As with the past few years, 2024 presents unique challenges and trends shaping the auto industry, from the surge in electric vehicle (EV) adoption to the ongoing chip shortage. Learning how these trends might affect your clients gives you an opportunity to build relationships.
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 in 2024. But now buyers have to contend with the highest auto loan rates in several decades, an environment which could limit sales growth despite widespread pent-up demand for autos from during the pandemic.
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.
2024 economic trends impacting the auto industry
Moving into 2024, the trends shaping the auto industry include the car chip shortage, shifts in labor dynamics, ongoing inflation, supply chain issues, elevated interest rates, and the changing landscape of vehicle ownership. Dive into these trends below so you can offer valuable perspective when engaging with clients.
Listen to the Nationwide Market Insights podcast: What’s next for the auto market?
Slow adoption of electric vehicles
Despite strides in technology and infrastructure, the adoption of electric vehicles has been more gradual than anticipated. Consumers still face barriers like high upfront costs, range anxiety, and limited charging infrastructure. Additionally, EVs have unique considerations when it comes to premiums, risk assessment, and the potential for new insurance product categories. With tax credits and other provisions, the Inflation Reduction Act is expected to impact EV demand and margins, according to insights from industry experts.1
Car chip shortage
Car chips, also known as semiconductor chips, play a vital role in a variety of vehicle systems, from managing engine performance to ensuring safety through advanced driver-assistance systems. These chips enable features that are now considered standard by consumers, including automatic braking, lane-keeping assistance, and smartphone integration.
The ongoing car chip shortage, which originated during the COVID-19 pandemic, continues to impact the auto industry’s production capacity. Semiconductor chips are not only used in cars, but in nearly every computing device. When demand for cars plummeted in the early days of the pandemic, auto manufacturers stopped ordering and chip producers focused their attention elsewhere. Once the demand returned, there wasn’t an adequate supply of chips, and the auto industry has been feeling the effects ever since.2 As new vehicles rely more on chips, this scarcity directly affects output levels, leading to price hikes and longer wait times for buyers.
Labor agreement for UAW
The United Automobile Workers (UAW) labor agreement negotiations, resulting in wages increases upward of 60% for new hires3 may create waves throughout the auto industry, affecting everything from production costs to profit margins. With the UAW being one of the largest and most diverse unions in North America4, with members in virtually every sector of the economy the negotiations may ripple into other sectors.
Inflation and supply chain issues
Inflation continues to challenge the auto industry, driving up the costs of materials, and consequently, vehicle prices. Coupled with supply chain disruptions, the industry faces a dual challenge of increased production costs and delayed delivery times.
High interest rates
Interest rates for financing cars have seen a noticeable uptick. The average rate for a 48-month auto loan rose to nearly 8% in March 2024, up from just 3.5% in early 2022. 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.
Minimal used-cars and high trade-in value
With more consumers choosing to hold on to vehicles, the number of available used cars remains low. While used car prices have declined from their pandemic peaks, the average value of used car is still much higher than in years past. This means that upon trade-in, many consumers will get much more for their current vehicle than they might expect. This had helped some purchasers to offset the high interest rates and afford a more expensive new or used vehicle.
Future expectations for the auto industry
The elevated interest rate environment is not expected to fade soon with average auto loan rates likely to remain high into 2025. This likely places a cap on auto sales over 2024 and into 2025 despite the many positive trends for auto demand. On the upside, the labor market is still strong in 2024, boosting incomes and providing the wherewithal for many households to buy a car. Moreover, with the average age of a vehicle on the road at record levels, there should be residual demand from over the pandemic that should boost sales. We expect around 15.5 million new sales in 2024, on par with 2023 as the industry navigates the shifting economic environment. This sales trend could continue into 2025 with some upside if interest rates start to decline as expected.
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The auto industry weathered a volatile environment in recent years but has settled into a positive trend in 2024. While challenges remain from higher interest rates and supply chain disruptions, the outlook for sales is upbeat and the industry is prepared to adapt to changing consumer preferences in coming years. Stay up-to-date with timely data and commentary from our Nationwide economics team on financial markets, consumer activity, inflation and more. You can also subscribe to our weekly Nationwide Market Insights podcast.
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