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Consumer leverage ratio

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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 Q2 2013, the ratio stood at 1.05x, 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).

Consumer Leverage Ratio = Total household debt/ Disposable personal income Edit: The ratios are incorrect. The denominator is from BEA Table 2.1 Personal Income and Its Disposition, Line 27, Disposable Personal Income. The numerator is as described FRB NY Household Debt. 14-Nov-13 Debt 11.28 $T Debt, FRB NY Disp Inc 12.54 Disposable Inc. BEA, Table 2.1, Personal Income and Its Disposition, Line 27 90%

[1]http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1#reqid=9&step=3&isuri=1&903=58 Note: The BEA table referenced is current and not Q3 2013



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 1.18x
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 1.19x
Q3 2010 1.17x
Q4 2010 1.15x
Q1 2011 1.13x
Q2 2011 1.11x
Q3 2011 1.10x
Q4 2011 1.10x
Q1 2012 1.07x
Q2 2012 1.07x
Q3 2012 1.06x
Q4 2012 1.04x
Q1 2013 1.05x
Q2 2013 1.05x

See also

References

  1. ^ http://www.newyorkfed.org/microeconomics/hhdc.html#2013/q3

External links

  • Consumer Credit: The Next Crisis
  • HBR Editor's Blog: [1] [2]
  • 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
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