The consumer leverage ratio (CLR) is the ratio of total household debt to disposable personal income. In the United States these are reported, respectively, by the

Federal Reserve The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a series of ...

(as the household debt service ratio (DSR)) and the

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 United ...

of the US Department of Commerce.

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The concept has been used to quantify the amount of

debt Debt is an obligation that requires one party, the debtor, to pay money Loan, borrowed or otherwise withheld from another party, the creditor. Debt may be owed by a sovereign state or country, local government, company, or an individual. Co ...

an average consumer has, relative to their disposable income. In essence, the consumer leverage ratio demonstrates how many years it would take an average consumer to pay off their debt if their entire annual disposable income went toward it.

Overview

The 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 not-for-profit, independent corporation that is an affiliate of Harvard Business School. ''HBR'' is published six times a year ...

, is being used in economic analysis and reporting, having been compared to other relevant economic indicators since the 1970s. The consumer leverage ratio in the US was increasing in the years before the

2008 financial crisis The 2008 financial crisis, also known as the global financial crisis (GFC), was a major worldwide financial crisis centered in the United States. The causes of the 2008 crisis included excessive speculation on housing values by both homeowners ...

, peaking at 1.29x in 2007 and decreasing ever since. As of the fourth quarter of 2016, the ratio in the US stood at 1.04x. The historical average of this 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).

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

Overview

See also

References

External links