Consumer leverage ratio

Consumer leverage ratio is a term popularized by William Jarvis and Dr. Ian C MacMillan in a series of articles in the Harvard Business Review and refers to the ratio of total household debt, as reported by the Federal Reserve System to disposable personal income, as reported by the US Department of Commerce, Bureau of Economic Analysis. The ratio has been used in economic analysis and reporting and has compared relevant economic variables since the 1970s.

The term 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. As of Q4 2016, the ratio 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 underlying Consumer Leverage 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).

In essence, the CLR demonstrates how many years it will take on average to pay off the debt in full if the whole annual disposable income is used to do so. As reported by data from the Bureau of Economic Analysis and the Federal Reserve, below are recent historical Consumer Leverage Ratio levels. The table demonstrates how the leverage was increasing in the years prior to the financial crisis of 2008, peaking at 1.29x and decreasing ever since.

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