Personal Financial Satisfaction Index (PFSi) Defined The Personal Financial Satisfaction Index (PFSi) is the result of two component sub-indexes. It is calculated as the difference between the Personal Financial Pleasure Index and the Personal Financial Pain Index. These are in turn composed of four equally weighted factors, each of which measure the growth of assets and opportunities, in the case of the Pleasure Index, and the erosion of assets and opportunities, in the case of the Pain Index. Methodology To construct the indices each component was first normalized by its own standard deviation prior to July 2013. The factors were then individually modified to an average value of 50 over the period up to July 2013. The financial pleasure index and the financial pain index each equally weight the individual component factors. Second Quarter 2017 PFSi Summary The PFSi measured 24.1 in the second quarter of 2017. This reflects a 7.3 point increase from one year ago, and a 7.5 point increase from the prior quarter. This puts the PFSi within 3.8% of its record value achieved in the fourth quarter of 2006. 25 PFSi Historical Measurement 15 5-5 -15-25 -35-45 1
The Q1 2017 value of the PFSi was 1.9% lower than its level in Q2 2016. So the change quarter to quarter in the overall index is almost 2% greater than the year over year change. However, the more important driver of the year over year change was a 5.6 point (9.3%) increase in the pleasure index, which has been advancing steadily for the last 5 quarters. The pleasure index has been setting records for the last 3 quarters. On the other hand, the biggest factor in the quarterly change was a 6.2 point (12.9%) decline in the pain index. The pain index had experienced an uptick in Q1, but it more than reversed that in Q2. 85.00 65.00 45.00 25.00 History of Pleasure vs. Pain 2004-q1 2004-q4 2005-q3 2006-q2 2007-q1 2007-q4 2008-q3 2009-q2 2010q1 2010q4 2011q3 2012q2 2013q1 2013q4 2014q3 2015q2 2016q1 2016q4 Pleasure Pain Second Quarter 2017 Personal Financial Pleasure Index Top-Line Summary The Personal Financial Pleasure Index, at 66.0, is 1.4 points (2.2%) higher than the prior quarter and 5.6 points (9.3%) up from the prior year. The gain over the previous quarter s level was almost entirely due to a 5.3 point (8.3%) increase in job openings per capita. They are at a record level currently. Home equity added 0.6 points (just under 1%), while the PFS 750 market index was flat and the CPA outlook ticked down 0.9 points (1.8%). The increase from the prior year was due to gains in all factors, led by a 6.8 point (9.4%) gain in the PFSi 750 Market Index and a 6.5 point (14.6%) increase in the CPA outlook index. Job openings moved up 4.8 points (7.4%) and home equity 4.3 points (7.1%). Second Quarter 2017 Personal Financial Pleasure Index Detailed Summary PFS 750 Market Index: This reached an all-time high in Q4 2014 and maintained it in Q1 2015. It subsequently declined slightly, but in Q1 2017 it set another all-time high, increasing the prior record by another 3.2 points. It essentially just held this level in the current quarter, and it is the factor which has the largest contribution to the Pleasure Index. For the year over year comparison financial service (led by banks and capital markets), was the highest gainer, closely followed by information technology. Industrials also gained, with airlines particularly strong. Telecommunication services lost, as did energy. For the quarter, information technology was the strongest industry, gaining more than 12%, followed by consumer discretionary and health care, coming in at about 8.4%. Energy and telecom made losses. 2
Real Home Equity per Capita: This factor s current value, which is based on data issued for January, is 7.1% above the prior year level, and 0.9% above the previous quarter level. It is still 16.5% below its 2006 all-time high. The changes in value have been due to increases in the market value of real estate, which for the most recent reading came in at 7.2% per annum. They have exceeded increases in mortgages outstanding, which have been advancing at about 2.6% per annum. According to Zillow, as of January U.S. median home values were just 0.7 percent below the alltime high of $196,600 reached in April 2007. (And as of May they had reached $199,200.) Annual home value growth in January among homes valued in the bottom one-third of all homes (up 9.7 percent year-over-year in January) continued to outpace home value growth at the topthird of the market (up 5.4 percent year-over-year). In January, among the 40 largest