Gloomy Macroeconomic Backdrop Weighs On Spring Outlook

The Trump administration's shifting policy mix is altering the economic outlook, with our assumptions reflected in a likely downshift in GDP growth with rising downside risks.

The April 2 tariff announcements by the U.S.--and subsequent countermeasures announced by China--went far beyond what financial markets had imagined and exceeded our previous assumptions (see "Global Credit Conditions Q2 2025: Puzzling Reshuffling," published March 31, 2025, on RatingsDirect). President Trump's recent 90-day pause of most tariffs didn't remove the uncertainty around what could ultimately occur. Unresolved trade tensions as the partial pause approaches its end could have a visible impact on credit quality. As a result, if the paused U.S. tariffs are ultimately implemented in full, the economic fallout would be broad and deep (see "Global Credit Conditions Special Update: Ongoing Reshuffling," published April 11, 2025, on RatingsDirect).

Our revised forecasts for the North American auto industry incorporate narrowing cushions at households to absorb the back-to-back macroeconomic shocks of high vehicle prices, ongoing inflation, rising unemployment, and high monthly payments for auto loans and leases. We revised our U.S. light vehicle sales estimates downward by around 2% for 2025 and 7% for 2026 (compared to our January 2025 estimates of 15.8 million and 16.0 million, respectively) to reflect the impact of tariff price increases on consumer affordability through the next two years. We now expect that auto sales will remain at or below 15.5 million units (40-year median) through 2027 (see chart 1). Incremental downside to our base-case stems from China's export restrictions on seven rare earth elements, effective from April 4, 2025, which will have a significant impact on automotive supply chains. The U.S. auto industry will also adjust to a slower growth environment (for battery electric vehicles and plug-in hybrids in 2025-2026 per revised S&P Global Ratings estimates (see table 1).

Chart 1

Table 1

Tariffs Will Intensify Ratings Downside In The North American Auto Sector

Base-case scenario assumptions:

• This scenario assumes more cautious consumer spending than our previous baseline projection due to more broad-based and prolonged tariff risks beyond 2025.
• Light vehicles imported from outside North America will be subject to a 25% tariff on the total value of the vehicle.
• Light vehicles assembled in the U.S. will face a 25% tariff on parts not covered by the U.S.-Mexico-Canada agreement (USMCA) effective May 3.
• Light vehicles assembled in Mexico or Canada and shipped to the U.S. will face 25% tariffs on parts if they do not meet USMCA requirements as and when determined by the Secretary of Commerce.
• U.S. auto sales decline modestly in 2025 to around 15.5 to million units, around 15 million in 2026, with sales well below 16 million units even in 2027.
• We assume a 50%-60% pass-through of the higher and prolonged tariff-related costs from automakers to consumers, 0.5-0.75 price elasticity of demand through 2026, equating to a roughly $40-$70 increase in monthly payments for consumers.
• Average transaction prices (ATPs) for new vehicles increase about 5%-7% (from Dec. 31, 2024, levels) through the end of 2025 and around 6%-8% in 2026 due to lower incentive activity from automakers and higher pricing at dealerships to absorb the sustained broader tariff costs.
• Used vehicle prices rise 5%-7% (from December 2024 levels) in 2025 and by another 2%-5% in 2026 as supply of two- to four-year-old vehicles remains tight following three years of pandemic-induced lower original equipment manufacturer (OEM) production.
• Some issuers will start to deploy capital expenditure (capex) toward relocating production for select products, which could have a modest impact on cash flow and margins over the next two years.

Credit Impact

Over the next several weeks, we will review our issuer-specific assumptions in light of the revised economic and industry-specific forecast revisions today. This will include an in-depth review of exposure to tariffs on earnings and cash flow beyond 2025 after incorporating potential mitigating actions, supply-chain management, relative positioning versus peers, and against current ratings headroom.

In our preliminary review, we defined the following risk categories:

High risk:   Indicates the possibility for a negative rating action over the next several weeks if we believe there is limited ability to offset the impact of extended tariffs on a sustained basis. These companies may have high exposure to tariffs and/or lower cushion on their downgrade triggers (even before tariff consideration), to absorb large incremental margin or cash flow shortfalls.

