NAR’s Lawrence Yun: Corporate Profits Sky-High, Yet Recovery Lags

If there’s a phrase of the week in commercial real estate — and seemingly everywhere else — it has to be “fiscal cliff.” In previous months, you might have bumped into this term here or there as part of the presidential election seasonal background.  But in conversation at NAR Conference & Expo 2012, “fiscal cliff” is a constant refrain, something you will hear several times a day, if not per hour.  It’s on morning television (I counted five uses in around 20 minutes on the Today Show), it’s on the convention floor, and it’s in the national dialogue.  If you used “fiscal cliff” as a drinking game (morning rules: coffee only) you’d be wired and climbing the walls inside of an hour.

So I found it to be something of a surprise when NAR Chief Economist Lawrence Yun took the stage to lead the Economic Issues & Commercial Real Estate Business Trends Forum, because while he did glancingly refer to the FC, the most eye-popping slide he presented wasn’t about a cliff, but about a chokepoint.  

A slide from Lawrence Yun's Economic Issues & Commercial Real Estate Business Trends Forum
Not a cliff, but a mountain of cash.

The enduring “cliff” is about the narrative of how government expenses are outpacing its ability to pay for what it does.  But there’s a serious case to make that a broadened tax base, where employment is high and the corporate spending that drives employment is also high,  is a giant part of what is missing.  Without corporate spending, the tax base doesn’t grow and, well, fiscal cliff ahoy.

With worker productivity up at record levels and tax rates on corporate coffers among the lowest in the western world, “corporate profits are sky-high, but they have reduced their spending,” said Yun, throwing up a slide indicating the boardrooms of the country are indeed flush with the very green stuff we could all use to avoid the dreaded fiscal cliff.  But they’re not spending.  “If businesses used the cash, it would speed recovery,” he continued.

Which means to me, we have the wrong buzzword this week.  Why not replace “fiscal cliff” with “corporate chokehold”?  Is it because it’s easier to beat up on Washington when we feel it so often beats up on business?

Some further highlights’ of Lawrence’s presentation:

World Trade Continuing To Double

Promising good things for the industrial/warehousing sector, Yun added that world trade continues to double every ten years.  More trade means more shipping, which means more rail and intermodal traffic, which means more goods and more logistics structures to distribute them. The business of moving stuff around remains a growth industry and benefits the industrial sector.

The Fiscal Cliff

“I don’t think it will happen,” said Yun.

Dodd-Frank /  Size Matters

There’s beating up on government regulation, and then there’s just reporting about workflow.  The Dodd-Frank legislation has produced a nearly 10,000 page set of regulations, the sheer size of which is benefiting the largest banks and kicking the smaller ones out of compliance and therefore lines of business.  Why?  JPMChase has a legal department employing scores of attorneys and is therefore in a position to digest Dodd-Frank.  Your local bank might have one lawyer to deal with 9,000+ pages of regulation.

You can get an audio recording of Lawrence’s entire presentation at PlaybackNAR.



  • Suzanne Close

    December 3, 2012

    Very interesting semantic difference. Chokehold gives a whole new feeling to the idea of what is going on with the economy….a bit scary and VERY frustrating….

  • Gary Nessim

    December 3, 2012

    The economy has to be already growing solidly for most businesses to expand confidently across the board. Oil and natural gas industry is spending everywhere while most other sectors are not.

    Each recession follows a similar pattern with the majority of businesses and banks waiting for the recovery to be in full swing before lending and expanding.

  • SuzanneBrady

    December 3, 2012

    Chokehold is a good term. It puts the onus back where it belongs – on the government.

    • Wayne Grohl

      December 3, 2012

      Hi Suzanne,

      Sorry if I wasn’t clear: Lawrence Yun’s slides showed corporate profits to be at an all-time high. Since at the same time, employment and investment by these corporations is at a historic low, that plainly means mountains of cash are being held – e.g. choked off – by the profiting corporations, as opposed to being spent, invested, etc.

      There’s all kinds of opportunities for government to affect how economies develop, but it can’t force companies return their profits back into the economy through investment and employment. That’s the boardroom’s call to make. Part of free enterprise means they’re free to hold onto record profits.

      Thanks for reading!

  • Donna Godfrey

    December 3, 2012

    I’ve got a new buzz word now “fiscal cliff”…..I can’t wait to be on the other side of the fiscal cliff…

  • Marti Barnewolt

    December 3, 2012

    It is common practice for corporations to take advantage of an economic downturn. There are a number of actions taken which result in reduced operating costs, which in turn increase profits. The lack of confidence of our leadership is a major contributor to corporations and the consumer holding on to their money – better to be prepared for the worst.

