Livin’ on a Prayer

“Whooah, were half way there
Livin on a prayer
Take my hand and well make it - I swear
Livin on a prayer.”

-Jon Bon Jovi

I kept humming this song as I thought about US consumers. Earlier this week, I discussed the urgent need to save more for retirement (“Payback Approaches”, June 17, 2008) but I should have started with a simple statement: WAKE UP AND STOP SPENDING! This is obviously not directed towards everyone reading, but there are indeed a few who might take this to heart—the ones who have spent their tax rebate checks not on gas, but on stuff or even worse, the folks that continue to use home equity lines of credit to postpone their day of reckoning.

These people seem to be living on a prayer—and not just one. The prayer here is multi-fold and it includes lower prices at the pumps; a rebound in real estate; a rise in wages; and lower interest rates on everything from school loans to mortgages. Let’s examine the possibility of each of these prayers and determine whether they will be answered.

Price at the pumps: This one may actually turn into reality. Although crude oil has gone parabolic and has caused great pain at the nation’s pumps just as the summer driving season arrives, there is evidence that demand is weakening among developed nations. Some suggest that oil prices will finally crack after the Olympics. The reason is that in advance of the games, China has idled most of their coal plants to clear the skies. With coal offline, China’s demand for oil has increased. Once the Olympics passes and coal plants re-start, we may see a dip in Chinese demand, which would help prices globally.

A rebound in real estate: Data has thus far not been too rosy, but there will eventually be a bottoming in housing. The problem is that the amount of housing inventory suggests that even if prices stop falling, they are unlikely to rise any time soon.

A rise in wages: As corporations feel the pinch of the slowdown, there is very little hope for this one. For most, not losing the low-paying job you have may be a victory in and of itself.


Lower interest rates: When inflation is the headline across the nation’s papers, you can pretty much count of interest rates rising. Despite inflation concerns, I do not think that the Fed will raise short-term rates any time soon, nor do I think that despite persistent economic weakness, that they will lower rates. That said, longer term rates have already started to climb. Because mortgages and student loans tend to be tied to longer term rates, the outlook for consumers on the rate front is that we may have already passed the cheapest rates of the cycle.

If any one of those prayers turned into reality, it would be great, but the way people are spending indicates that all would need to turn simultaneously to justify the rate of spending that is still occurring.