2025 economic trends impacting the auto industry outlook

As with the past few years, the start of 2025 has presented unique challenges and uncertainties for the auto industry. From high interest rates, to rising prices and tariffs, learning how these trends might affect your clients gives you an opportunity to help provide valuable insights to help them plan.

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Economic impact on the auto industry over the years

The auto industry has been on a wild ride since the start of the pandemic. At first, demand for cars and trucks plummeted as workers shifted to work from home and restrictions limited activity. Then, as the economy reopened, a semiconductor chip shortage caused new and used vehicle prices to surge to record levels with few cars available at auto showrooms. New vehicle production and inventories have improved substantially, helping to reduce ease prices and provide more stability to the auto market. But in 2024, buyers had to contend with the highest auto loan rates in several decades. Now, with the uncertainty around the impacts of tariff policies, the industry is once again bracing for more changes. The overall uncertainty could reshape consumer behavior and market dynamics, introducing a new era of transformation in the auto industry.

How the current auto industry supports the U.S. economy

The auto industry is an important barometer for the overall health of the U.S. economy. Auto production is a key component of overall manufacturing activity in the country, especially for those local communities that support the production lines. More than 1 million people work in the auto sector with downstream employment impacts across nearby businesses. Vehicle purchases are also a driving force of overall consumer spending, providing about 3% of real GDP growth in the U.S. The vast majority of households own at least one car and a buying a vehicle is one of the most important financial decisions that people make. When the auto industry is expanding and doing well, it’s a sign that the U.S. economy is moving in the right direction.

2025 economic trends impacting the auto industry

Tariff impacts

The recently imposed 25% tariffs on imported vehicles and upcoming tariffs on auto parts have created substantial ripples in the auto industry. These tariffs—alongside existing steel and aluminum tariffs—are expected to increase production costs and as a result, prices for the consumer. The price of a new car is estimated to increase 10-15%. This situation has ignited a short-term boom in sales as consumers rush to buy before prices surge, but the long-term forecast indicates a sales decline, with projections dropping to 14.6 million units by the end of 2025. As foreign brands reconsider their import strategies, supply chains are likely to undergo significant changes, possibly increasing domestic production.

High interest rates

Interest rates for financing cars have been elevated for almost three years. The average rate for a 48-month new auto loan was 7.6% as of mid-April, and for used cars the average range was 10-15%.This increases the monthly loan payments and has caused many buyers to extend out the duration of their loan – even up to 8-10 years. Higher financing costs can deter potential buyers from purchasing new vehicles, prolonging ownership cycles of existing vehicles.

Inflation and supply chain issues

After the challenges of inflation and supply chain disruptions the past few years, material costs have been on the rise in recent years, and consequently, vehicle prices. Now, uncertainty within the industry has many auto companies reanalyzing their supply chains and determining if they need to make changes to minimize the impact of these tariffs. For example, some foreign brands have decided they won’t import certain makes or models to the US because they just can’t justify the higher cost.

Minimal used-cars and high trade-in value

With the expected higher costs, it’s expected more consumers will choose to hold on to vehicles, keeping with the trends over the past few years of the number of available used cars remaining low. While used car prices have declined from their pandemic peaks, increased prices can be expected with higher demand and low inventory.

Future expectations for the auto industry

Long-term impacts of the tariffs remain uncertain. While the administration aims to incentivize domestic production, this goal may be unrealistic given existing global supply chain dependencies and the extended timeframe required to build new manufacturing capabilities. Some production may return to U.S. soil, but a widespread revival in domestic manufacturing is improbable.

Ultimately, the auto industry faces a period of heightened uncertainty and potential transformation. Economic pressures, shifting trade policies, and evolving consumer habits will redefine the landscape in the years ahead, fostering both challenges and opportunities.

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