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Here’s what economic recovery could look like for your family

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Federal Reserve Chair Janet Yellen this week said the Fed's current forecast projects the economy could be recovered and full employment restored within a little more than two years. By the Fed’s definition, “maximum employment” means an unemployment rate between 5.2% and 5.6%. Speaking at the Economic Club of New York in just her second public speech since taking the top job at the Fed, Yellen said, “If this forecast was to become reality, the economy would be approaching what my colleagues and I view as maximum employment and price stability for the first time in nearly a decade. I find this baseline outlook quite plausible.” Her comments were in the context of how Fed policy might look depending on where the economic recovery stands.

You and 5 million other Americans back to work

So what would economic recovery and full employment look like? 5,734,816 new jobs would need to be created by the end of 2016 in order to reach 5.2% unemployment, according to an Atlanta Federal Reserve calculator. That’s a big number, but it’s actually right in line with the current pace of job creation. If you average those five million jobs out over the next 32 months, it comes out to 179,213 per month. In the first three months of 2014, the economy added an average of 177,666 each month.

Yahoo Finance Editor-in-Chief Aaron Task said the question is what kind of jobs those are. “If we create a lot of jobs where people are working at fast food restaurants that’s not going to feel like a full-employment type economy to a lot of people,” he said. “To me, it’s about the quality of the jobs, not just the jobs.”

In her speech, Yellen used pre-recession levels as the benchmark against which to measure recovery in specific areas of the economy. “Led by a resurgent auto industry, manufacturing output has also nearly returned to its pre-recession peak,” she said. Using that benchmark, the housing market still has “far to go,” as Yellen put it even as she said the housing market seems to have turned the corner.

Home prices 20% higher?

Applying Yellen’s use of the pre-recession peak as a benchmark for the housing market, prices are off about 20%. Housing prices peaked at the end of 2005 at an average of $254,000. At the end of last year, prices averaged $205,000, according to the National Association of Home Builders.

“We could get back to that level, but do we want to?” asked Yahoo Finance’s Lauren Lyster. “Houses were in a massive bubble and that’s what those prices reflect.”

For many homeowners, the pre-recession value of the home is what they have in mind when they consider what their home should be worth today. Once your home is worth $300,000, it’s hard to accept that it might never return to that level, or at least not anytime soon. But Jeff Macke, host of Yahoo Finance’s Breakout said he’s incredulous that anyone would want housing prices to return to the inflated levels before the crash. “I can’t even believe that we want housing prices to go high to where they were - to the bubble levels before,” he said. “I’m gobsmacked when I hear politicians standing there, talking about the American Dream involving you being married to a piece of land, having a mortgage and paying your property taxes month after month.” Macke said the middle class does not need to own homes.

The new "normal"

While housing prices remain well off their peak at the height of the bubble, there are other indications that the housing market is returning to what is considered “normal.” According to the NAHB, 59 out of 350 metro areas have “returned to or exceeded their last normal levels of economic and housing activity,” which were before 2007.

By another measure, a “normal” housing market means home values should be about three times a homeowner’s income. At the height of the housing bubble, home values ballooned to nearly five times homeowner income. According to NAHB, that level has returned to about three-times’ income levels.

How about a raise?

That is due more to housing prices coming down than incomes rising. Incomes have been stagnant or declining for more than a decade. Median U.S. income peaked in 1999 at $56,080 a year. Incomes came close to approaching that level in 2007, reaching $55,627. In 2012, the latest year available, median income adjusted for inflation was $51,017.

Using Yellen’s example of pre-recession levels for comparison, incomes would need to increase about 8% to get back to normal. Based on the median income, that would be more than $4,500 a year back in the pockets of American workers in a recovered economy.

Now how do we do it?

But how do we get there? Task said the decline in incomes is a trend that goes back to the early 1970s, well beyond the recent declines from the peak. He said the economy would need some sort of huge new industry in order to make that happen. “I don’t know what that is, but short of that or – and this I know is not going to happen – the government all of a sudden says we’re going to do a huge amount of stimulus spending, you know, trillions of dollars and put everybody to work building stuff,” he said. “I just don’t see that.”

Federal Reserve chair Janet Yellen thinks recovery is plausible, but big questions remain about what that recovery will look like for the average American family.

Poll: Do you agree with the Fed's forecast that full employment and economic stability are possible by 2016? Cast your vote and post your comments below.

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