Moderate risk:   Indicates a lower likelihood of a negative ratings action over the next 12 months due to a reasonable cushion on credit metrics and liquidity, and/or lesser direct exposure to tariffs (especially for suppliers), or some ability to mitigate the impact through cost management or greater financial flexibility given strong liquidity and free cash flows.

Low risk:   Indicates substantial cushion on credit metrics or minimal exposure to the proposed tariffs.

Automakers:  

We now assume high risk to our ratings on Ford Motor Co. and General Motors Co. (GM) given the potential for material incremental headwinds to both automakers' earnings and cash flows, which may not be largely offset by mitigants. During the next several weeks, we will fine-tune our issuer-specific assumptions and review our ratings across the broader industry after incorporating our estimates in 2025 and 2026 for tariff-related cost impact, volume declines, price pass-throughs, and mitigating actions. Mitigating actions include better utilization of U.S.-based plants, incremental cost-reduction efforts, supply chain management, inventory build-up strategy, and the willingness and ability to pass through costs to the consumer on a sustained basis. For more details please see "Uncertain Tariff Policies Could Create Ratings Risks For North American Automakers And Suppliers," published Feb. 18, 2025, on RatingsDirect and the April 9, 2025, S&P Global Ratings' webcast "Autos Caught In The Tariffs Storm," available on spglobal.com.

Table 2

Auto suppliers:   The ratings ramifications for auto suppliers will depend more on the volume and mix impact from higher prices longer term as well as increased supply chain and production volatility. We do not think that direct tariff fallout will be as significant to suppliers because USMCA-compliant parts will likely be excluded from the 25% tariffs for now. Even if a large tariff were placed on suppliers, we think most of the burden would be expeditiously passed on to OEMs. While there will be pressure from higher costs for components imported from China, with the exception of semiconductors, the majority of parts are produced and sourced within North America.

We expect several suppliers we rate, with low cushion to downside triggers (see table 3), could be subjected to a negative outlook revision or placed on CreditWatch with negative implications. We assume that most suppliers would have decremental margins on lower volumes in the mid- to high-20% range, though with time and cost reduction this could drop to the mid- to high-teens percentage. In addition, to the extent higher prices push consumers into smaller, cheaper vehicles, this would exacerbate the content and margin impact given the weaker product mix for suppliers. Finally, we would not expect significant capital outlays to move production from Mexico any time soon given the large differential in labor costs compared to the U.S.

Aftermarket suppliers:   For some aftermarket suppliers that rely more on imports, the risk has increased recently primarily due to the reciprocal tariffs, including a recent escalation in the trade conflict between the U.S. and China leading to a proposed 125% tariff on Chinese imports. While we think aftermarket suppliers overall have a greater ability to increase prices quickly to consumers, they will have to balance this with lower volumes as consumer demand drops in response to higher prices, particularly for more discretionary products.

Aftermarket suppliers that have more production in the U.S., like The Goodyear Tire and Rubber Co. and First Brands Corp., will likely benefit from tariffs on foreign imports, though overall consumer demand for their products will dip.

Auto dealers:   For the dealers we rate, sustained higher tariffs would reduce volumes of new vehicles. However, the companies could increase their sales of used vehicles, leading to more older vehicles on the road, which would support the very high margin parts and service business at dealers. Most dealers have significant cushion in their credit metrics, so we expect the tariffs to result in very few rating actions.

Table 3

With Increased Pricing Pressure, Inventory Management Will Be Critical

New vehicle prices remain about 30% above pre-pandemic levels in the U.S. so far in 2025; average transaction prices were around $44,849 in March 2025 per J.D. Power. In anticipation of the tariffs, we have seen limited increase in incentive activity despite rising inventory on dealer lots. We expect prices will increase by 8%-10% (compared to our prior expectation for a price decline by about 6%-8% by early 2026) as consumers opt for lower trim versions and more entry-level segments.

We believe volatility in automakers' sales (see table 2) could persist over the next few months, especially because of the differences in inventory levels across automakers. We expect most automakers with products skewed toward light trucks, particularly pickups, will target 50-60 days of total dealer inventory on a portfolio basis (see chart 4). This is down more than 30% compared to pre-pandemic levels of 80-85 days (in mid-2019) for light-truck-focused automakers.

