(FORTUNE Magazine) – Economists, like lawyers, are a quarrelsome lot. They seldom agree on anything more complicated than, say, Adam Smith's birthplace (Kirkcaldy, Scotland, in case you didn't know). But when it comes to the U.S. slowdown, most Wall Street economists are of the same mind: We're undergoing a sharp adjustment. Nothing to freak out about. Just a realignment to more sustainable and moderate growth levels. There'll be pain along the way, but it should all be over in six to nine months at worst. Whew!

Then there's the Stephen Roach view. And rosy it's not. Roach, Morgan Stanley's chief economist, argues that firms have spent far more on technology than they can ever hope to get back in productivity gains. Now, he says, CEOs are waking up to their excesses and slashing IT budgets--and they aren't likely to boost them again soon. If Roach is right, things could get really ugly. The U.S. may be facing a protracted slump brought on by a total collapse in business spending on technology.

Although most economists still don't completely accept Roach's prognosis, more have started to take it seriously as the tech shakeout continues. Even a long-time bull like CSFB chief strategist Tom Galvin admits that the IT bust scenario is the one thing that keeps him up at night. And while there's reason to think that Roach is being overly gloomy--we'll tell you why a little later--he does make a fairly compelling case.

Roach's argument goes like this: In the rush to get wired to the Internet, corporate America overdosed on technology and now must check in to the business equivalent of the Betty Ford clinic. "IT budgeting discipline altogether vanished," Roach says. Indeed, big IT investments were often done on faith. CEOs weren't asking "Can I afford to do this?" but "Can I afford not to?" Y2K fears also fueled the frenzy. Trying to forestall a millennium meltdown, firms pushed capital outlays to new heights. Suddenly, spending on equipment and software accelerated from an annual rate of 9% in the fourth quarter of 1999 to 21% in the first quarter of 2000. And business spending on fixed investments reached a record 13.9% of GDP by the third quarter of 2000, considerably higher than the average of 10% for the past 15 years.

Today CEOs are scrutinizing the payback from all that IT spending. And what they'll find, Roach argues, won't be reassuring. In the past decade, average productivity growth doubled to 2.4% a year, and most economists, Alan Greenspan included, argued that it was driven by IT advances. But now even Greenspan seems to fear that those gains were induced not by IT itself but by spending on IT. In other words, if a firm buys a new computer, the very act of spending will boost output in the economy, and, assuming employment remains steady, increase productivity. (Remember, productivity is output divided by the number of workers.) So what happens if our accelerated productivity growth came from simply throwing money at IT rather than from efficiency gains generated by all that newfangled technology? As the economy slows, so, too, will productivity growth. Then firms will have little incentive to keep pouring money into IT. If companies lose faith in technology, and spending dramatically reverses, there could be a negative self-reinforcing cycle. A lack of investing makes the economy worse, which leads firms to put off IT purchases even longer. "It's a classic case of an unsustainable investment boom," says Roach, "and it will take time to purge the excesses."

At certain points during the past several weeks, Roach's scenario seemed to be playing out before our eyes. Cisco Systems, Compaq, Nortel Networks (the list goes on) have all sounded the same warning: Customers are pulling orders quickly. In Silicon Valley they're calling it a "buyer's strike."

But it's one thing to point out that IT spending is slowing and another to suggest that firms doubt the benefits of technology and won't be buying PCs or routers or anything else for that matter. So far the data just don't support Roach's view. According to figures for the fourth quarter, business spending on IT was still growing. It did slow from a 31.4% annual pace at the start of last year to 10.7% by year-end, but clearly firms are still investing in IT. Data for the first quarter won't be available for several weeks, but new orders for computers, communications equipment, and machinery also indicate that spending is up.

By almost every account, corporate America remains committed to IT. Leading firms like GE, Intel, Caterpillar, and Merrill Lynch have all said they won't alter their strategy even if the economy worsens. Of course, they could change their minds. But if they do, it won't be because they have lost faith in technology but because they find themselves in a financial crunch. Companies still believe the Internet can help their businesses--and for good reason. According to a survey by PricewaterhouseCoopers, firms that embraced the Internet averaged a 13.4% jump in productivity last year, compared with 4.9% for those that did not.

Jim Glassman, a senior economist at J.P. Morgan Chase, is among the folks who dismiss Roach's thesis. IT investments won't go bust, he says, because firms have already seen big payoffs in the form of higher profits. At the end of the 1990s, the share of corporate profits to output was at its highest level in 30 years. That couldn't have occurred without improved efficiencies and lower costs from IT.

Of course, no one knows how all this will play out. If the supposed gains brought on by IT are really a mirage, then productivity will decline along with the economy. But the fact is that productivity expanded at an annual rate of 2.2% in the fourth quarter even as the economy ground to a halt. So for now, at least, Roach's nightmare doesn't seem to be coming true.

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