Consumer leverage ratio
Encyclopedia
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 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 Q2 2011, the ratio stood at 1.15x. 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 represents significant economic risk to the US economy. Jarvis and MacMillan quantify this within specific businesses and industries in a ratio form as Consumer Leverage Exposure (CLE).
Consumer Leverage Ratio = Total household debt/ Disposable personal income
As reported by data from the Bureau of Economic Analysis and the Federal Reserve, below are recent historical Consumer Leverage Ratio levels:
Harvard Business Review
Harvard Business Review is a general management magazine published since 1922 by Harvard Business School Publishing, owned by the Harvard Business School. A monthly research-based magazine written for business practitioners, it claims a high ranking business readership among academics, executives,...
and refers to the ratio of total household debt
Household debt
Household debt is the debt owed by persons living in households, as opposed to business debts. It includes consumer debt and mortgage loans held by members of households for the homes they live in....
, as reported by the Federal Reserve System
Federal Reserve System
The Federal Reserve System is the central banking system of the United States. It was created on December 23, 1913 with the enactment of the Federal Reserve Act, largely in response to a series of financial panics, particularly a severe panic in 1907...
to disposable personal income
Disposable income
Disposable income is total personal income minus personal current taxes. In national accounts definitions, personal income, minus personal current taxes equals disposable personal income...
, as reported by the US Department of Commerce, Bureau of Economic Analysis
Bureau of Economic Analysis
The Bureau of Economic Analysis is an agency in the United States Department of Commerce that provides important economic statistics including the gross domestic product of the United States. Its stated mission is to "promote a better understanding of the U.S...
.
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
Disposable income
Disposable income is total personal income minus personal current taxes. In national accounts definitions, personal income, minus personal current taxes equals disposable personal income...
. As of Q2 2011, the ratio stood at 1.15x. The historical average ratio since late 1975 is approximately 0.9x.
Many economists argue the rapid growth in consumer leverage
Leverage (finance)
In finance, leverage is a general term for any technique to multiply gains and losses. Common ways to attain leverage are borrowing money, buying fixed assets and using derivatives. Important examples are:* A public corporation may leverage its equity by borrowing money...
has been the primary fuel of corporate earnings growth in the past few decades and represents significant economic risk to the US economy. Jarvis and MacMillan quantify this within specific businesses and industries in a ratio form as Consumer Leverage Exposure (CLE).
Consumer Leverage Ratio = Total household debt/ Disposable personal income
As reported by data from the Bureau of Economic Analysis and the Federal Reserve, below are recent historical Consumer Leverage Ratio levels:
| Quarter | Ratio |
|---|---|
| Q1 2005 | 1.20x |
| Q2 2005 | 1.21x |
| Q3 2005 | 1.23x |
| Q4 2005 | 1.24x |
| Q1 2006 | 1.25x |
| Q2 2006 | 1.26x |
| Q3 2006 | 1.27x |
| Q4 2006 | 1.28x |
| Q1 2007 | 1.29x |
| Q2 2007 | 1.30x |
| Q3 2007 | 1.30x |
| Q4 2007 | 1.30x |
| Q1 2008 | 1.28x |
| Q2 2008 | 1.24x |
| Q3 2008 | 1.26x |
| Q4 2008 | 1.27x |
| Q1 2009 | 1.28x |
| Q2 2009 | 1.27x |
| Q3 2009 | 1.27x |
| Q4 2009 | 1.26x |
| Q1 2010 | 1.23x |
| Q2 2010 | 1.21x |
| Q3 2010 | 1.19x |
| Q4 2010 | 1.18x |
| Q1 2011 | 1.16x |
| Q2 2011 | 1.15x |
See also
- Bureau of Economic AnalysisBureau of Economic AnalysisThe Bureau of Economic Analysis is an agency in the United States Department of Commerce that provides important economic statistics including the gross domestic product of the United States. Its stated mission is to "promote a better understanding of the U.S...
- ConsumerConsumerConsumer is a broad label for any individuals or households that use goods generated within the economy. The concept of a consumer occurs in different contexts, so that the usage and significance of the term may vary.-Economics and marketing:...
- Consumer debtConsumer debtIn economics, consumer debt is outstanding debt of consumers, as opposed to businesses or governments. In macroeconomic terms, it is debt which is used to fund consumption rather than investment...
- Consumer economicsConsumer economicsConsumer economics is a branch of economics. It is a broad field, principally concerned with microeconomic analysis behavior in units of consumers, families, or individuals . It sometimes also encompasses family financial planning and policy analysis...
- Economic indicators
- Federal Reserve SystemFederal Reserve SystemThe Federal Reserve System is the central banking system of the United States. It was created on December 23, 1913 with the enactment of the Federal Reserve Act, largely in response to a series of financial panics, particularly a severe panic in 1907...
- Harvard Business ReviewHarvard Business ReviewHarvard Business Review is a general management magazine published since 1922 by Harvard Business School Publishing, owned by the Harvard Business School. A monthly research-based magazine written for business practitioners, it claims a high ranking business readership among academics, executives,...
External links
- Consumer Credit: The Next Crisis
- HBR Editor's Blog: http://blogs.harvardbusiness.org/hbr/hbreditors/2009/05/no_payments_and_no_interest_un.html http://blogs.harvardbusiness.org/hbr/hbreditors/2009/06/how_bad_is_your_companys_consu.html
- Harvard Business Review, October 2009
- Harvard Business Review Toolkit
- Harvard Business Review CLE Calculator
- Rita Gunther McGrath's Blog
- The Narrow Bridge Blog by Anya Kamenetz
- WSJ Blog: Real Time Economics