What is a ‘Macro Environment’
A macro environment is the condition that exists in the economy as a whole, rather than in a particular sector or region. In general, the macro environment includes trends in gross domestic product (GDP), inflation, employment, spending, and monetary and fiscal policy. The macro environment is closely linked to the general business cycle as opposed to the performance of an individual business sector.
Explaining ‘Macro Environment’
The macro environment in which a company or sector operates influences its performance, and the amount of the influence depends on how much of the company’s business is dependent on the health of the overall economy. Cyclical industries, for example, are heavily influenced by the macro environment, while consumer staples are less influenced. The macro environment can also greatly affect consumers directly, affecting their ability and willingness to spend. Consumers’ reactions to the broad macro environment are closely monitored by businesses and economists as a gauge for an economy’s health. Effects from some of the market’s key factors influencing the macro environment include the following:
Gross Domestic Product
GDP is a measure of a country’s output and production of goods and services. The Bureau of Economic Analysis releases a quarterly report on GDP growth that provides a broad overview of the output of goods and services across all sectors. GDP is often the lead influencing factor of corporate profits for the economy, which is another measure of an economy’s comprehensive productivity.
Inflation
Inflation is a key factor watched by economists, investors and consumers. It affects the spending strength of the U.S. dollar and is a factor closely regulated through monetary policy by the Federal Reserve. The target rate for annual inflation from the Federal Reserve is 2%. Inflation higher than 2% significantly affects the purchasing power of the dollar, making each unit less valuable as inflation rises.
Employment
Employment levels in the United States are measured by the Bureau of Labor Statistics, which releases a monthly report on increases in business payrolls and the status of the unemployment rate. As of June 3, 2016, the U.S. unemployment rate is 4.7%. The Federal Reserve also seeks to regulate employment levels through monetary policy stimulus and credit measures that can ease borrowing rates for businesses to help improve capital spending and business growth, also resulting in employment growth.
Monetary Policy
The Federal Reserve’s monetary policy initiatives are a key factor influencing the macro environment in the United States. Monetary policy measures are typically centered around access to credit and federal interest rate limits, one of the main levers of the Federal Reserve’s monetary policy tools. The Federal Reserve sets a federal funds rate for which federal banks borrow from each other, and this rate is used as a base rate for all credit rates in the broader market. The tightening of monetary policy indicates rates are rising, making credit borrowing less appealing.
Further Reading
- Formal and informal SME financing in the restaurant industry: The impact of macroenvironment – www.sciencedirect.com [PDF]
- Financial distress and bankruptcy prediction among listed companies using accounting, market and macroeconomic variables – www.sciencedirect.com [PDF]
- Does financial macroenvironment impact on carbon intensity: evidence from ARDL-ECM model in China – link.springer.com [PDF]
- Micro-Mechanism, Market Structure and the Macro-Environment: The Operation Performance of the Commercial Banks in Developed Areas – en.cnki.com.cn [PDF]
- A macro‐finance model of the term structure, monetary policy and the economy – academic.oup.com [PDF]
- A causal model of linkages among environmental dimensions, macro organizational characteristics, and performance – journals.aom.org [PDF]
- What drives financial innovations in Kenya's commercial banks? An empirical study on firm and macro-level drivers of branchless banking – www.tandfonline.com [PDF]
