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Synchrony Financial's quarterly profit surges on lower rainy-day fund, higher interest income
Synchrony Financial's quarterly profit surges on lower rainy-day fund, higher interest income

Yahoo

timea day ago

  • Business
  • Yahoo

Synchrony Financial's quarterly profit surges on lower rainy-day fund, higher interest income

(Reuters) -Synchrony Financial on Monday reported a 52% jump in second-quarter profit, as the consumer lender set aside less money to cover potential defaults and elevated rates boosted its interest income. Consumers have been resilient despite high interest rates and inflation, with many managing to meet debt obligations and avoid sharp deterioration in credit health. Credit card interest rates in the U.S. are significantly higher than those for mortgages or auto loans, which helped card issuers across the industry maintain interest income. Synchrony's quarterly net interest income - the difference between how much a lender earns from loans and pays out on deposits - rose 3% to $4.52 billion. Its net interest margin, which measures the profitability of lending operations, increased 32 basis points to 14.78% in the three months ended June 30. Provision for credit losses decreased by $545 million to $1.1 billion during the second quarter, helped by a reserve release of $265 million, compared with a build of $70 million in the prior year. Provisions are funds set aside by lenders to cover potential loan losses, serving as a key buffer against defaults and an indicator of how they view future credit risk. While overall credit health was stable, many consumers - especially those in lower-income brackets - are pulling back on discretionary spending as persistent inflation and high borrowing costs strain household budgets. Synchrony's quarterly purchase volume - a measure of customer spending - fell 2%. Its revenue came in at $3.65 billion in the second quarter, compared with $3.71 billion a year ago. Meanwhile, net income available to common shareholders surged 52% to $946 million. The bank's second-quarter profit came in at $2.50 on a per-share basis, up from $1.55 a year earlier. Sign in to access your portfolio

Tariff Uncertainties, Pt 5: The Big One – Will It Cause A Recession?
Tariff Uncertainties, Pt 5: The Big One – Will It Cause A Recession?

Forbes

time6 days ago

  • Business
  • Forbes

Tariff Uncertainties, Pt 5: The Big One – Will It Cause A Recession?