metros nationwide, annual home value appreciation was fastest in Nashville (12.4 percent); Portland, Ore. (up 12.1 percent year-over-year); and Tampa (+11.9 percent). Annual growth was slowest in January in Virginia Beach (+3.2 percent); Washington, D.C. (+3.6 percent); and Indianapolis (+3.7 percent). The current spate of home valuation acceleration began in February 2015. There has been some turnover in the identity of the fastest growing markets. The cities which have been growth leaders throughout the growth spurt are Portland OR, Miami and Tampa. Prices have been advancing because the inventory of homes for sale has been falling since Feb. 2015. There are several factors driving this: Demand is high. Employment and wages are up, and mortgage rates remain low, which makes homeownership attractive and affordable. Millennials are entering the market en masse. Home building has slowed down, especially at lower price points. New housing starts fell off a cliff after the housing collapse, dropping from almost two million completed homes in 2006 to just 600,000 in 2011. They remain below the historical average of about 1.5 million new homes built a year. Pockets of negative equity continue to prevent some sellers from listing. Americans are moving less than at any point in recent history, with many single-family homes that used to be owner occupied now converted into rentals that come up for sale far less frequently. The low inventory and strong demand have led to the price appreciation we discussed above, which ultimately affects affordability, and the most recent data indicates that pending sales have declined as a result. Job Openings per Capita: The current reading is 7.4% higher than the prior year reading, and 8.3% stronger than the previous quarter. It is currently setting a record, and is the second most important contributor to the Pleasure index (having nudged out home equity this quarter). Overall job openings are setting records at a total of 6 million. Gains were most prominent among lower-paying sectors like leisure/hospitality and accommodation/food services both of which saw their vacancies rise to all-time highs. Government job openings are at their secondhighest level of all time, in part because the federal hiring freeze instituted early in Trump s term was lifted in early April. Meanwhile, hiring actually pulled back to just over 5 million. Layoffs, however, have been notably smaller in the recent period than a year ago. Manufacturing activity is hitting record highs, in part due to the recent weakening of the US dollar, and also in light of improving global growth. 3
Hiring was notably weak in information, trade, transportation, retail trade and the financial activities sector. There has long been discussion about a growing skills gap in the workforce, and these results suggest that it s a factor. Recent news stories confirm that corporate executives are discussing the difficulty of finding qualified workers. Regionally, almost 36% of the current job openings are in the South, and its year over year growth came in at under 1%. The West, on the other hand, had about 21% of the job openings, and they are 7.5% lower than the year ago level. The smallest number of job openings was in the North East, just 19%, and that region was the job opening growth champ, coming in at more than 30% year over year. Growth in job openings in the Midwest came in at 16% year over year. AICPA CPA Outlook Index: The current reading is 14.6% higher than the prior year level but 1.8% below the previous quarter level. The survey was conducted from May 2 to May 17. 1. The reading for the first quarter of 2017 was a 2 year high, and in the second quarter the index backed off slightly. 2. For the year over year comparisons to Q2 2017, all factors improved, led by US economic outlook and then profits and employment. 3. For the comparison between quarters, most factors gave back some of the gains, with the exception of employment, IT spending and other capital spending, which gained a little. 90 80 70 60 50 40 30 20 10 Pleasure Factors History of Values 2004-q1 2004-q3 2005-q1 2005-q3 2006-q1 2006-q3 2007-q1 2007-q3 2008-q1 2008-q3 2009-q1 2009-q3 2010q1 2010q3 2011q1 2011q3 2012q1 2012q3 2013q1 2013q3 2014q1 2014q3 2015q1 2015q3 2016q1 2016q3 2017q1 PFS 750 Real Home Equity/Capita AICPA Outlook Job Openings/Capita Personal Financial Pleasure Index Components Defined Measuring the positive factors impacting the economy, the Personal Financial Pleasure Index combines the following four economic factors. PFS 750 Market Index This AICPA proprietary stock index is comprised of the 750 largest companies trading on the US Market excluding ADRs, mutual funds and ETFs, adjusted for inflation and per capita. AICPA Outlook Index This broad-based composite index captures the expectations of CEOs, CFOs, Controllers, and other CPA executives and their plans for a breadth of indicators of economic activity within their own organizations. The composite measures the following factors equally: US economy optimism, organization optimism, business expansion, revenues, profits, 4
