If ever there was a time when Americans wanted the diversions of movies and television, it is now,” the Alliance of Motion Picture and Television Producers said a couple of weeks ago.

The context for the comment was the drawn-out negotiations between the alliance, the Hollywood studios' trade organisation for labour issues, and the Screen Actors Guild (SAG), which has been without a contract since June and has been considering a strike. Hollywood has still not got fully back on its feet since last winter's 14-week writers' strike, so my (liberty-taking) translation is that the basic message from the studios was: “Come on people, isn't America hurting enough? Let's not deprive a distressed populace of the entertainment that can help them dull the pain, and maybe put a few clams in our pocket along the way.”

More seriously, the comment underscores what an uneasy time this is in Hollywood as its biggest players are trying to get to grips with what the financial and economic meltdown is going to mean for them. As one big-deal agent told me the other day, only projects involving leading stars and producers are being treated like business as usual right now. “Everybody's putting their tail between their legs,” the agent said. “It is hard to get deals done.”

Surreal at the best of times — all right, all the time — sunny Hollywood has so far felt relatively sheltered compared with the sense of catastrophe that has shrouded Wall Street and spooked Silicon Valley. And one thing the denizens of the entertainment industry share with gloom-stricken bankers on the East Coast is that they are not part of a category of people that expects anyone else to feel particularly sorry for their plight. (On the stump in the presidential election campaign, “Joe production executive” does not have the resonance of “Joe sixpack” or “Joe the plumber”).

There are two early takes on how tough times are going to affect the entertainment industry and they may both be correct. The first take is that Hollywood, and the movie industry is going to be just fine for the next couple of years. This is more by chance than design, although there is evidence that entertainment products are less hurt by economic downturns than other sources of consumer spending. (The conventional thinking that the box office actually goes up because people are taking fewer vacations and or holding off on buying expensive items).

Additionally, this time Hollywood has timing on its side. For one thing, Tinseltown has just gone through a boom in new outside sources of funding led by hedge funds and Wall Street sources. One finance executive who worked on several of these fundings, estimates that between $10 billion and $15 billion was raised over the past few years to fund slates of studio films, as well as television projects. This means that whatever films are already in the works don't have to worry about how they are going to be financed and relatively few big Hollywood players are going to have an imminent need for cash.

“Hollywood is pretty well financed right now,” says a finance chief at one of the studios. “What it looks like two years from now, I don't know.”

But there is plenty of betting that even if Wall Street funding evaporates, there will be money from new foreign sources — step right up Middle East investors and Russian oligarchs — to keep the tills ringing.

Meanwhile, the impact of last winter's strike, as well as uncertainty over the negotiations with SAG, have caused a slowdown in production that some have called a “de facto strike”. But according to a recent report in Variety, after a period of dormancy some 40 or more films are going to go into production between spring and summer of next year.

On top of this is the fact that many of the Hollywood majors, including Warners, Fox and the Disney studio, have reduced the number of films they are releasing, while smaller studio divisions, such as Warner Independent, New Line and Paramount Vantage have been restructured or shuttered. In the first announcement of cost-cutting that was directly linked to the financial crisis, Paramount announced that it is slimming its release slate by 20 per cent to 20 films a year in order to ensure that it hits financial targets set by Viacom, its parent.

Which brings us to the second take, that the downturn is still going to hurt everyone and more fallout in LaLa Land is inevitable. Television costs will be under immense pressure as advertising continues to weaken and, if the autumn TV season so far is any indication, viewers are not stampeding to watch all the new shows. (Part of this is still hangover from the strike plus the fact that the presidential election and meltdown have been competing rather well for audience attention.) And, although no one is speaking of an actors' strike as though one were imminent, SAG is still operating without a contract. More worryingly, one senior TV executive posited to me: “I can almost guarantee that you're going to see major cuts across our businesses.”

And to the extent that Hollywood's growth is driven by the adoption of new technologies, a bleak outlook for selling new gizmos this holiday season could lead to further sluggishness in home video, a big cash engine for the studios. Meanwhile, for all the Hollywood executives who are cringing while watching their shareholdings in their media conglomerate parent companies diminish, we can only offer this humble suggestion: “If ever there was a time when Americans wanted the diversions of movies and television, it is now.”

Richard Siklos is an editor-at-large at Fortune magazine

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