(Photo by Library of Congress/) The Trade War is on. Will there be a Recession? Yes. Without a doubt. At some point, the business cycle will turn down. As night follows day. But – I don't think that tariff policies will be the cause of Summary The causal pathways that could lead from potential tariff hikes to negative growth are not (yet) showing signs of activation. There are four 'channels' that could transmit the tariff shock to the larger economy: The case for alternative 1 seems insufficient. The direct monetary impact of a tariff tax appears to be simply too small to derail a $30+ trillion dollar economy with four years of strong upward momentum. As for alternative 2, recent history shows that supply chain stress does not necessarily cause a slowdown. The U.S. economic surge in growth that began in Q4 2020 happened despite high levels of supply chain pressure throughout 2021 and 2022. Alternatives 3 and 4 are psychological in nature - which makes them harder to evaluate. Will the continuing uncertainty surrounding tariff policy lead to a crisis of confidence among businessmen and/or consumers? Will businesses stop investing? Will consumers cut spending, sucking demand out of the economy? Perhaps. It is the most credible risk scenario. But psychology has yet to translate into concrete behavior. So far we have not seen the typical signs of a slowdown. If anything, growth signals have strengthened over the past two months. Most forecasts are now downplaying the possibility of a recession in the next 12 months. Tariff Jitters The apprehension over tariffs is real. All Spring, and now into the Summer, the Risk-On/Risk-Off cycles in the financial markets have run in sync with the Tariff-On/Tariff-Off trade policy pronouncements coming out of Washington. The prospect of a new American protectionism – the likes of which has not been seen for a century – has created large and multidimensional uncertainties. Will higher tariffs lead to inflation? Will they poison the Treasury Bond market, and exacerbate the deficit? Will they provoke a trade war with Europe and weaken the Atlantic alliance? Time has quelled some of these worries. Inflation is declining. The bond markets have calmed down. The VIX is 20% below its long-term average. And Europe seems to be constructively engaged. At least for now. Return to Normal But as we pass the original July 9 deadline for the end of the 90-day 'pause' on new tariffs – now extended to August 1 – the biggest question of all is back on the table: Will higher tariffs cause a Recession?April was the Cruelest Month At first, it seemed so. 'Liberation Day' (April 2) produced panic in the forecasting profession. The Wall Street Journal Street surveyed 64 prominent economists two weeks later. Their estimate of the probability of a recession jumped from 21% in January to 46% in mid-April. Likelihood of a Recession in the Next 12 Months (April 2025)Even if the technical criteria for a recession might not be met, most forecasts projected a significant tariff-induced slowdown. Torsten Sløk, chief economist for Apollo, was convinced: Barron's 'Big Money' poll of top money managers found that 43% of respondents cited 'recession' or 'slowdown' as the biggest risk in the next 6 months, compared to just 11% for 'inflation.' The Atlanta Federal Reserve's macroeconomic model GDPNow – a 'realtime' model of economic growth – immediately dropped its forecast for the 2nd quarter GDP growth rate from 2.5% to 1%. The consensus outlook according to leading economists surveyed by Blue Chip Economic Indicators called for growth of less than 1%, with many expecting an outright contraction of the economy – that is, a recession. Recession Forecasts - Bluechip Forecasts vs Atlantic GDPNow model - April All in all, the professional view in April was pessimistic. The effect of the proposed tariffs was seen as clearly Economists' Confusion What was the logic of this pessimism? Let us start at a high level. Viewed from the most general macroeconomic perspective, the effect of a tariff on domestic economic growth should be more or less neutral, leaning positive in principle. In other words, a tariff does not make consumers' demand disappear. The business goes to domestic companies instead of foreign suppliers. Which should be stimulative. But other effects point in the opposite direction. This brings to mind a 'mango' parable, which goes like this: An Indian labourer unloads mangoes at the Gaddiannaram fruit market in Kothapet, located in the ... More outskirts of Hyderabad, on April 18, 2009. Mangoes are indigenous to the Indian subcontinent, where India produces nearly half of the world's production of the fruit. AFP PHOTO / Noah SEELAM (Photo credit should read NOAH SEELAM/AFP via Getty Images) Some studies, and some models, conclude that the negative supply shock on intermediate goods will outweigh the positive demand shock for final goods. Then there are 'frictions' and 'inefficiencies' –economists' classic caveat – that are also said to push the calculation back to a net negative. However, not every input is a domestically unsourceable mango. Many producers may be able to shift to domestic sources for their inputs – in fact, this is exactly what a tariff encourages them to do. At least some import-substitution will take place, so the net-net again should be more business for domestic suppliers — i.e., expansionary. There is also the larger context including fiscal and monetary policy responses. Tax reductions or interest rate reductions may offset or reverse any negative growth impact. And finally there are factors that typically lie outside the economists' models or are captured only very imperfectly, such as business confidence or stock market psychology, or general consumer sentiment. In the immediate aftermath of Liberation Day, violent stock market gyrations drove the markets crazy. Sudden and deep daily declines created a sharp (though brief) reversal of the 'wealth effect' – the sense of financial well-being that comes from a stable and rising stock market boosting the nominal value of people's portfolios. Consumers are said to react to such reversals by cutting back on spending, while increasing saving – which would be contractionary. Following the tariff flurry, consumer spending did drop somewhat, though the rate of growth remained above the pre-pandemic average. Personal savings rate spiked from 3.5% at the end of 2024 to 4.9% in April 2025, before falling back in May. The spike in forecasters' negativity was undoubtedly driven by such factors to a significant extent. But markets have calmed down and in fact have surged ahead to new record highs (more on that below). In short, as with many pressing questions related to tariff policy, there is no coherent and unbiased economic consensus. But let us try to summarize the framework for thinking about how tariffs could cause a recession, relying on general causal arguments rather than the esoteric paraphernalia of academic economic Mechanics of a Tariff-Induced Recession There are four pathways or 'channels' by which a tariff increase could lead to an economic slowdown or recession. 