In 2001 the auto companies introduced interest free financing that sparked a huge bump in retail sales.  October 2001 retail sales spiked 6.6% before plummeting 2.7% the following month.  We all know what unfolded in 2002 as the market double dipped and investors were crushed.  Cash for clunkers had a similar effect as retail sales surged 2.7% for the most recent month.  Dan Greenhaus at Miller Tabak thinks we could be setting ourselves up for future disappointment as government stimulus wears off:

“Cash for clunkers” may have just as fleeting an effect on U.S. retail sales as automakers’ no- interest loans did in the last recession, according to Dan Greenhaus, chief economic strategist at Miller Tabak & Co.The CHART OF THE DAY shows sales figures for October 2001, when interest-free financing was initially offered, and the four months before and after the incentive took effect. Greenhaus had a similar chart, based on data from the Commerce Department, in a report today that drew the comparison.

“Ultimately, this is the issue with one-time sales incentives,” Greenhaus wrote. “You pull sales forward.”

“Cash for clunkers,” the U.S. government’s effort to encourage trade-ins of older autos, may also restrain future sales because many consumers borrowed to buy new vehicles and reap the program’s benefits, he wrote.

Greenhaus’s report came out before today’s retail sales figures were released. They showed a 2.7 percent increase overall and 1.1 percent growth excluding autos, surpassing the average estimates of economists in a Bloomberg survey.

Source: Bloomberg