The prospects for Maryland's economy this year can be boiled down to a single word - uncertainty.

Most experts agree that the economy has emerged from recession and doesn't appear headed for a "double-dip," or sharp downturn. Indeed, they say, the year should be marked by modest growth.

But unlike the late 1990s, when the biggest challenge for economists was predicting the speed at which the economy would grow, this year is riddled with wild cards that could stall the recovery and undo progress that has already been made:

Most economists believe that war with Iraq is likely, and they worry about its duration. A prolonged conflict would shatter confidence among consumers and businesses, jolt the stock market, fuel unemployment and result in an even slower economy.

Consumer spending propelled the economy out of recession in 2001 and kept growing. Consumers snapped up houses, cars and other goods at a furious pace. But their confidence has tempered and there is a fear that they will pull back. A big retreat would be devastating since consumer spending accounts for two-thirds of the economy.

Gov.-elect Robert L. Ehrlich Jr. steps into office faced with a mammoth problem - a $1.8 billion budget deficit. If Maryland balances the budget with deep layoffs and higher taxes or fees, the state's economic recovery will be dealt a setback.

Sales of homes and automobiles were white hot last year as interest rates plunged. But both sectors began slipping late in the year and that is expected to continue this year. A mild cooling will not be profound, but a sharp downturn would almost certainly kill the state's chances for real growth.

Companies have been in a deep freeze. They haven't hired or spent money on inventory and capital equipment. While large-scale hiring is unlikely, a pickup in capital spending is critical to economic growth.

Situation in flux

"I think you have a profound uncertainty," said Richard P. Clinch, director of economic research at the University of Baltimore. "The [economic] indicators are all over the place. Some things are pointing down, and some things are pointing up."

Indeed, there is a wide range of opinions over where the economy will end this year.

At one end of the spectrum is James E. Glassman, senior U.S. economist at J.P. Morgan Chase & Co. in New York, who expects the nation's economy to grow by as much as 5.25 percent this year - if business expands and a potential war with Iraq is short.

He even expects investors to forget about the numerous financial scandals - Enron, WorldCom, Tyco International, Rite Aid and Arthur Andersen - that shook the stock market.

Optimism

"I think last year's issues will pass," Glassman said. "I can't remember a time when there was reason to be more optimistic than at this moment. My guess is by this time next year we won't be talking about the economy anymore."

At the other end of the spectrum is Paul Kasriel, director of economic research at the Northern Trust Corp. in Chicago, who says the economy will struggle because debt-laden consumers will cut spending. At best, he says, the economy will grow at 2.6 percent, well below its historic 3.4 percent average.

"I must say, I have some questions whether we will make it to that," Kasriel said. "It looks to me at best another year of very moderate, subpar growth."

But most economists believe that the economy will end up in the middle, growing at about the average rate. Maryland, they add, could expand faster than the nation, spurred by a handful of sectors.

"There will definitely be bright spots," said Scott Hoyt, director of consumer economics at Economy.com in West Chester, Pa. "We are definitely expecting some gradual improvements in the state's economy."

One of those will be Maryland's defense contractors, which employ about 15,000 workers in the state, and will benefit from the Bush administration's military buildup, economists say.

AAI Corp., a Hunt Valley-based defense contractor, for instance, will profit as it begins building 41 unmanned surveillance drones for the U.S. Army, which plans to spend $100 million on the project.

Defense giants

Billions of dollars are also headed for defense giants Lockheed Martin Corp. of Bethesda, and Los Angeles-based Northrop Grumman Corp., which has more than 10,000 employees in Maryland. The companies make everything from fighter jets to aircraft carriers.

Military "procurement spending is growing strongly," Hoyt said. "It will be a support to the [Maryland] economy as we go forward."

Service jobs - those in engineering, law, accounting and public relations - also should grow.

Even financial services companies, such as T. Rowe Price Group Inc., Legg Mason Inc. and Ferris, Baker Watts Inc., which have been beaten up by the stock market's three-year decline, should have a better year, experts said.

"I don' think the stock market has another 30 percent drop in it," Clinch said. "The downturn from the decline in the value of the stock market has occurred. The effects now can only be positive as the market recovers."

New York investment banking giant Morgan Stanley is making a bet in that direction, planning to open an operations office in Fells Point this year, bringing at least 150 jobs by 2005 and another 450 jobs over the next eight years.

Perhaps the biggest issue facing the country and Maryland is war with Iraq. While war may be good for defense contractors, it threatens to shake the economy's most critical underpinning - confidence.

"Right out of the chute ... it [war] has constituted a powerful headwind," said Kenneth Mayland, economist at ClearView Economics in Pepper Pike, Ohio. "The potential ... war with Iraq has been a black cloud hanging over the economy and has created a great deal of uncertainty."

