Market Size: 16 million Vehicles is the new 17 million Vehicles
February 2026 – This time last year, the industry outlook for 2025 was 16.2 million to 16.3 million vehicles, a modest increase of 200,000 to 300,000 vehicles from the prior year. Nobody would have second guessed the experts if they had put up bigger numbers. After all, demand had been steadily building throughout 2024 and the seasonally adjusted annualized rate (SAAR) for December 2024 was 17.1 million vehicles, the highest sales rate of the year. The sales momentum carried over into the first quarter as consumers rushed to purchase vehicles before the latest round of tariffs took effect. The momentum waned in the second quarter before another surge in the third quarter by consumers wanting to take advantage of federal EV tax credits before they expired on September 30th. The annual sales rate then eased back to 15.7 million vehicles in the fourth quarter and the full year sales total ended at 16.3 million vehicles well within the initial range, albeit after a bit of a rollercoaster ride.
Interestingly, in terms of expectations for the coming year, the industry is calling for another “carryover” year at best, and most likely a modest decrease of 200,000 vehicles to 300,000 vehicles. Interesting because every forecast that I can recall projected some level of growth, maybe flat, but never a contraction. If demand did not materialize as expected, then the industry learned that it could always rely generous incentives to make up the difference. In the past, maximizing volume tended to trump maximizing profit.
On the other hand, I am encouraged by the industry’s most recent forecasts. Rather than basing production schedules on overly optimistic expectations and then relying on ever‑increasing incentives to manage excess inventory, the industry is now aligning production more closely with customer demand. Of course, customer demand depends on perceived value — the balance between the benefits a product provides and the price a customer is willing to pay. According to the price elasticity of demand, when demand is elastic, lowering the price will generally increase the quantity demanded. However, a lower price does not automatically increase the perceived value proposition, since value is also shaped by non‑price factors such as quality, brand strength, performance, and product differentiation.
The goal is to identify the production level that generates sufficient profit to maintain and grow the business over the long term. Historically, that level may have been around 17 million units. But domestic manufacturers used the pandemic as an opportunity to reset their business model and, among other things, permanently idle a significant amount of domestic capacity. As a result, I believe that 16 million vehicles may now be the new 17 million in terms of the volume needed to produce healthy, sustainable profits. With the exception of certain special charges arising from factors outside their control, manufacturers appear to be performing well at this level — maintaining acceptable margins, keeping inventory at disciplined levels, and avoiding the heavy incentives that can erode brand value.
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