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Theconsumer leverage ratio (CLR) is the ratio of totalhousehold debt todisposable personal income.[1] In the United States these are reported, respectively, by theFederal Reserve (as thehousehold debt service ratio (DSR))[2] and theBureau of Economic Analysis of theUS Department of Commerce.[citation needed]
The concept has been used to quantify the amount ofdebt an average consumer has, relative to their disposable income.[3] 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 theHarvard Business Review, is being used in economic analysis and reporting, having been compared to other relevanteconomic indicators since the 1970s.
The consumer leverage ratio in the US was increasing in the years before the2007–2008 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 consumerleverage has been the primary fuel of corporateearnings growth in the past few decades and thus represents significant economic risk and reward to theUS economy. Jarvis and MacMillan quantify this risk within specific businesses and industries in a ratio form as "Consumer Leverage Exposure" (CLE).
The consumer leverage ratio can be calculated as the ratio of total household debt to disposable personal income.