    It was long ago that the amount paid by the taxpayer became inadequate to cover governement spending and yet, our leaders continue to spend. I believe that’s because we have given them carte blanche – we do nothing about their spending. Our government no longer works for us . . . we work for them. They are the “royalty” of our country. My opinion – downsize government, stop the spending, get back to elected officials WORKING for the people. Just sayin’

  • Don Pasek

    December 3, 2012

    Wayne Grohl correctly states that Lawrence Yun’s point was that corporations are reaping and holding on to cash at unprecedented rates. The implication is that this money, if invested in research and development, or an expanded labor force, would improve our economy.

    Instead, many U.S. corporations have been paying “special dividends” to shareholders. They’re hurrying to do this for investors before year’s end to help them to avoid the possibility of a higher tax rate on such payments later after the so-called “Fiscal Cliff” occurs.

    I disagree with Wayne Grohl’s assertion that government “can’t force companies return their profits back into the economy through investment and employment.” Indeed this is the purpose of most tax law — to get money moving in as many sections of the economy and into as many pockets as possible.

    Creating a tax system that works only to the advantage of those who wish to amass a fortune would quickly make the U.S. a third-world country, with a severe imbalance of wealth (and power) between rich and poor and no discernable middle class. In real estate, our business depends on as many people as possible having sufficient means to purchase or lease property and being able to sustain those means over a long period of time to retire their debt.

    Suzanne Brady apparently thinks that the government, through taxation, is somehow choking the economy. On the individual income tax level, this is a position that’s hard to defend, since the U.S. has had the lowest capital-gains taxes and individual income tax rates it has ever had for a number of years now. Indeed, on an individual level, Americans these days pay some of the lowest taxes in the industrialized world. This, combined with government spending on wars and economic stimulus, has contributed to the massive debt and budget deficits we currently have.

    On the corporate tax level, there may be an argument for a lower nominal tax rate, however. Part of the reason corporations invest overseas and keep their profits outside of the U.S. is that current tax law encourages them to do so by taxing “worldwide income” at a rate of 35%. I won’t get into a detailed explanation of how this works, but in general, a lower tax rate at home would cause more profits to be repatriated and hopefully, more investment in U.S. operations. This could be accompanied by adjustments to the tax code to encourage development of domestic production and employment.

    Another reason for record corporate profits rests in world economic cycles. While the U.S. was falling into recession, much of the rest of the world was chugging along, including the foreign subsidiaries of U.S. corporations. So, while domestically things were pretty bleak, internationally they were not so bad. Of course, of late both Europe and China are feeling the effects of the economic slowdown (while we are making sluggish, but steady gains).

    The weakening of the U.S. dollar to other currencies in the past few years also played a role in this entire process, which, as Gary Nessim said, is representative of a typical “pattern” of post-recession corporate planning. It is curious, though, that officially we’ve been out of recession for some time now and yet reinvestment in the U.S. economy hasn’t picked up to the same extent as corporate profits have.

    Hopefully, we won’t fall off the “Fiscal Cliff” come January. I’m still optimistic that our elected representatives will come to their senses to reform the tax code and create a progressive tax system that requires both corporations and individuals to pay their fair share while encouraging domestic investments to employ Americans at wages that allow them to do things like purchase real property for business or personal use.

    • Wayne Grohl

      December 3, 2012

      Excellent points, Don. We’re actually in agreement, because I do categorize investment and employment as distinct outflows from that of taxation, which is, as you correctly state, a mechanism in place to circulate capital back into the wider economy.

      Thanks for the contribution!

  • Kathi Jones

    December 4, 2012

    Two of the largest expenditures for companies are employees’ salaries and facilities. If you don’t hire, you don’t have to provide the furniture and facilities for the workers and so remaining workers’ productivity goes up to take up the slack. Profits rise, dividends are distributed before taxes go up and big bonuses are paid out to corporate executives whose compensation includes such incentives.

    I am confident that Corporate America will ride this wave of profits right up to the Fiscal Cliff. Financiers are working on options to adapt strategic positions relative to a new tax code. Incentives for domestic investments will create jobs for a highly skilled work force who earn attractive wages. Some businesses, (Hostess, will not survive but new ones will take over.

    Our job as Realtors is to put this all into perspective to help our clients make informed decisions. Adapt or Die!


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