“Whether we are in fact in a recession or on the verge, it will be sluggish for a year or two,” said Sung Won Sohn, chief economist with Wells Fargo in Minneapolis.

National economic gauges project a gloomy short-term future. The Index of Leading Economic Indicators released today by the Conference Board showed a drop of 0.3 percent in March following a 0.2 percent dip in February. The index is a measure of business sentiment used to forecast the economy’s health for the next three to six months.

Consumer confidence has dropped about 19 percent since last spring. And the major stock indices continue to roam into bear country, despite the Fed’s lowering of interest rates by 2 percentage points so far this year. The most recent half-point cut was announced today.

“Once business confidence is damaged, it takes years, not months, to recover,” Sohn said.

MEMS companies, whether they are startups or more established, already are seeing a tightening of cash, said George Nichols, a Morningstar analyst who specializes in emerging technologies and initial public offerings. Chicago-based Morningstar tracks and analyzes mutual fund companies and investment strategies.

Venture capitalists are still providing seed money, Nichols and Sohn said, but they are being much more discriminating and demanding. Previously funded startups with poorly conceived business plans and high expenses will be on their own once their funds dry up.

That’s a good thing, said Nichols, who tracked the hyperinflation of dot-coms into 2000 and their fall from grace after last March. “Everyone thought they could make big bucks and it diluted the quality of innovations. Now we’re seeing the opposite.”

Although tech companies in general are in disfavor among venture capitalists and investors, the potential impact of MEMS, microsystems and nanotechnologies on an array of industries gives small tech companies an edge, says Howard Anderson, founder and president of The Yankee Group, a Boston-based tech consulting service. He is also co-founder of the venture capital firm Battery Ventures and the high tech incubator YankeeTek.

“The venture capital door is closing, but only half way on MEMS,” he said. “I’m a venture capitalist and I’m listening to MEMS companies. … And frankly, not listening to an Internet story is refreshing.”

Anderson argues that a downturn benefits venture capitalists because they can buy more for less. “I want to invest when times are bad and sell when they’re good. It’s an opportunity to make more.”

Startups that have burned through capital with no additional funds in sight likely will have to cut staff and sell “the jewels” — their intellectual property, says Bob Sulouff, who works with MEMS labs as director of business development for Analog Devices Inc. Any easing of the tight labor market will help surviving startups that have been struggling to find trained and affordable MEMS specialists.

“We view it as more realistic and better in the long run. For MEMS in particular, there now appear to be more scientists, talent and resources,” he said. Analog Devices, based in Norwood, Mass., makes analog and digital circuits.

With the stock market in a manic state, few if any small tech companies are likely to go public, Nichols said, and if they do they will sell for much less than even a few months ago. Agere Systems raised about $3.6 billion – $2.5 billion less than what it originally hoped for – when it went public on March 27. The same holds true for acquisitions, he said, especially trades based on stock, since most larger companies have seen their own valuations drop.

Janusz Bryzek, president and chief executive officer of Transparent Optical Inc. in Santa Clara, Calif., recognizes the economic downturn is a two-edged sword. As a veteran entrepreneur who has launched five MEMS companies in 18 years, he acknowledges that what he may lose in valuation he regains in opportunity.

“Technology will change the life of everyone,” said Bryzek, whose company develops MEMS products for optical networks. “The venture firms know we are setting the pace. They have been through a correction before and they are not scared. We’re on the cutting edge.”

The best small tech companies will not only survive but also improve, Sulouff said. “A tough down cycle forces a company to be more innovative, more aggressive and responsive, putting new equipment and processes in place.”

Tom Kinnear, director of the University of Michigan’s Institute for Entrepreneurial Studies, points out that the attrition level for startups is high, even without a hostile economic climate. Add fiscal turmoil to the other hurdles any startup faces — marketing, acceptance, competition — and the carnage grows.

“Bad times never help anybody,” he said.