Sorry Bears, 2020 Is A Cyclical Upturn

Very Long Expansion

We’ve recently seen a decrease in personal income growth, which has led to an increase in credit card usage in December. Specifically, personal income growth has fallen from 6.1% in July 2018 to 3.9% in December 2019. It's okay that the consumer taking on some debt this cycle because there has been so much deleveraging. 

Obviously, the golden goose would be accelerating income and spending growth. Upside of this low steady GDP growth rate and the deleveraging is the avoidance of a recession. This is the longest expansion since the 1850s as the last recession ended in June 2009. Personally, I can see this one lasting over 12 years.  

Once this expansion’s total growth rate exceeds that of prior expansions which had quicker growth and shorter duration, we can say undoubtedly this is the best expansion in American history. Some would argue even if that doesn’t happen, the avoidance of a recession makes this one the best. 

Avoiding the pain one year of a recession exudes is certainly better than the benefit one year of solid growth brings. My evidence to support that is how it takes a few quarters for the unemployment rate to spike in a recession and a few years for it to recover.

Consumers Increase Borrowing

Getting back to the consumer’s borrowing propensity, the December consumer credit report showed that consumer debt rose $22.1 billion which rose from $11.8 billion and beat estimates for $15 billion. That was above the highest estimate which was $16.5 billion. Annual growth rate increased from 3.4% to 6.3%. Growth came from revolving credit which is credit card debt.

Revolving credit debt was up 14% in December which was the highest growth since April 1998. To be fair, the late Thanksgiving pushed spending from November to December. However, this was still a large leap which was likely brought about by high consumer confidence and the decline in income growth. Non-revolving credit growth which is auto loans and student loans (mortgage debt isn’t in this report) was 3.7%. In all of 2019 credit card debt was up at a 4.2% pace and non-revolving debt growth was 4.8%.

As you can see from the chart above, the percentage of total debt that is 90+ days delinquent is 3.04% which is quite low. It should be low because consumers aren’t overly leveraged, the unemployment rate is low, and interest rates are low. A lone problem is auto loan delinquencies. 4.71% of auto loans are 90+ days delinquent which is almost at the peak reached just after the last recession. This explains why most automakers see a decline in auto sales in 2020 even with a potentially solid economy. 

In the past 12 months, the CARZ ETF, which is a global automakers fund, is up just 5.11% while the S&P 500 is up 22.8%. Tesla is the only clear winner as the company is being valued as a tech firm and is taking market share as it expands its product lineup to more affordable cars such as the Model 3 and Model Y.

Whenever there is a negative chart, bears want to forecast a recession. But it's clearn that when auto delinquencies have been high that this isn’t a recession. Mostly because recessions start at the beginning of the spike, not at the peak. This is an industry-specific issue similar to the fracking burst from 2014 to 2015. 

If the unemployment rate stays low in the next 18 months (which I expect it will), the delinquency rate should start to fall. That’s another small crisis that will be avoided as this cycle continues with its slow and steady growth.  

Unemployment Rate Below Long Run Rate

Unemployment rate spikes quickly in recessions which makes it beneficial to avoid them. You can see that play out in the chart below. The rate continues to increase after recessions are over and then takes years to fall back to the natural rate. As you can see, the unemployment rate stays below the natural rate between 21 and 50 months before the next recession The rate has been below the natural rate for 34 months in this expansion. 

A natural suggestion to this is there will be a recession within the next 16 months. I disagree because high wage growth has already caused profit margins to decline. We just had the longest run of NIPA margins falling since WWII. A negative catalyst has occurred, but we didn’t have a recession. We expect margins to recover, ending the chance of a recession in the next 1-2 years.

Cyclical Upturn?

Many have been calling for a cyclical upturn in 2020 for the past few months. And I’m still confident it will occur. As you can see from the chart on the left, money supply growth advanced 9 months is correlated with the ISM new orders index. This correlation implies the ISM index will increase to about 58 by the end of the year. Similarly, the 3 month moving average of the Housing Market index is correlated with the new orders index. It implies an even bigger spike to about 62.

ECRI leading index is on board with this turnaround. Even though the index fell 2 points to 149 in the last week of January, probably because of the decline in the stock market, the yearly growth rate stayed high at 5.9%. Its growth is expected to fall in January because of the tougher comps. But clearly the improvement is strong enough to overcome the tougher comps.


This cycle will continue for the rest of the year. The consumer took on more credit card debt to pay for holiday gifts in December. I think income growth will pick up in January especially because of the easier comp. Initial indications show retail sales growth will increase as well. 

And the consumer might not need to take on much new debt to pay for this spending. On the negative side, while auto sales weren’t terrible in January, it seems likely that sales for the full year will fall moderately. Especially since the auto loan delinquency rate is high. 

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