Economic Shifts in 2025: Will Construction and Auto Sectors Drive Plastics Growth?

Residential construction and motor vehicle manufacturing, two key end markets for the plastics industry, did not experience growth in 2024. Higher borrowing costs constrained consumer demand and business investment, impacting industries reliant on financing for large capital expenditures. The downturn in these sectors underscores the challenges of elevated interest rates, even as overall U.S. economic output expanded last year. In Q4 2024, U.S. real gross domestic product (GDP) increased at an annual rate of 2.3%, bringing economic growth to 2.8% for the full year.

The PLASTICS 2024 Size and Impact Report highlights the industry's significant role in these markets. In 2023, plastics accounted for $2.7 billion of the $69.7 billion in final demand for motor vehicles and parts, and $28.5 billion of the $628.5 billion in final demand for automobiles. Given the extensive use of plastics in motor vehicles and parts, the slowdown in vehicle production had ripple effects across the plastics supply chain.

Additionally, product development in both the construction and automotive industries requires substantial investment in tooling. A pullback in business activity and reduced capital spending contributed to a decline in U.S. industrial mold production, a critical segment of plastics manufacturing.

According to PLASTICS estimates, industrial molds production declined by 4.7% in 2024, following an even steeper 11.3% drop in 2023. This trend reflects the broader impact of restrictive monetary policy, which affected not only end-market demand but also upstream industries, including moldmakers that supply essential tooling for manufacturing. The new year opened with the Gardner Business Index on moldmaking remaining below the growth threshold at 48.0 in January 2025 but has shown slight improvement from December 2024.

With interest rate adjustments expected in 2025, could these lagging sectors — construction and vehicle production — become the next growth drivers for the plastics industry? A more favorable borrowing environment may help spur demand, potentially reversing recent declines and stimulating renewed investment across these critical markets.

Interest rate adjustments, which would benefit residential construction and the motor vehicle industry, could unlock growth opportunities in moldmaking.

Motor Vehicles: Interest Rates and Credit Conditions

Higher interest rates influence both the supply and demand sides of light vehicle manufacturing. The Federal Reserve’s benchmark rate affects borrowing costs, shaping household and business purchasing decisions.

For households, credit scores play a crucial role in auto loan accessibility. The Federal Reserve Bank of New York reported that the total outstanding U.S. auto loan balance reached $1.6 trillion in Q3 2024. Auto loan applications declined, with the application rate falling from 13.5% in October 2023 to 11.8% in October 2024, while rejection rates hit new highs. These trends reflect tightening credit conditions that have made financing vehicle purchases more difficult.

Businesses also face borrowing challenges. As of December 2024, the U.S. prime rate, available to creditworthy corporate borrowers, stood at 7.5%. This benchmark influences corporate borrowing costs, making capital expenditures — especially for those unable to secure the prime rate — more expensive. U.S. business debt reached $21.6 trillion in Q3 2024, marking a 3.0% year-over-year increase, underscoring continued corporate reliance on credit despite rising costs.

A 2018 study by the Federal Reserve Bank of New York and academic researchers examined how interest rates impact the auto market.¹ It found that a 100-basis-point increase reduces annual light vehicle production growth from 1.0% to -11.0% and lowers new vehicle sales growth from 1.0% to -2.9%. Extending this analysis through 2024 would likely yield similar conclusions, given that elevated borrowing costs continue to constrain both consumer demand and manufacturer investments.

On the supply side, automakers allocate capital strategically, scaling production in response to shifting market conditions. When higher interest rates reduce consumer demand, manufacturers adjust output to align with sales forecasts. With borrowing costs expected to decline in 2025, manufacturers may find renewed incentives to expand production, provided demand stabilizes.

With borrowing costs expected to decline in 2025, manufacturers may find renewed incentives to expand production, provided demand stabilizes.

Residential Construction: Mortgage Rates and Housing Demand

Higher interest rates have significantly affected home sales. Following the COVID-19 surge in single-family home sales — peaking at over one million units in October 2020 — sales declined, averaging around 700,000 units in Q3 2021. A brief recovery in late 2021 pushed sales to 834,000 units, supported by historically low mortgage rates of around 3.0%.

As rates climbed, home sales declined. By June 2022, the 30-year fixed mortgage rate reached 5.5%, bringing sales down to 543,000 units. Further Fed tightening pushed rates above 6.0% by September 2022 and by October 2023, mortgage rates stood at 7.6%.

