We have been living with a number of myths over the last three years. One of them is that this economic expansion is subpar in terms of the number of new jobs created. The truth is that subpar job creation is not the main problem. The average number of new jobs created in the private sector during this expansion is 154,233 per month, versus 143,604 per month in the previous expansion. The bigger picture is that markets have had such a massive drawdown that we are facing a dynamic that we have not seen in our lifetime.
The main factor to consider in this is the housing mess. The persistent overhang in excess housing inventory will continue to be a drag on the balance sheets of financial institutions, meaning the plumbing of the financial industry is not going to function properly. Additionally, depressed home prices weigh on consumer sentiment and inhibit spending. Only once we move through this downturn in the housing market will we see the economic conditions and credit creation necessary to build a stronger, more robust recovery that will sop up the unemployment problem.
The good news is that there are signs that the housing situation is starting to improve. U.S. existing home prices are on pace to increase by 17% this year through August. If prices continue on their current path, this would provide a significant boost to household net worth and would enable stronger U.S. consumption through the wealth effect. Our estimates suggest that every 1% QoQ rise in household net worth would translate into 0.4% annualized consumption growth, and add 0.31% to nominal GDP. At the current pace of improvement, it appears that home inventory levels are likely to be cleaned up by around 2015.