As mentioned in a past article, the U.S. economy is sitting on a huge pile of debt, which, as of the second quarter of 2025, amounts to $18.4 trillion. Earners across all brackets are feeling the squeeze, with many falling behind on their credit card and auto loan bills.

In an economy powered by consumer spending over the past few years, this spells trouble for sectors like the auto industry.

2025 was initially expected to be a great year for the industry. The market was forecasted to benefit from tax cuts, a deregulatory push, and continued sales growth, especially as carmakers finally had their factories operating at full capacity after being battered by the COVID-19 pandemic and subsequent semiconductor shortages.

Unfortunately, those hopes didn’t materialize. What bullish analysts and investors got instead was the possibility of flat, if not nonexistent, growth in the sector for this year and next.

These optimistic hopes for the auto industry’s growth weren’t unwarranted. Even though car prices rose due to post-pandemic supply shortages, buyers, until earlier this year, were willing to pay regardless of cost.

However, all that changed due to a combination of factors. First, imported car and automobile parts tariffs—both set at 25%—in March and April led to higher prices. Second, the Federal government’s $7,500 electric vehicle (“EV”) incentive ended in September.

Combined with inflation and a tighter job market, consumers were forced to rethink their spending, leading to a spending pullback that included cars.

Despite these headwinds, auto sales maintained their pace through three quarters this year, as automobile giants absorbed tariff costs despite losing billions in the process.

Cracks are starting to show, however. Dealers are struggling to move inventory, forcing them to offer discounts just to make sales.

Unfortunately, the auto industry is about to face more pressure as analysts expect new vehicle sales to fall roughly 7.8% year over year. EV sales are expected to decline even more sharply, dropping around 30% year over year.

In the face of rising car prices and tightening wallets, consumers are delaying new car purchases, and opting for more used vehicles rather than pricier new ones.

This had led to the average age for passenger cars to rise to 14.5 years, with little sign of slowing down. While this opens up the possibility for growing demand in the repair service segment, the overall impact on auto manufacturers is negative.

That’s despite the fact that the top 20% of households have maintained their spending habits on new cars. The auto industry is staring down the possibility of muted prospects as the majority of consumers pull back their spending. 

And even though repairs are seeing renewed activity and a segment of buyers are propping up sales, these aren’t enough to singlehandedly change the overall picture for this market. 

It remains to be seen whether the auto market is barreling towards catastrophe, but what’s clear is that for now, investors hunting for opportunities should look elsewhere until the auto industry’s outlook sees tangible improvements.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research

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