A High-Octane Start

When the federal government unveiled its "cash for clunkers" program, it was largely derided as the dying auto industry's desperate push to urge Americans to buy new cars. Surprisingly, it worked.

Cash for clunkers, formally known as the Car Allowance Rebate System, is one of the few government programs that has pushed Americans to spend money in this tight economy. The program already ran through its allotted $1 billion budget since it took effect a week ago. On Friday, the U.S. House of Representatives voted 316 to 109 to give the program an additional $2 billion.

"It was exactly the spark consumers were looking for," says Jim Appleton, president of the New Jersey Coalition of Automotive Retailers. "For the last nine months, the auto-retailer industry has been in a historic slump. The pent-up demand has been huge."

Yet, the demand ultimately may not be enough to save the U.S. auto industry. General Motors emerged from bankruptcy weeks ago following the departure of several top executives. Chrysler sold most of its assets to Fiat after surviving 42 days in bankruptcy. Thousands of autoworkers have lost their jobs in recent months. In Michigan, home to several auto factories, the unemployment rate reached 15.2 percent as of June 2009, compared with the national unemployment average of 9.5 percent.

"It's a small blip on the radar screen for the auto industry, though I'm sure they appreciate it," says Russell Walker, a professor at Northwestern's Kellogg School of Management.

The problem, according to Walker, is that many Americans may be using the "cash for clunkers" rebate as a way to rid themselves of expensive gas-guzzling cars. The program gives rebates of $3,500 and $4,500 when consumers trade in vehicles that get 18 miles or less per gallon and that are less than 25 years old. But the American automakers—like General Motors and Chrysler—which need the boost the most, primarily produce sport utility vehicles and trucks. "The two companies at the greatest financial risk have the least amount of offerings in the fuel-efficient lines," Walker says. "It's more likely that you'll end up with a Kia, Toyota, or Hyundai."

This theory has played in showrooms, where consumers like Ellen Ribitzki of Ringwood, N.J., recently traded in her General Motors sport utility vehicle for a Santa Fe Hyundai. Though she and her husband are currently unemployed, she called the deal too good to pass up. "We do a lot of traveling and that engine light kept flashing on and off," she says about her old SUV. "It was a good incentive."

For auto dealers, this translates into dollar signs. Rick DeSilva, owner of Liberty Hyundai in Mahwah, N.J., says his showroom floor was packed last Saturday, with customers growing irritated as they waited to see a salesman. His dealership usually sells about 60 cars a month. Under the "cash for clunkers" program, they've already sold 30 cars. "Yesterday, the place was just packed, and at first, we actually couldn't keep up with the flow," he says. "Finally, we did wrap our arms around it ."

The House of Representatives' vote to infuse cash into the clunker program doesn't mean it's a lock. The legislation still has to pass the Senate, where politicians are expected to debate the program’s fuel-efficiency standards in the final week before they go on their August recess.