employment, IT spending, other capital spending, training and development and Plans for spending on employee training and development over the next 12 months. Real Home Equity per Capita This factor is a calculation of the Market Value of Real Estate, Households and Nonprofit Organizations, less the Home Mortgage Liability. Both are published by the Board of Governors of the Federal Reserve System, deflated by the PCE Price Index and divided by the Civilian Non-institutional Population. Job Openings per Capita Factor is a calculation of total non-farm job openings, published by the Bureau of Labor Statistics, divided by the Civilian Non-institutional Population. Second Quarter 2017 Personal Financial Pain Index Top-Line Summary Pain index at 41.8 is 1.7 points (3.8%) lower than the prior year and 6.2 points (12.9%) lower than the preceding quarter. The behavior of the inflation index is the reason why the comparison with the year-ago value is so much weaker than the quarterly comparison: Inflation is up 11.5 points (50.3%) versus a year ago, but down 16.5 points (35.2%) compared with Q1. Every other factor declined in both the year ago comparison and the quarter to quarter comparison, all of them more in the year ago comparison. For the year ago comparison, loan delinquencies declined 9.9 points (18.7%) on the year, and 2.7 points (5.9%) on the quarter. Next in importance for the year, underemployment fell 6.9 points (15.3%) on the year and 5.3 points (12.2%) on the quarter. Taxes made only a small difference, down 1.4 points (2.6%) on the year and 1.2 points (2.3%) on the quarter. Second Quarter 2017 Personal Financial Pain Index Detailed Summary Delinquencies on Loans: This factor s current level is 5.9% lower than in the previous quarter and 18.7% below the prior year s level. Improvements are due to both delinquencies on mortgages and delinquencies on all loans. In comparison, the peak delinquency rate for mortgages was 11.26% in the spring of 2010, and the overall peak was 7.5% at the end of 2009. However, the current reading of 3.93% delinquencies on mortgages is still well above the 2.12% that was typical between 1994 through 2003. That said, home equity lines of credit are once again a product worth discussion, and their delinquency rate is now 1.06%, which is below their 15-year average of 1.15%. Home equity loan delinquencies are also under their 15-year average of 2.85%. Further reports state that the number of underwater borrowers has fallen below 2 million for the first time in 11 years. Most of the problems are in the least costly houses. While the nation as a whole now has a negative equity rate of just 3.6 percent, among owners in that lowest price tier, it s over eight percent. In fact, these lowest-price-tier properties are more than twice as likely to be underwater as those in the next price tier up, and 6.5 times more likely to be underwater than those living in the top 20 percent of the market. Underemployment: This factor, registering 38, is 12.2% lower than the previous quarter level and 15.3% below the prior year. In comparison, its peak value was 84.3 (corresponding to 17.1%, versus the current 8.4%) in the fourth quarter of 2009. It is still about 1.6% above its average value before the great recession. 5
Like most economic measures, unemployment is worse in some regions than in others. The PFSi uses the U6 measure. The lowest unemployment across all measures is found in South and North Dakota, Nebraska, and New Hampshire, followed by Colorado, Iowa and Hawaii. The highest is in New Mexico, Nevada, Alaska and California. Inflation: Our blended inflation measure is 1.4% for the second quarter, versus 1.0% a year ago but 1.7% last quarter. Please note that the Federal Reserve s target for inflation is about 2%. In terms of the index, the current value is 34, versus 51 in Q1 and 23 a year ago. Inflation is the most volatile factor contributing to the PFSi. The Q2 pain index relies on the May level. It has been held down in recent months by a price war in the wireless cell phone industry and falling prescription drug prices as Trump is putting pressure on the industry. Personal Taxes: The personal taxes index declined 1.4 points (2.6%) and 1.2 points (2.3%) from the year-ago and prior quarter levels, respectively. Personal tax rates plunged more than 200 basis points to under 9.5% in mid-2009, and they have been increasing unevenly since then. The current level is 12.1%. Going back as far as 1994, the highest levels for personal taxes were 14% to 14.5% from late 1999 to mid-2001. Pain Factors History of Values 150 130 110 90 70 50 30 10-10 Underemployment Inflation Loan Delinquencies Taxes 6
