Consumer leverage ratio

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The consumer leverage ratio is the ratio of total household debt to disposable personal income.^[1] In the United States these are reported, respectively, by the Federal Reserve and the Bureau of Economic Analysis of the US Department of Commerce.

${\displaystyle {\mbox{Consumer leverage ratio}}={{\mbox{Total household debt}} \over {\mbox{Disposable personal income}}}}$

The concept has been used to quantify the amount of debt an average consumer has, relative to their disposable income.^[2] 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.

The concept, popularized by William Jarvis and Dr. Ian C MacMillan in a series of articles in the Harvard Business Review, 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 2007–2008 financial crisis, 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).

• Debt-to-income ratio — the percentage of a consumer's monthly gross income that goes toward paying debts.
• Debt ratio — the percentage of company assets that are provided via debt.
• Debt-to-GDP ratio — the ratio between government debt and the national GDP.
• Consumer economics
• Economic indicators

• Consumer Credit: The Next Crisis
• HBR Editor's Blog: [1] [2]
• Harvard Business Review, October 2009
• Harvard Business Review Toolkit^{[permanent dead link]}
• Harvard Business Review CLE Calculator^{[permanent dead link]}
• Measuring Consumer Leverage Exposure
• Rita Gunther McGrath's Blog
• The Narrow Bridge Blog by Anya Kamenetz
• WSJ Blog: Real Time Economics