Table 2

Due to the significant pull-forward of sales in the first quarter, light-vehicle inventory at dealerships reflected a 45-day supply, down from 50 days a year ago, and a pre-pandemic range of 60-80 days. There is some divergence across OEMS, as some companies like Stellantis N.V. and Ford have higher inventory days while Toyota still has a very low days' supply. Thus far, the elevated inventory at Stellantis has not significantly hurt pricing or demand for competitors' products that benefit from newer products at attractive price points.

Chart 4

Financing Options Could Shield OEMs From Large Volume Declines

As vehicle prices remain high for an extended period, lenders will continue to support loans of over 72 months (nearly 28% of all loans in 2024) to attract borrowers with lower credit scores, often by offering loans that exceed the value of the vehicle.

The downside risk is that it could prevent many buyers from re-entering the new car market for several years because vehicle owners who would usually trade in for a new model could end up owing more than the car is worth. The average loan to value was around 110% in 2024, just marginally above 2023 levels.

In recent years, several subprime borrowers delayed vehicle purchases as elevated vehicle prices, higher borrowing costs, and inflationary pressures affected their overall spending. If prices rise further, consistent with our base case, we expect fewer subprime borrowers to reenter the market through 2026 until financing rates somewhat subside. For instance, subprime loans as a percentage of all U.S. auto loans increased in the fourth quarter of 2024 to 16.1%, which is still lower than the 17%-19% observed in 2009 after the Great Recession, and well below the past 20-year average of 21%.

Other factors that will shield large volume declines include more incentives, subventions, and attractive lease options that avoid large spikes in monthly payments for the consumer.

Tariffs Add Significant Headwind For Affordable EV Launches

We expect significant competitive pressure in 2025 and 2026 for all automakers. This is evident based on the large market share losses in 2024 and through the first quarter of 2025 for Tesla's Model 3 and Y (combined) despite multiple price cuts. This could slow revenue growth and delay profitability parity for electric vehicles (EVs) relative to legacy products possibly beyond 2027, especially for issuers that do not achieve economies of scale. The next wave of buyers appears to be more price sensitive and sales will likely depend on material improvements in battery range, charging infrastructure, and technology. This is also evident from a significant growth in pure hybrid vehicles (up 47% in the first quarter of 2025) as sales were 24% higher than the combined sales of EVs and plug-ins during the quarter. Further downside pressure stems from the current Department of Energy (DOE) and Internal Revenues Service administrators' potential reevaluation of emissions standards, repeal of EV tax credits for consumers, and reduced investment in EV infrastructure. As a result, we lowered our expectation for EV share to remain below 20% by 2027.

For suppliers that support EVs, we expect higher research and development spending and working capital in the form of tooling to support the launch of new products. While there is the potential for greater revenue opportunities from newer EV-related products, initially this transition will be a drag on supplier margins and free cash flow. As an offset, we expect suppliers will be able to lean on their combustion portfolio profitability for longer, thereby mitigating some of the impact of lower EV product volumes.

Chart 9

Related Research

• Global Credit Conditions Special Update: Ongoing Reshuffling, April 11, 2025
• Uncertain Tariff Policies Could Create Ratings Risks For North American Automakers And Suppliers, Feb. 18, 2025
• Announced Steel And Aluminum Tariffs Would Mean Little Change For U.S. GDP And Prices, Bigger Risks For Downstream Users, Feb. 12, 2025
• Impact Of U.S. Tariffs On China's Auto Sector: Watch For Second-Order Effects, Feb. 10, 2025
• Economic Research: Macro Effects Of Proposed U.S. Tariffs Are Negative All-Around, Feb. 6, 2025
• Economic Research: How Might Trump's Tariffs--If Fully Implemented--Affect U.S. Growth, Inflation, And Rates?, Feb. 6, 2025
• A 25% Tariff Would Create New Trade Challenges For Mexican Corporations, Feb. 3, 2025
• Industry Credit Outlook 2025: Autos, Jan. 14, 2025
• Auto Industry Buckles Up For Trump's Proposed Tariffs On Car Imports, Nov. 29, 2024