(FORTUNE Magazine) – Ever since George W. Bush set his sights on toppling Saddam Hussein, prognosticators have had three main worries about the U.S. economy: What if oil prices surge and then stay high? What if the war is not only nasty and brutish but also long? And finally, on the domestic front, what if capital spending continues to stall? In a matter of weeks, two of those worries have faded: Oil has tumbled $10 a barrel, and while the war isn't over, beheaded statues of Saddam litter the streets of Baghdad. That leaves the third question, which is an important one: With consumers unlikely to power a recovery on their own, will business spending be robust enough to pump up growth?

At the moment most companies are at best paralyzed and at worst still cutting back. Duke Energy announced recently that it would slash investment spending by $200 million this year, while companies from aerospace (Cessna) to electronics (Solectron) to automotive services (Midas) have announced large-scale layoffs. The economy lost almost half a million jobs in February and March alone, more than double the number for all of last year. Activity in services, the economy's pulse, dropped abruptly last month for the first time since the aftermath of Sept. 11. And the long-awaited manufacturing recovery has stopped dead in its tracks. (For the toll SARS is taking, see "Masks Can't Stop This Virus" in First.) The Institute of Supply Management (ISM) index, an important indicator of manufacturing activity, fell to 46.2 in March, from 50.5 in February; a reading under 50 is a sign of contraction.

Capital spending on computers and other technology had started to show a slow but steady improvement last summer. By the end of the year the recovery had spread to other sectors, and the broad measure of business spending recorded growth for the first time in more than two years. Nondefense capital goods orders, a key measure of business investment, rose 5.2% in January. Then came February, when everything ground to a halt. That same measure of capital spending fell 3.7%, and business confidence crumbled. The war, says Richard Dekaser, chief economist of National City Corp., a financial services group in Cleveland, made it "very hard for firms to plan and make spending decisions."

No kidding. But that backward look doesn't capture real progress on the oil and war fronts. Richard Berner, chief U.S. economist at Morgan Stanley, calculates that a $9-per-barrel drop in oil prices, if sustained, is the equivalent of a $50 billion tax cut for businesses and consumers. Robert DiClemente, an economist at Salomon Smith Barney, believes conditions may already be in place for an uptick in capital spending. "I think there are pent-up needs beginning to build in the economy, especially among businesses," he says. One of the most telling signs is that inventories across major industries are currently at historically low levels according to government statistics. In January the ratio of inventory to sales for all businesses stood at 1.36, vs. 1.5 when the economy emerged from the 1990--91 recession. March's unexpected rise in retail sales may further prod firms to boost inventory.

Business sentiment, which admittedly can change with the drop of a bunker buster, seems to be headed up. Economy.com's index of business confidence, based on a weekly survey of senior executives, stood at a mere 45.1 in mid-March. By early April, with the war well underway, it had risen to 70. "A change in psychology can lead to a strong turnaround in spending," says James Glassman, chief U.S. economist at J.P. Morgan Chase, "especially because the business sector is so lean."

How will we know we're in the clear? Economists are paying the most attention to equipment and software spending, which they predict will grow 7% to 10% this year, vs. 6% in the second half of 2002. That's not enough to create a lot of jobs (for that we'll probably have to wait at least another year), but it would keep the economy growing slowly. And right now, a jobless recovery sounds like good news.