Personal Financial Satisfaction Near High

Personal Financial Satisfaction Near High

Some positive data about Americans’ personal finances comes to us from the American Institute of CPAs (AICPA). They have been reporting a Personal Financial Satisfaction Index on a quarterly basis since 2004. In spite of its name, though, this index is not based on a survey or poll.  It is rather a calculation based on a number of economic factors purporting to indicate how well Americans collectively are feeling about their financial situation. In the latest quarter (Q2 2017) the index has climbed to a level not seen since 2006.

How good a proxy for financial satisfaction does this index represent?  Let’s explore the factors that comprise it.  At the highest level it is calculated as the difference between two component sub-indexes: the Personal Financial Pleasure Index – which measures the growth of assets and opportunities – minus the Personal Financial Pain Index, which measures their erosion. The pleasure index set a record for the third consecutive quarter, reaching a value of 66.0, while the pain index declined to 41.8.  That puts the overall index at 24.2, just shy of the previous high reached during the fourth quarter of 2006.

The pleasure index is comprised of four equally-weighted factors:

  • PFS 750 Market Index, an AICPA proprietary stock index made up of the 750 largest companies trading on the U.S. market, adjusted for inflation and calculated on a per capita basis.
  • AICPA Outlook Index, a measure of economic optimism, business expansion, employment, capital spending, and other related expectations over the next 12 months, as reported subjectively by CEOs and CFOs for their respective organizations.
  • Real Home Equity per Capita, a calculation of the market value of real estate less total mortgage liability, again calculated on a per capita basis.
  • Job Openings per Capita, total non-farm job openings divided by the civilian population.

The pain index also consists of four factors, all equally-weighted:

  • Inflation, a mix of the annual change in the Personal Consumption Expenditures Price Index and the Consumer Price Index.
  • Personal Taxes, including income, capital gains, personal property, and several miscellaneous licenses and fees, but excluding taxes on Social Security and Medicare, real property, and sales.
  • Delinquencies on Loans, calculated as 75% of the delinquency rate on residential mortgages and 25% of the delinquency rate on all loans and all commercial banks.
  • Underemployment, calculated as the total unemployed plus all workers employed only part-time for economic reasons.

The biggest contributor to the latest quarter’s results on the pleasure side was the increase in the stock market index, setting a record at 79.  And although inflation pulled the pain index down by 17 points over Q1 (representing a inflation rate drop from 1.7% to 1.4%), it is the most volatile element of the index according to the AICPA.  The underemployment factor also contributed to the positive drop in the pain index with a decline of 5.3 points.

Since this index includes many concurrent or lagging economic indicators, it really does not have any useful predictive value.  Rather it is a snapshot of a number of economic factors that in aggregate measure how well the AICPA believes we are all doing financially.  So perhaps the best way to use this data is to compare it with your own subjective viewpoint.  Are you feeling positive about your current financial situation?  Are you feeling as good as you did back in 2006?  If so, enjoy the moment!  If not, there may be some element of your personal finances that could use improvement. And addressing it now, while the economy is good, will be easier than waiting until the economy turns negative (as it inevitable will as part of ordinary business cycles).

Here’s a link to the AICPA’s Personal Financial Satisfaction Index for Q2 2017: http://www.aicpa.org/InterestAreas/PersonalFinancialPlanning/Community/DownloadableDocuments/PFSi-2017Q2-Summary.pdf

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