Sure, the economy sucks. IT spending has stalled, global recession is looming, and terrorist attacks and anthrax scares have everyone hunkering down. Take it from the experts: 2001 will be "the worst year in recorded memory for the IT industry," says John Gantz, chief research officer at the research firm IDC. Next year, tech companies will continue to struggle. But take heart: the U.S. Department of Defense's latest budget earmarks $10 billion--a sum equal to one-quarter of Russia's total annual budget--for new-technology research-and-development spending, and historically, more than half of that money has gone to private industry.

The severity of the projected recession is debatable. Economists say that today's economic conditions are comparable to those during the Gulf War era ten years ago, when declining economic growth, waning consumer confidence, and the shock of war sent the United States into a recession. But that contraction lasted only a few quarters; the economy, followed by technology spending, recovered relatively swiftly.

Since payouts from the government and insurance companies will cover the losses from the September 11 attacks, some economists are betting that the current recession will be relatively minor. But most are also outlining worst-case scenarios. (The release of fourth-quarter figures for the U.S. gross domestic product will likely show negative growth, confirming a recession.)

Recovery in the technology sector is expected to trail a broader U.S. economic recovery, not emerging until late 2002 and into 2003. Metropolitan areas that are major tech centers will suffer from some of the weakest economies. San Jose, California, in particular, is projected to have the largest decrease in productivity and increase in unemployment of any U.S. metro area, according to the economic research firm Economy.com.

In October, the U.S. Senate approved a defense budget of $343 billion, up more than 10 percent from last fiscal year. The amount allotted for research and development is $51 billion, an increase of almost 13 percent. U.S. President George W. Bush has called for 20 percent of this funding to be allocated to new technology--possibly more than $10 billion for tech innovation.

In dispersing R&D money, the U.S. Department of Defense "will rely on the private sector to provide much of the leadership in developing new technologies," according to a recent review issued by U.S. Secretary of Defense Donald Rumsfeld. And indeed, more than half of the funds dispersed by one branch that coцrdinates military research, the Defense Advanced Research Projects Agency (DARPA), went directly to industry last year. (Another part of the government that funds tech startups is In-Q-Tel, an arm of the Central Intelligence Agency. Still, most military R&D dollars go directly to traditional defense contractors, like Lockheed Martin and Boeing, to support further research on established weapons technologies like airplanes and tanks.

In recent years, the government has provided a relatively small proportion of overall R&D funding. But in the '60s, it provided nearly two-thirds of such funding. At the height of the space program, about one-third of government R&D spending went to space-related innovation. Though the space program eventually shrank in importance, it spawned major technological advances in semiconductors, biomedical devices, and satellite systems. Renewed government investment in technologies to fight terrorism may provide a similar foundation for innovation.

But any analogy to the space race is limited. The war on terrorism is less dependent on technology, especially given the human component in intelligence gathering. Also, government R&D spending will probably never again see the levels reached in the '60s. "Chances are that 90 percent of technology-development funding that occurs in the United States will be in the commercial sector," says Loren Thompson, chief operating officer and a military analyst at the Lexington Institute, a public-policy research group.

Increased military R&D dollars may provide an immediate tonic. But a redistribution of spending as the military shifts its procurement patterns away from what Mr. Thompson calls "the last refuge of socialist buying practices," in which a few companies receive the bulk of defense contracts, is necessary to improve the military's use of technology. The military "needs the commercial sector, because only the commercial sector delivers technology quickly," says Mr. Thompson.

In a prescient report delivered to Congress last summer, DARPA predicted that the two most urgent areas of research were protection from biological warfare and defense against information attack. Now that these needs have become absolutely imperative, the push to refine biosensors that detect pathogens better and to create network security that will further insulate against cyberattacks may lead the way to the next phase of tech innovation.