It won't be consumption this time

Jim Puzzanghera and Jerry Hirsch wrote a story in this morning's LA Times about the rapid speed at which consumers are paying off their credits cards:

The amount Americans owe on credit cards and other consumer loans plunged a record $21.6 billion in July, clouding prospects that the budding economic recovery would soon extend to Main Street.
The drop in consumer debt for the month was the largest since the Federal Reserve began tracking the data in 1943 and the sixth straight monthly decline in outstanding consumer debt, the longest streak since 1991.

The amount of the decrease -- five times what analysts had predicted -- along with continued job losses and an uncertain housing market show that consumers are still skittish about borrowing money for big-ticket purchases, even though economic data show that the deep recession may have technically ended.

Consumer spending accounts for roughly 70% of the nation's economic activity.

That last sentence may seem like a throwaway line, but it actually underscores an important long term problem. While consumption this decade has been a little more than 70 percent of GDP, in the 50s and 60s it was around 63 percent of GDP, and as recently as the 90s, it was about two-thirds of GDP. The driver of consumption was consumer debt: the ratio of consumer debt to GDP rose from about 60 percent in 1995 to over 100 percent in 2007.

Recent levels of consumer debt and consumption are likely not sustainable in the long term. Investment and exports are in the end going to have to pick up the GDP slack. This is good news for the long-term outlook for industrial real estate; it is bad news for retail real estate.