The consumer leverage ratio, a concept popularized by William Jarvis and Dr. Ian C MacMillan in a series of articles in the
Harvard Business Review
''Harvard Business Review'' (''HBR'') is a general management magazine published by Harvard Business Publishing, a wholly owned subsidiary of Harvard University. ''HBR'' is published six times a year and is headquartered in Brighton, Massach ...
, is the ratio of total
household debt
Household debt is the combined debt of all people in a household, including consumer debt and mortgage loans. A significant rise in the level of this debt coincides historically with many severe economic crises and was a cause of the U.S. and su ...
, as reported by the
Federal Reserve System
The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a ...
, to
disposable personal income, as reported by the US Department of Commerce,
Bureau of Economic Analysis
The Bureau of Economic Analysis (BEA) of the United States Department of Commerce is a U.S. government agency that provides official macroeconomic and industry statistics, most notably reports about the gross domestic product (GDP) of the Unite ...
. The ratio has been used in economic analysis and reporting and has been compared to other relevant economic variables since the 1970s.
Overview
The concept in a variety of other forms has been used to quantify the amount of debt the average American consumer has, relative to his/her
disposable income
Disposable income is total personal income minus current income taxes. In national accounts definitions, personal income minus personal current taxes equals disposable personal income. Subtracting personal outlays (which includes the majo ...
.
As of the fourth quarter of 2016, the ratio in the US stood at 1.04x, down from highs of 1.29x seen in 2007. The historical average ratio since late 1975 is approximately 0.9x.
Many economists argue the rapid growth in consumer
leverage has been the primary fuel of corporate earnings growth in the past few decades and thus represents significant economic risk and reward to the US economy. Jarvis and MacMillan quantify this risk within specific businesses and industries in a ratio form as Consumer Leverage Exposure (CLE).
Formula
:
In essence, the CLR demonstrates how many years it would take on average to pay off the debt in full if the whole annual disposable income were used to do so. The consumer leverage ratio in the US was increasing in the years prior to the financial crisis of 2008, peaking at 1.29 and decreasing ever since.
See also
*
Bureau of Economic Analysis
The Bureau of Economic Analysis (BEA) of the United States Department of Commerce is a U.S. government agency that provides official macroeconomic and industry statistics, most notably reports about the gross domestic product (GDP) of the Unite ...
*
Consumer
*
Consumer debt
In economics, consumer debt is the amount owed by consumers (as opposed to amounts owed by businesses or governments). It includes debts incurred on purchase of goods that are consumable and/or do not appreciate. In macroeconomic terms, it i ...
*
Consumer economics
Consumer economics is a branch of economics. It is a broad field, principally concerned with microeconomic analysis behavior in units of consumers, families, or individuals (in contrast to traditional economics, which primarily government or bu ...
*
Economic indicators
An economic indicator is a statistic about an economic activity. Economic indicators allow analysis of economic performance and predictions of future performance. One application of economic indicators is the study of business cycles. Economic i ...
*
Federal Reserve System
The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a ...
*
Harvard Business Review
''Harvard Business Review'' (''HBR'') is a general management magazine published by Harvard Business Publishing, a wholly owned subsidiary of Harvard University. ''HBR'' is published six times a year and is headquartered in Brighton, Massach ...
References
External links
Consumer Credit: The Next Crisis*HBR Editor's Blog
Harvard Business Review, October 2009Harvard Business Review ToolkitHarvard Business Review CLE CalculatorMeasuring Consumer Leverage ExposureRita Gunther McGrath's BlogWSJ Blog: Real Time Economics
{{Debt
Economic indicators
Financial economics