1. The 'Tariff Tax' Channel This is the argument that a tariff forces people to pay more for what they buy, reducing their purchasing power, and thus subtracting demand from the economy. If I must have mangoes, and I have to pay more for my now heavily-tariffed mangoes, I will have less money to spend on other things – which means that the producers of those other things will see less of my business. They will experience reduced profits, leading them perhaps to cut back and lay people off. In the aggregate, lost demand means lower growth. There are a number of problems with this logic. Overall, it seems unlikely that a 'tax-like' reduction in purchasing power which is small (relative to the size of the economy) and which can be mitigated either by consumers themselves or by government policies would be enough by itself to drive a robust economy into full-blown recession.2. The 'Supply Chain Stress' Channel According to this argument, tariffs disrupt global supply chains, causing distortions, dislocations, bottlenecks and shortages which will drive up inflation beyond the 'tariff-tax' effect and lead to 'inefficiencies' and 'lost output.'The Pandemic shock in 2020 created disruptions far more severe than anything that tariffs are likely to produce. The chart here tells the story. The left-scale shows the New York Fed's index of Global Supply Chain Pressure (GSCPI). The right-scale shows the changes in Real GDP. Supply Chain Stress in the Pandemic Observations: In short, it does not appear that this factor alone will be sufficient to drive the economy into a recession.3. The Business Uncertainty Channel John Maynard Keynes blamed the lack of business confidence – he called it a loss of 'animal spirits' – for the economic downturn of the 1930s. If today's drum roll of Tariff-On/Tariff-Off pronouncements – a 'stop-start trade war' as the Wall Street Journal called it – has undermined business confidence, it could have a negative impact on hiring and investment. Initial reactions were is not clear that apprehension translates yet into actions that would lead towards a recession or a slowdown. Business Confidence and Capital Goods Investments Following Liberation Day, surveys of executives certainly show pessimism. But note the highlighted nuances in the Conference Board's report. That earlier recession never materialized. There may be a bias built into these survey responses. And then, A good example of Tariff-Off = Risk Off? While there is uneasiness in the private sector, it has not evolved into a sustained 'crisis of confidence.' Business leaders may be evolving past the 'shock phase' and returning to a more balanced perspective.4. The Consumer Confidence Channel Consumer sentiment has also declined. The Conference Board reported thatDeclining consumer sentiment could result in reduced spending and increased savings behavior — invoking the famous 'paradox of thrift' that would suck demand out of the sentiment is always volatile. Following a big drop in April, a rebound in May was the largest upswing in several years. Nevertheless, consumers tend to be pessimistic, with two-thirds to three quarters of those surveyed by the Conference Board predicting a recession every month over the past four years. The Michigan Consumer Sentiment Index shows that public psychology has not recovered from the Pandemic shock. Consumer Psychology Altered By The Pandemic Aside from sentiment, trends in actual consumer behavior — spending and saving – are inconclusive. Retail spending did decline in May, though not much (the rate of spending growth eased about half a percent, about equal with the January 2024. level). And the savings rate fell. (By comparison, when the Pandemic hit in 2020, consumers immediately cut spending by 14% in one month, and the savings rate jumped from 7% to 32%. That is what a true loss of consumer confidence looks like.) In short, people today may be worried, may say they are worried, but they are not yet acting Sets In In my opinion, the 'confidence' channels are the principal drivers of recessionary tendencies in the modern economy. Most of the tecniques of countercyclical policy have been figured out. Central banks now generally know when to stimulate and when to withdraw stimulus, even if they are sometimes tardy about it. What is not so easy to control is the psychological dimension. George Selgin has written a terrific new book (False Dawn: The New Deal and the Promise of Recovery) on the government's efforts to wrench the U.S. out of the Depression, which shines a light on the antagonism between the Roosevelt administration and the private sector as a major factor in explaining the slow and fitful recovery. The parallels with our current situation are not far-fetched. Tariff threats and retractions have rattled the cage hard, spiking up uncertainty and volatility – two things that traders may love, but businessmen hate. If there is a tariff-related mechanism in the economy that could generate a recession, it is probably along the lines of 'continuous, often disconcerting experimentation' by the policy-makers, frightening consumers into pulling back from spending, and paralyzing business investment, rather than some incremental price penalty at the margin. But so far, despite intermittent sour moods, neither the business community nor the public have reined in their spending. Gross Private Domestic Investment grew by 5.8% in Q1 compared to the previous quarter – the most since Q4 2021. Q 1 2025 Gain in Private Sector InvestmentMeanwhile, the tenor among forecasting professionals has turned positive. A late June WSJ headline read 'U.S. Economy Shrugs Off Trade War and Soldiers On: Employers and investors braced for economic meltdown. It hasn't happened.' The stock market recovered its April losses and began pounding out new record highs. The S&P 500 Index has gained 27% in the last 100 days, its most vigorous rally in five years. Torsten Sløk modified his '90% recession probability' view to the upside, now projecting just a 0.8% reduction in GDP – not enough to trigger a recession. The Atlanta Fed Forecast had also brightened considerably. The GDP estimate for Q2 spiked up about 4% in May and settled to about 2.5% by the end of June. The so-called Blue Chip consensus also moved back up to project a healthy 2% GDP growth rate. Recession Forecasts - Bluechip Forecasts vs Atlantic GDPNow model - July And right on time, economists have started to regain their confidence. The Wall Street Journal's July survey found that 2/3rds of those surveyed see no recession in the next 12 months. The Wisdom of Crowds… Two other data-sets point also to a normalization of the tariff threats. Immediately following Liberation Day, prediction markets like Kalshi and Polymarket reflected the general panic, and the betting consensus for a recession this year soared to 66%. Today, however, the odds of a recession are less than 20%., Polymarket Predictions of Recession Probabilties This Year The other source for crowd wisdom is the financial market itself. Aside from the general rise in share prices (hitting an all-time high last week), earnings forecasts for the next 12 months have accelerated sharply since early May. This is clearly inconsistent with a recession scenario. Earnings ForecastsA Tentative Conclusion? Professional forecasters have been overly pessimistic for several years, consistently underestimating GDP growth. They are now catching up to events. Paradoxically, expert forecasts are looking like a lagging indicator – at best. Meanwhile, the real agents in the economy are simply not behaving in a pre-recessionary way. Consumers as always remain pessimistic — but they keep on spending. Employers are worried, but they keep on hiring. The standard indicators are inconclusive, at best. It does not appear that the 3rd and 4th causal concepts described above — business confidence and consumer sentiment – are currently generating a recessionary trend. In any case, the asteroid-alert can be called off. Further reading –

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