The health of the financial services sector is an integral part of the overall level of global economic activity. It is for this reason that the main macroeconomic indicators are also very important data for the outlook for this sector. Financial services companies rely on a high level of business activity to generate income because they act as an intermediary in many economic transactions.
The financial services sector consists of companies and institutions that provide financial services to commercial and private customers. This includes banks, investment companies, insurance companies and real estate companies.
Economic indicators are published through studies, surveys, sector reports, and the data collection efforts of government agencies. These indicators have far-reaching implications for every economic sector. However, the financial services sector is perhaps the most sensitive to large economic aggregates.
The central theses
- The main macroeconomic indicators are also very important data for the outlook for the financial services sector.
- Financial services companies rely on a high level of business activity to generate income because they act as an intermediary in many economic transactions.
- Economic indicators are published through studies, surveys, sector reports, and the data collection efforts of government agencies.
For investors in the financial services sector, these four economic indicators can be a sign of general health or potential problems.
1. Interest rates
Interest rates are the most important indicators for banks and other lenders. Banks benefit from the difference between the interest rates they pay the depositors and the interest rates they charge the borrowers. Banks find it increasingly difficult to pass the interest costs on to consumers as interest rates rise. High borrowing costs mean less borrowing and more savings. This limits the volume of total profitable activity for lenders.
It is very clear that banks (at least in the short term) do best when interest rates are lower.
Lower interest rates also turn savers into speculators. It is harder to beat inflation when the interest rate on a savings account or deposit slip (CD) is paying a low interest rate. Workers are turning to stocks more often to find ways to counter inflation and grow their nest egg for retirement. This creates a demand for asset management services, brokers and other money brokers.
2. Gross domestic product (GDP)
Countries around the world are tracking the level of economic activity Gross Domestic Product (GDP) calculations. Increasing spending or investment leads to an increase in GDP, and the financial services sector typically sees increased demand for its goods and services when spending and investment increase.
Because GDP is the most common and comprehensive measure of a region’s economy – and is often viewed as a lagging indicator – the ratio of a company’s stocks to GDP is small at best. Still, it is seen as a useful gauge of the overall health of the financial sector.
3. Government regulation and financial policy
Government regulation is not necessarily an indicator in the traditional sense. Instead, investors should pay attention to how rules and regulations apply Tariffs could have an impact on the activities of the financial services sector. Banks, which make up more than half of the entire sector in the US, are heavily influenced by reserve requirements, usury laws, insurance and credit guidelines, and the possibility of government assistance.
Fiscal policy does not affect banks as directly. Rather, it affects the banks’ potential customers and trading partners. Consumer confidence tends to increase during expansionary fiscal policy and decrease during contractionary fiscal policy. This could result in less investment, business, and credit.
4. Existing home sales
The The Real Estate Sales Report is published monthly by the National Association of Realtors. Banks and mortgage lenders receive up-to-date information on sales prices, stocks and the total number of homes sold.
This report often has an impact on applicable mortgage rates. Investors in financial services and housing should see spikes as home sales data soars.
The bottom line
Investors are advised to consider changes in interest rates, published data on GDP, changes in economic policy that may require government intervention, and the overall level of homes sold and selling prices. These economic indicators can provide guidelines for the future of the financial services sector – possible setbacks or, alternatively, growth opportunities.
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