There is a new optimism in Silicon Valley and among most US economists who expect a recovery early this year fuelled by increased business spending on technology, writes Conor O'Clery.

Jamis McNiven, the self-styled "pancake guy" who runs Buck's Diner in Woodside, California, has a unique insight into the American economy. Many of the venture capitalists and entrepreneurs of the tech revolution did their first deals in the booths of his up-scale diner in the heart of Silicon Valley.

Craig Johnson, the founder of Venture Law, always has a January 1st New Year's bash at Buck's. The mood this year apparently was upbeat, despite the devastation visited on the heartland of technology in 2001.

"Craig, Guy Kawasaki, founder of Garage Technology Ventures, and others joined me in proclaiming that 2002 will be the year in which Silicon Valley will be back like a lion," Mr McNiven informed me, adding that the revellers noted in particular "remarkable progress" with 3D silicon wafers, genetic engineering and transportation.

The bulls on Wall Street seem to share the growing belief that volatile technology stocks are poised to benefit from an economic recovery. On Thursday the Nasdaq Composite Index, dominated by technology companies, rose 3.29 per cent, its biggest one-day gain since December 5th and an advance of 44 per cent since hitting bottom on September 21st.

The reason for the new optimism in Silicon Valley and among most US economists and analysts is twofold. There is a growing conviction that the recession will end sooner rather than later - probably after another three months - and there are signs of fresh business spending on costly technology like software applications.

Business spending, is the key to recovery. This US recession was driven by the collapse in spending by companies rather than by consumers, partly due to the exhaustive modernisation undertaken by corporate America in the run-up to Y2K which left little incentive to upgrade technology.

The most positive sign is that orders for high-tech equipment rose in October and November, after plummeting 50 per cent in the previous 18 months.

The golden days are not back yet; spending on telecommunications equipment is still falling, investment in other important areas like the automobile industry remains feeble, and many big tech companies are still reporting big losses. But the pain is easing.

Indeed, continuing losses are now always bad news for investors. Take the case of Manugistics.

Two weeks ago the Maryland tech company reported a big loss but it was less than forecast by analysts, and as it also reported greater confidence about orders for its profit optimisation software, it's stock price went up.

Now that high-tech spending is stabilising, excess inventories are falling and positive earnings announcements are increasing, experts are practically unanimous in their view that the long-awaited turnaround is coming soon.

Certainly that is the combined view of the 55 economists who participated in the annual Wall Street Journal forecasting survey for 2002, the results of which were published yesterday. The consensus was that America's real gross domestic product adjusted for inflation would rise at an annual rate of 0.87 per cent in the first quarter, by 2.4 per cent in the second quarter, and by 3.6 per cent during the second half of the year.

While certain that the recession which began in March last year was coming to an end, they disagreed on timing. Many saw the economy continuing to contract during the first half of the year, others thought the recession was already all but over.

ECONOMISTS are not always the most reliable of forecasters. Few of the 55 got it right at the start of last year. The best in the pack was Brian Wesbury of Griffin Kubik, Stephens and Thompson, who factored recession into his forecasts before anyone else. He believes now that the recession is petering out and his prediction is for fairly strong growth by the second half of 2002.

"My belief is that recessions are caused by policy mistakes," he told me from his Chicago office. The United States made three policy mistakes in 2000, "that's why I predicted recession".

The first: the decision by Federal Reserve chairman Alan Greenspan "to push interest rates up too far and hold them there for too long - they thought inflation was coming, I think they were wrong".

The second: allowing federal taxes to get to record levels, "20.6 per cent of GDP, the highest ever in peacetime".

The third: "The regulatory environment was bad especially on the energy front and in broadband which was not able to expand as fast as it should have".

"This year we've cut interest rates, we've cut taxes, and because of that I think our economy will recover. In other words we've fixed the mistakes that we made in 2000.

"I still think we are in recession. I think the first quarter will be negative, my forecast is minus 0.3 growth. In the second quarter we will see slight positive growth, about 1.5 per cent, and then we will accelerate to 3.8 per cent with the fourth quarter.

"There will not be a huge rebound right away but I think this is the beginning of another long recovery in the US with very strong growth and low inflation because this new era (of technology and high productivity) is still with us," said Mr Wesbury.

The Irish economy he noted had excelled for the same reasons as the US, driven by technology and productivity, and the boom in Ireland would continue "as long as Ireland keeps tax rates low".

The owner of Buck's Diner had his own spin. "It seems to me," said Jamis McNiven, "that Churchill, Napoleon and even Nixon were tossed out on their keesters, only to come roaring back with a big second act."