Despite intermittent stabilization, home sales largely remained between 600,000 and 700,000 units throughout 2023 with a notable spike to 741,000 in May. This volatility underscores the housing market’s sensitivity to rate fluctuations.

The trend continued into 2024, with 30-year mortgage rates staying above 6.5%, except for brief dips to 6.2% in September and 6.4% in October. By year-end 2023, the average rate stood at 6.7% and new home sales reached 698,000 units. Limited inventory and high prices, coupled with elevated borrowing costs, further constrained affordability.

It is well-documented that higher interest rates have significantly impacted home sales. Following the COVID-19 outbreak, new single-family home sales surged, peaking at over one million units in October 2020. This boom was followed by a decline, with sales fluctuating around 700,000 units during the third quarter of 2021. Sales briefly recovered to 834,000 units by the end of that year, driven by low mortgage rates that averaged around 3.0% during this period.

As rates climbed, home sales declined. By June 2022, the 30-year fixed mortgage rate reached 5.5%, bringing sales down to 543,000 units. Further Fed tightening pushed rates above 6.0% by September 2022, and by October 2023, mortgage rates stood at 7.6%.

Despite intermittent stabilization, home sales largely remained between 600,000 and 700,000 units throughout 2023, with a notable spike to 741,000 in May. This volatility underscores the housing market’s sensitivity to rate fluctuations.

The trend continued into 2024, with 30-year mortgage rates staying above 6.5%, except for brief dips to 6.2% in September and 6.4% in October. By year-end 2023, the average rate stood at 6.7% and new home sales reached 698,000 units. Limited inventory and high prices, coupled with elevated borrowing costs, further constrained affordability.

Data from 2000 to 2024 shows a strong relationship between industrial mold production and housing activity, with a 0.68 correlation between mold production and housing starts, and a 0.53 correlation with construction supplies manufacturing. This highlights how fluctuations in home sales directly impact demand for plastics used in moldmaking and construction materials.

Rate Cuts and Economic Growth

Interest rate adjustments, which would benefit residential construction and the motor vehicle industry, could unlock growth opportunities in moldmaking. In 2024, the Federal Reserve cut rates by 100 basis points and projected two additional cuts for 2025. If the Fed proceeds with a 50-basis-point reduction in 2025, the Fed funds rate would fall within a 3.75%-4.00% range. Such a move could stimulate home sales and vehicle purchases, driving increased demand for plastics in construction and automotive manufacturing.

However, the extent of this impact will depend on broader economic conditions, particularly labor market trends and inflation. The Federal Reserve’s dual mandate — maximum employment and price stability — will remain the key factor in shaping future monetary policy. Additionally, policy decisions under the Trump Administration will influence macroeconomic conditions, regulatory frameworks and fiscal priorities, further shaping the business environment.

If elevated interest rates were the primary constraint on construction activity and vehicle production in 2024, then lower borrowing costs in 2025 could help reverse these trends — provided that no major economic disruptions arise. A more favorable credit environment could encourage consumer and business investments, bolstering demand for plastic materials used in infrastructure, home building and auto manufacturing. The plastics industry, which supplies essential components for these sectors, stands to benefit from an improving economic climate.

Strong durable goods consumption in Q4 2024 highlighted the resilience of the U.S. consumer. Personal consumption expenditures (PCE) rose 4.2% at a seasonally adjusted annual rate with durable goods consumption, which includes motor vehicles and parts, surging 12.1%. This marked a sharp acceleration compared to the 3.8% increase in durable goods consumption over the same period in 2023.

A more favorable borrowing environment may help spur demand, potentially reversing recent declines and stimulating renewed investment across the construction and vehicle production markets.

A similar trend is evident in residential investment spending — which includes new home construction, home purchases, improvements and major replacements — as it increased 13.7% in the fourth quarter. In the full year, residential investment spending rose 4.2% — a notable change from the 8.2% and 8.3% decreases in 2022 and 2023, respectively.

At its January 2025 meeting, the Federal Open Market Committee (FOMC) opted to maintain the Fed funds rate at its current target range of 4.25%-4.50%, citing continued economic expansion, a resilient labor market, and inflation that, while moderating, remains a consideration in future policy decisions.

¹ Copeland, Adam & Hall, George & Maccini, Louis. (2018). Interest Rates and the Market for New Light Vehicles. Journal of Money, Credit and Banking. 51. 10.1111/jmcb.12564.