ANALYSIS-US clunkers program may give Mexico a phantom burst

MEXICO CITY, Aug 26 - Forget statistical noise, Mexican industrial production figures could be in for a roar.

That's because the U.S. cash-for-clunkers program, which has poured $3 billion into an economic incentive cum green stimulus, is bound to offer only temporary relief to Mexico's ailing auto factories.

"This will be a one-time boost to output," said Alonso Cervera, economist for Latin America at Credit Suisse.

The U.S. government measure, which started in late July and ended this week, allowed Americans with older, less fuel-efficient vehicles to trade them in for rebates on newer, greener ones.

But because so much of U.S. car manufacturing production happens in Mexico, the program has a direct impact on activity south of the border.

U.S. auto sales jumped in July to their highest levels this year. Mexican vehicle production during that same month fell 25 percent from a year earlier, a steep drop but a notable improvement on June's 48.1 percent plunge.

There is also anecdotal evidence the slide may be slowing. At a General Motors plant in the central Mexican city of Silao, for instance, work stoppages are no longer a regular occurrence.

"They have not happened since the beginning of July," said Mauricio Kuri, a spokesman for GM. "Things have stabilized."

Still, analysts say the American initiative could make it difficult to discern a genuine turbo-charged recovery from borrowed horsepower over the next two months.

"This looks like good news, though it isn't a trend yet and we have to be cautious about it," said Eduardo Solis, head of the Mexican Automotive Industry Association.

Mexico, which is heavily dependent on exports to the United States, is on track for its worst recession since the 1930s, with its economy set to shrink at least 7.0 percent this year.

The U.S. plan for reducing the number of gas-guzzlers on its streets and highways, which has recorded 690,000 dealer transactions worth $2.87 billion in rebates, has given a welcome boost to Mexico's suffering industry.

But those hoping for continued gains may be disappointed.

OLD WAYS, NEW NORMAL

Despite an easing of the global credit crisis, Mexico's export machinery is a mere shadow of its boom-time self.

The U.S. recession, the most severe since World War II, has strained the country's manufacturing base and led to hundreds of thousands of layoffs.

Prospects for a sustained recovery in the United States remain in question. Many believe U.S. consumers are undergoing a seismic shift from being a nation of free-spenders to one of savers, with grim implications for Mexico's own trajectory.

In that context, the possibility of a return to the days when U.S. carmakers could sell 16 million units a year seems like little more than a pipe dream. The spurt in July car sales could even take away from prospective demand for the rest of the year.

"One could argue that the program boosted production and employment, but these impacts are temporary," said TJ Marta, strategist and founder of advisor, Marta on the Markets LLC.

"By year's end, the boost to employment and production will be over and both will fall back to even lower levels, as the program probably stole from future sales."

GHOST IN THE MACHINE

In assessing the efficacy of cash-for-clunkers, analysts say timing is everything.

"These types of programs are only effective when there is already an underlying recovery," said Armando Soto, head of the Mexico City-based auto consultancy Kaso y Asociados. "Otherwise the money is spent and you only get a temporary effect."

On this count, there are grounds for optimism. The U.S. economy appeared to be mending when the program was introduced, with both housing and industry showing signs of stabilization. In Mexico, activity also appears to be shrinking less rapidly.

Still, a milder pace of contraction is no guarantee of near-term growth. Some prominent economists believe the United States is headed for a "double-dip" recession where growth perks up temporarily only to hit another wall.

If that is the case, then Uncle Sam's auto trade-ins will do little more than help those with old cars get new ones, without a lasting economic impact.

The latest U.S. industrial production reading contained hints into such uncertainty. Output rose 0.5 percent in July, the first positive reading so far this year.

But the report, issued by the Federal Reserve, contained a note of caution that could soon be repeated in other snapshots of the economy: "Most of the increase was due to a jump in motor vehicle assemblies."

Unfortunately, the same might be true for Mexico.