# 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.[1] The ratio has been used in economic analysis and reporting and has compared relevant economic variables since the 1970s.

## Overview

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.[2] 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).

## Formula

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

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.

Quarter Ratio
Q1 2005 1.18x
Q2 2005 1.20x
Q3 2005 1.21x
Q4 2005 1.22x
Q1 2006 1.22x
Q2 2006 1.25x
Q3 2006 1.26x
Q4 2006 1.27x
Q1 2007 1.27x
Q2 2007 1.28x
Q3 2007 1.29x
Q4 2007 1.29x
Q1 2008 1.29x
Q2 2008 1.25x
Q3 2008 1.26x
Q4 2008 1.26x
Q1 2009 1.26x
Q2 2009 1.24x
Q3 2009 1.24x
Q4 2009 1.23x
Q1 2010 1.21x
Q2 2010 1.21x
Q3 2010 1.20x
Q4 2010 1.18x
Q1 2011 1.16x
Q2 2011 1.14x
Q3 2011 1.12x
Q4 2011 1.12x
Q1 2012 1.09x
Q2 2012 1.08x
Q3 2012 1.08x
Q4 2012 1.05x
Q1 2013 1.09x
Q2 2013 1.08x
Q3 2013 1.08x
Q4 2013 1.08x
Q1 2014 1.07x
Q2 2014 1.06x
Q3 2014 1.05x
Q4 2014 1.05x
Q1 2015 1.05x
Q2 2015 1.04x
Q3 2015 1.03x
Q4 2015 1.04x
Q1 2016 1.04x
Q2 2016 1.04x