car companies desperate to increase sales quickly increased production. According to official estimates, the scheme resulted in an increase in US GDP of $3.8 billion to $6.8bn and saved or created more than 60,000 jobs.
But, in introducing the scheme, the government exacerbated the problem that drove the US into recession in the first place - that, up until 2008, consumers were given short-term sweeteners to take on big financial commitments, whether those were cars or houses or other purchases, that they could not afford in the long term. Unless the government wants to ensure a double-dip recession, it is probably not a good idea to encourage this behaviour this year.
Americans may have cut their use of credit, but it does not mean they have been transformed over the past 20 months or so into models of financial prudence. It might be a good idea for the US government to remember that fact the next time it asks consumers to help the economy over a hump. email@example.com