Personal Financial Pain Index Components Defined The Personal Financial Pain index is a measurement of the following negative economic factors: Inflation This factor is comprised of 95 percent annual change in the PCE Price Index and 5 percent annual change in the Consumer Price Index for Fuel Oil and Other Fuels, as published by the BLS. Personal Taxes This factor uses BLS statistics on income including realized net capital gains, taxes on personal property, payments for motor vehicle licenses, and several miscellaneous taxes, licenses, and fees. Social security and Medicare taxes are excluded, as are taxes on real property, sales taxes, and certain penalty taxes. Personal current taxes are measured on a payments basis (i.e., when paid) except for withheld taxes (largely on wages and salaries) which are measured on an accrual basis. Delinquencies on Loans Taken from data published by the Board of Governors of the Federal Reserve System, this factor is calculated as 75 percent delinquency rate on single family residential mortgages and 25 percent the delinquency rate on all loans and all commercial banks, both Underemployment This BLS-calculated factor is a combination of full title total unemployed numbers, all marginally attached workers, and total number of workers employed part-time for economic reasons. 7
Chart View of Above Information 2Q16 1Q17 2Q17 Change vs. Component Data Index Data Index Data Index the prior year, the prev quarter Net Index 16.9 16.6 24.1 7.3 7.6 Pleasure 60.4 64.6 66.0 5.6 1.4 PFS 750 Market Index ($ trillion, index) CPA Outlook (index) Home Equity ($ trillion, index) Job Openings (millions, index) 23.3 72 25.7 79 26.5 79 6.8 0.0 68 44 76 52 75 51 6.5 (0.9) 15.5 61 16.6 64 17.0 65 4.3 0.6 5.6 64 5.6 63 6.0 69 4.8 5.3 Pain (subtracted) 43.5 48.0 41.8 (1.7) (6.2) Underemployment (%, index) Inflation (%, index) 9.6 45 9.2 43 8.4 38 (6.9) (5.3) 1.0 23 2.1 51 1.4 34 11.5 (16.5) Taxes (%, index) 12.3 53 12.2 53 12.1 52 (1.4) (1.2) Loan Delinquencies (%, index) 3.9 53 3.3 46 3.1 43 (9.9) (2.7) Data Revisions Two of the factors in the Pleasure Index, the PFS 750 market index and the AICPA CPA Outlook Index, are based on original AICPA research. The other factors are based on data created by several federal government economics bureaus. (Actually, the PFS 750 market index is deflated, and can be affected by updates in the deflator; such revisions have been very small.) When these data series are revised we incorporate the revisions in order to preserve period to period comparability of the PFSi. This can lead to changes in the historic values of the series. We will comment in footnotes what impact data revisions have had on the comparisons of the current period to historic period. Over the past 8 quarters the Net Index, which has had an average value of close to 18, has been impacted by data revisions by as much as 2.3 points in a period (both positive and negative adjustments). Both the Pleasure and Pain components have been impacted by data revisions. The Pleasure Index, which has averaged about 62, increased 0.2 to 1.3 points and decreased 0.1 to 2.6 points. Revisions in the Home Equity component and the job openings have both impacted the results. The Pain Index, which has averaged about 44, has increased as much as 0.8 points and decreased as much as 2.3 points once. Both inflation and taxes have been revised. 8
Year ago comparisons: The revised Net Index for Q2 2016 is 16.9, versus 19.0 originally posted. The Pleasure Index decreased 2.6 points due primarily to a revision in home equity, and the Pain Index decreased 0.5 points, primarily due to a big inflation revision. Comparisons to the most recent quarter: The revised Net Index for Q1 2017 is 17.6, versus 17.5 originally posted. The Pleasure Index ticked down one point due to rounding. The Pain Index increased 0.7 point, primarily due to revisions in inflation. Note: see the accompanying table detailing the history of revisions. 9