COLLEGE STATION, July 14, 2010 – As much of the nation ponders whether the country is in rebound mode or headed for a “double-dip” recession, the chief economist and director of research at the Real Estate Center at Texas A&M University’s Mays Business School offers insight about why the economic engine is in “neutral” and what it will take to get it in gear and up to speed. The economist, Mark G. Dotzour, says that while the road ahead is filled with potholes, he sees definite signs that point to hope for the future.

“As we begin the second half of 2010, clearly the entire country is ready for the end of the current economic decline and the beginning of a new phase of economic expansion. There are signals that the economy is trying to turn the corner. Consumer confidence has increased from a year ago, and consumer spending has resumed its relentless upward trajectory,” Dotzour notes.

He says the most important positive indicator is that corporate profits have rebounded.

“In a free-market, capitalistic system like America, profit growth is the key indicator. When profits are growing, companies hire employees. When profits flatten, they stop hiring. When profits fall, they start to fire people, and they keep on firing people until profits start to increase again. Clearly, most businesses have right-sized their firms sufficiently to regain profitability,” he observes.

So why aren’t they hiring people?

“The answer is uncertainty: uncertainty of capital gains and income tax rates; Uncertainty about the cost of health care and the possible increase in energy costs due to ‘cap and trade.’ The prospect of new and increased government regulation makes it hard for business to see clearly into the future,” he contends.

Dotzour points out that businesses can buy insurance against risk, but there is only one way to “insure” against uncertainty–and that is to hoard cash.

“There is now nearly three trillion dollars sitting in cash on business balance sheets,” he observes. “They have much more capital then the Federal Reserve, the FDIC, Fannie Mae, and Freddie Mac combined.”

So, what will it take to get businesses to deploy their capital and start hiring? In asking that question, the Texas A&M-based economist emphasizes that a new cycle of economic expansion in the United States will not happen until that capital is deployed and hiring is under way.

“The answer lies in business owners seeing the opportunity to make significant profits again. It is unlikely that the issues of taxes, ‘cap and trade,’ insurance costs and new regulations will be resolved in 2010. Hence, expect a sluggish economy through the remainder of the year. After the elections in November and new Congress members are seated early in 2011, business owners may get a clearer picture of what the future looks like. As the uncertainty recedes, the confidence to invest, expand and hire will increase,” Dotzour predicts.

“Many business decisions have been deferred in the past three years. There could be a pleasant economic surprise if, and when, businesses see the “all clear” signal from Washington, because of the pent up demand that has been created by several years of postponed purchasing.

“A second headwind for economic recovery comes from the government sector at the state, county and city level, including school districts. All over the country, income tax revenues are down. So are sales tax revenues. Property tax revenues from commercial real estate have fallen some, and are likely to fall further in 2011. In many states residential property taxes have fallen as home prices declined.”

He says these declines in revenues are forcing government entities to make difficult decisions regarding spending and hiring.

“There is little doubt that there will be reductions in employment at all levels of government. The private business sector has right-sized their firms to adjust to the current environment. Individual households have increased their savings rate to pay down debt and improve their balance sheets. Government has begun the same process, but has a long way to go yet.

“Small business is crucial at this stage of the game. As the government lays people off, it will be essential that small businesses resume hiring. Otherwise, we will start losing more jobs rather than beginning a new expansionary cycle.”

Look for signals from Washington, the Real Estate Center economist advises.

“If the signals are positive toward business owners, then the recovery could happen soon. If such signals are not forthcoming, then 2011 will look a lot like 2010,” he says.

“Business owners are like race car drivers. They have a precision-tuned machine with lots of spare tires and parts. They have skilled mechanics and drivers. They are just waiting to hear from Washington that the yellow flag of government intervention has been lifted and it’s time to roll back onto the track and resume the race,” he concludes.

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About research at Texas A&M University: As one of the world’s leading research institutions, Texas A&M is in the vanguard in making significant contributions to the storehouse of knowledge, including that of science and technology. Research conducted at Texas A&M represents an annual investment of more than $582 million, which ranks third nationally for universities without a medical school, and underwrites approximately 3,500 sponsored projects. That research creates new knowledge that provides basic, fundamental and applied contributions resulting in many cases in economic benefits to the state, nation and world.

Contact: Kelli Levey, Texas A&M University News & Information Services, at (979) 845-4645 or Mark Dotzour at (979) 862-6292.

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