Economists see the war playing out in one of two ways. First, a conflict that ends quickly that sparks a rally in the stock market, builds confidence among consumers and spurs investment and hiring by businesses. Or a protracted war, which would send stock prices tumbling, prompt additional layoffs and jolt consumer confidence.

"If that [war] can be over with early, one big psychological obstacle will be out of the way," said Thomas F. Carpenter, chief economist at ASB Capital Management Inc. in Washington. "We may have a fairly dynamic economic backdrop."

If consumers get spooked, the economy will pay dearly, since they single-handedly carried the country out of the 2001 recession and are necessary to growth this year.

"The sector that has been responsible for driving the economy forward might begin to stall ... in a big way," said Anirban Basu, senior economist at RESI Research & Consulting, Towson University's economics research arm. "If the consumer is not out there, the effects ... keep going through the economy."

Consumers spent a record $6.6 trillion in last year's third quarter, up 3.7 percent from a year earlier. But they tightened the purse strings late in the fall as more of them lost jobs and slipped further into debt.

Some experts believe that consumers will continue to spend. "I don't expect new drama from the consumer," said Glassman, the J.P. Morgan Chase economist. "The consumers are on automatic pilot: 'You pay us, we spend.' Consumers are not erratic."

But others see signs that point to a pullback. Among them: household debt has shot to record levels; personal income is growing slowly; foreclosures are at a 30-year high; and people are pumping more money into savings.

"If our income is not growing more rapidly and our savings rate is starting to move up, that implies a fairly weak growth in consumer spending ... which in turn will have some ripple effects in the economy," said Kasriel, the Northern Trust economist. "They will buy less from Wal-Mart."

The reverberations would extend far beyond Wal-Mart. If consumers don't spend, sales of houses and cars and durable goods could plunge.

Home sales rocketed to record levels last year, spurred by the lowest mortgage rates in four decades.

The pace is expected to slow this year, although most experts believe that the sector will hold up even though interest rates are expected to rise.

"The buyers are there," said Theodore Reichhart, president of First Horizon Home Loans in Baltimore. "There is a large pipeline of pre-approved buyers who are looking for real estate. The problem is going to be inventory: Are there enough houses out there?"

After three sizzling years, auto sales are expected to fall, too, because consumers have spent heavily and are showing signs of tapping out.

Automakers sold an estimated 16.7 million cars and light trucks last year. While that is strong, it is down from a peak of 17.4 million in 2000. Sales should slip by another 200,000 or more vehicles this year, according to the National Automobile Dealers Association.

Car registrations in Maryland are expected to fall almost 5.5 percent, or to about 390,000, this year, Hoyt said.

"There is no pent-up demand," said Hoyt, the Economy.com economist. "Auto manufacturers have been working so hard to stoke demand that they have enticed people to buy ahead."

Reducing the deficit

Reducing the state's ballooning deficit is another looming issue that will require a delicate touch. Cutting too deeply could slow the economy and push the recovery further off.

Governor-elect Ehrlich has been out front saying he will neither raise sales and income taxes nor lay off state workers. Most experts believe that he will have to make some cuts among Maryland's 108,956 state government employees.

While layoffs might help reduce the deficit, unemployment benefits would rise, payroll taxes would fall and there would be fewer consumers to buy homes, cars and shop in the malls.

Job cuts "would cause even more of a drag on the public finances," Basu said. "That is part of the irony."

A key question facing Maryland is whether private industry offsets these losses by hiring workers.

While Maryland's unemployment rate was a seasonally adjusted 4.0 percent in November, well below the 6 percent national average, many companies slashed payrolls last year, and those that didn't were not hiring.

Some of the biggest cuts came among technology firms and manufacturers.

Manugistics Group Inc., a Rockville software company, cut 350 jobs; Aether Systems Inc., a wireless communications firm in Owings Mills that has cut its payroll in half over the past two years, laid off 400; and Ciena Corp., a maker of fiber-optics equipment, cut 450, slashing its work force by 44 percent in about a year.

Weakness in jobs

The prospects are not strong for job growth this year.

Economists expect the state's unemployment rate to rise during the first half of the year to the 4 percent or 5 percent range.

In the first quarter alone, Black & Decker Corp., the Towson-based toolmaker, will begin cutting 1,300 jobs at its Easton plant, which it plans to close by the end of the year, leaving the company with virtually no manufacturing presence in its home state.

And Bethlehem Steel Corp.'s Sparrows Point operation, which employs 3,300 workers, also hangs in the balance. Bethlehem filed for bankruptcy protection in October 2001.

"There are just not going to be a lot of new jobs created," said Charles W. McMillion, chief economist at MBG Information Services in Washington.

While McMillion sees no "huge roadblock," everything will continue to struggle throughout the year, he said.

"I think we will make it through another year, but I don't think we will have terrific growth," McMillion said. "There is a lot of uncertainty."