Key takeaways for dealers and lenders
- Economic growth stayed solid with Q3 2025 GDP at 4.4% annualized, led by services (+5.3%).
- Inflation cooled but remains above target: PCE up 0.2% m/m in October and November; estimated 2.8% y/y through November.
- Household finances are tighter: personal income rose 0.3% in November, while the personal saving rate fell to 3.5%.
- Spending remained resilient: real consumption +0.3% in both October and November, +2.6% y/y in November.
- Sentiment is mixed: University of Michigan index at 56.4 (late January) improved from late 2025, but still below a year ago; Morning Consult sentiment declined.
- Gas prices stabilized near $2.86 per gallon (Jan. 23), down 9% y/y; recent declines have moderated.
- For autos, solid growth plus higher-for-longer rates keeps affordability constrained; rates remain a headwind into 2026.
Economic backdrop
Q3 growth accelerated to 4.4% annualized from 3.8% in Q2, with services leading gains at 5.3% on strength in information services, finance and insurance, and professional services. Cox notes the persistence of services-led growth has surpassed expectations for a sharper 2025 slowdown.
Inflation complicates the policy outlook. The Fed’s preferred PCE index rose 0.2% m/m in both October and November; the estimated 2.8% y/y pace remains above the 2% goal and roughly in line with expectations, reducing the likelihood of a near-term policy shift.
Cox links firmer Q3 GDP to solid consumption and exports after a “rocky” start to 2025 tied to shifting tariffs. While trade disruptions eased by midyear, momentum now contends with slower job creation and inflation that is stickier than policymakers prefer.
Consumers: income, spending, and sentiment
Income growth softened: personal income rose just 0.3% in November, leaving real disposable income at its weakest y/y pace since December 2022. In contrast, real consumer spending advanced 0.3% in October and November and was up 2.6% y/y in November, supported by durable goods and selected nondurables (e.g., apparel).
Households dipped further into savings to sustain spending. The personal saving rate declined each month since April, reaching 3.5% in November—about 1.5 percentage points lower than a year earlier—as expenses outpaced disposable income.
Sentiment is split across surveys. The University of Michigan index rose to 56.4 in late January—nearly 7% above late 2025 but 21% below a year earlier—with current conditions and expectations up 9.9% and 4.4%, respectively. Inflation expectations improved: one-year at 4.0% (lowest since last February) and five-year at 3.0% (lowest since December 2024). Morning Consult’s index weakened, down 3.5% since late December and nearly 8% y/y.
Fuel prices and household budgets
National unleaded averaged about $2.86 per gallon as of Jan. 23, down 9% from a year earlier. However, the pace of declines has slowed, tempering a recent tailwind for consumers and dealer traffic.
Implications for the auto market
- Affordability remains the constraint: slower income gains and persistent price pressures reduce purchasing power even as spending holds up.
- Financing costs are still elevated, limiting the pool of buyers willing or able to take on higher monthly payments—keeping rates a near-term headwind for both buyers and retailers.
- Goods demand is more rate-sensitive than services; November’s pickup in durable goods spending shows resilience, but sustainability is uncertain if income growth remains soft.
- Trade policy remains a watch item: earlier-2025 tariff shifts affected pricing and supply chains; renewed volatility could impact inventories and margins.
Policy outlook
Cox expects the Federal Reserve to stay patient given PCE trends in line with expectations and a cooling, but not weak, labor market. The path forward hinges on whether inflation continues easing without sharper labor-market deterioration. A lack of clear disinflation progress keeps borrowing costs elevated for longer.
What to watch next
- Upcoming inflation and labor data for signs of further disinflation and labor-market cooling.
- January auto sales to gauge whether year-end momentum carried into the new year.
- Tax-season traffic, credit availability, and incentive levels as early indicators for 2026.
- Signals from the NADA annual meeting on demand, supply, pricing, and technology priorities.
