Auto Market Weekly Summary

This edition of the Auto Market Weekly Summary includes updates on the Fed chair nomination, the Federal Open Market Committee (FOMC) decision, productivity and labor costs, producer prices, and consumer confidence. The week begins with a partial government shutdown that began at midnight on Saturday, Jan. 31, after Congress missed its funding deadline.

Bottom Line Up Front

The Fed held rates steady this week as expected, but the bigger story was President Trump’s nomination of Kevin Warsh to replace Jerome Powell as Fed chair in May. Warsh, a former Fed governor during the financial crisis, has been publicly critical of Powell’s leadership, calling for “regime change” and criticizing the Fed’s cautious approach to rate cuts. His nomination signals potential shifts in Fed philosophy, particularly around balance sheet management and monetary policy communication.

Meanwhile, the economy continues sending mixed signals. Q3 productivity surged 4.9%, driven by AI investment spending that’s boosting output while suppressing job creation and wage growth. This productivity surge matters for automotive markets: sustained gains without wage pressure could support consumer spending power, though weak job creation may offset these benefits for big-ticket purchases like vehicles.

The consumer confidence picture turned decidedly darker in January, with the Conference Board’s index plunging nearly 10 points to 84.5. More concerning, the forward-looking Expectations Index fell to 65.1, well below the 80 threshold that typically signals recession risk. Purchase intentions for new vehicles held flat, though used vehicle plans ticked higher – aligning with expectations for stronger tax refunds and the January used vehicle sales patterns we’re already observing.

For dealers, the through-line is clear: Elevated financing costs will likely persist through the spring selling season with the Fed on hold until at least mid-year. The productivity gains offer a silver lining for consumer spending capacity, but deteriorating confidence and weak job creation present headwinds for the discretionary big-ticket purchases that drive showroom traffic. Credit availability has been increasing lately, and we will need to see more of that to help consumers bridge the affordability gap.

New Fed Chair Nomination

While the FOMC met last Wednesday, the bigger news came Friday morning: the appointment of Kevin Warsh as the new Fed chair. Warsh was on the list of potential replacements for the top spot, but he was not widely expected to get the role, likely surprising the market. Kevin Warsh was a Fed governor during the Great Financial Crisis and is well known by market participants.

• Kevin Warsh will need to be confirmed by the Senate, but he has long ties to the Fed and Wall Street, serving at the Fed from 2006 to 2011. He began his career at Morgan Stanley before joining George W. Bush’s team as an economic policy advisor. In 2006, Bush nominated Warsh to be a Fed governor, where he became the youngest governor in history at the age of 35.
• Warsh has been critical of Chair Powell over the last several years, calling for a “regime change” in a CNBC interview last July and writing public op-eds criticizing the Fed’s slow response to economic changes.
• Over the years, Warsh has been critical of the size of the Fed’s balance sheet, traced back to the start of Quantitative Easing, or QE, in response to the Great Financial Crisis. The Fed’s balance sheet more than doubled in size in response to the COVID pandemic, peaking in April 2022 just shy of $9 trillion. If you were wondering, both CPI and PPI rates peaked in Q2 of 2022 as well. The Fed’s balance sheet has fallen to roughly $6.6 trillion this week. If financial markets are concerned that Warsh will further reduce the Fed’s balance sheet, we may see bond yields rise in the future.

FOMC Decision

The FOMC kept interest rates steady last week, as job growth remained muted and inflation held steady.

• The FOMC voted to keep rates steady on Jan. 28, with language noting the economic assessment for the United States was slightly upgraded. The statement was also more optimistic about the jobs market, citing that the unemployment rate has shown signs of stabilizing even as jobs gains have remained low.
• In the statement, the committee also removed the comment that downside risks to employment had risen, a nod signaling they are not as concerned about the jobs market as they were in December.
• Two voting members dissented in the vote, wanting lower rates: Miran and Waller (who was on the short list to be named Fed chair). Miran’s term expires at the end of this month, creating the board vacancy that Warsh would fill when nominated as Fed chair and governor.

PPI, Productivity and Unit Labor Costs

While the December producer price index (PPI) report arrived Friday morning, the week’s most significant data point may have been the final Q3 productivity reading – showing stronger economic gains despite weak labor growth. This matters because it reflects productivity gains from AI investment spending, a trend that could reshape labor markets throughout 2026.

• Q3 productivity in the U.S. surged 4.9% on an annualized basis – up almost 2 pts year over year and accelerating from the 1.5% pace seen in Q2.
• Unit labor costs declined 0.2% in the same quarter, for the second reading in a row after rising for the last couple of years.
• These two factors will likely continue to be a key theme for the economy in 2026, as AI spending boosts productivity, squeezing job creation, and likely keeping wage growth fairly muted moving forward.
• PPI rose by 0.5% month over month in December, hotter than the anticipated increase of 0.2% in the month. All growth was driven by the services segment, which was up 0.7% in the month, as the index for goods was unchanged.
• On a year-over-year basis, the Producer Price Index was up 3.0% in December, down from a 3.5% increase in the final month of 2024.

Consumer Confidence Index

The Conference Board released their latest index reading for consumer confidence this week, showing quite a decline in the index over the month of January. According to the report, consumers’ assessments of both current conditions and future expectations deteriorated significantly.

• The Conference Board’s Consumer Confidence Index dropped almost 10 points in the month of January, falling to 84.5 from an upwardly revised 94.2 reading in December. The December reading showed a gain against November, but that observation was reversed in January.
• Looking at the Present Situation and Expectations Indexes, both measures were also down nearly 10 points in the month of January. The forward-looking index fell to 65.1 points, significantly below the 80-threshold level that usually signals a recession.
• Measuring across demographics, all age groups declined in January, as well as all generations, although Gen Z remained the most optimistic about the future. Additionally, confidence was also lower across all political positions, led by a decline in Independents, while Republicans’ confidence also declined, though it remained higher than that of other groups.
• As it relates to automotive, future plans for purchasing a vehicle were flat in January, though plans to buy used vehicles climbed. This coincides with our expectations for higher tax refunds this year, as well as stronger sales trends for used vehicles in January.