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For more than a century, dream weavers have been going to Hollywood to create alternative worlds of fantasy and escape. Which may be why, amid gloomy economic times, the town is heading into this weekend's Oscar festivities with a sense that it may be immune to the economic influenza infecting the rest of the world.

Since the beginning of 2009, as the U.S. and Canadian economies have hemorrhaged more than 700,000 jobs and major stock indices have toyed with people's psyches like felines batting around injured mice, Hollywood has been busy setting box-office records. Last month, riding a massive wave of interest in its populist wares like Clint Eastwood's Gran Torino and the surprise hit comedy Paul Blart: Mall Cop, the U.S. film industry enjoyed its first-ever billion-dollar January. Last weekend, as the U.S. celebrated President's Day and workers in some Canadian provinces enjoyed regional holidays, the North American box office had its best February weekend on record, taking in more than $220-million (U.S.).

It may be that the recession is actually helping. “Even though people always complain about the cost of movie tickets, now they're looking like a relative bargain compared to everything else that's available outside of the home,” suggested Paul Dergarabedian, box office analyst for Hollywood.com.

But nothing is exactly as it appears in Hollywood, and those impressive theatrical revenues are masking some worrisome trends.

For starters, the traditional awards-season marketing burst is losing its magic, evidenced by steadily declining ratings for the Oscar broadcast over the last decade. The five movies nominated for best picture this year have almost entirely failed to capitalize on their raised profiles. Only one, Slumdog Millionaire, was in last weekend's top 10, riding a wave of little-film-that-could goodwill of the sort that propelled Juno, Little Miss Sunshine and Sideways in previous years.

Slumdog's unlikely success, however, underlines another of the industry's stress points. Made in part under the aegis of Warner Independent Pictures, the film almost ended up going straight to DVD when that company was shuttered by its parent, Warner Bros. Fox Searchlight picked up the film on the cheap last August, just before it debuted to popular acclaim at the Telluride and Toronto film festivals.

Warner Independent was only the latest specialty division to be axed by a lumbering corporate parent. But as numerous studios have shut their so-called indie divisions over the last two years, they have cut off relationships with many of the industry's most imaginative writers and directors. And they may also be denying themselves a pipeline for future Oscar contenders – three of this year's nominees for best picture are being distributed by specialty labels, including Milk (Universal's Focus Features) and The Reader (The Weinstein Company).

“The edges of the industry are really where the most vital energies come from. That feeds the expansion of the core,” said Richard Lorber, president of Koch Lorber Films, a New York-based specialty distributor, who noted that filmmakers like Danny Boyle (Slumdog Millionaire) and Chris Nolan (The Dark Knight) began their careers in the world of micro-budget films. “The real health of Hollywood has to be based on the continued nourishing and growth of the talent pool.”

But the economics are crumbling, most starkly with home video sales. This is especially troubling to the studios because most feature films lose money at the box office and only climb into the black once they hit other markets. The Alliance of Motion Picture and Television Producers (AMPTP) estimates that major studio releases cost about $100-million to produce and distribute, and much of that vast sum is invested in advertising designed in part to raise the film's profile for home-video release.

Now, executives are poring over the numbers to see if they will continue to add up. A report last month by Bernstein Research found some ugly indicators, with home video sales dropping 9.2 per cent in the third quarter of last year compared to 2007, and falling an additional 13.1 per cent in the fourth quarter as the pain of the recession spread.

With alternative forms of distribution continuing to expand, including mail-order video rentals, video-on-demand and online streaming, audiences are opting to rent movies for $5 rather than dropping $20 to buy a DVD they may never watch again. In the last two weeks, as media companies have unveiled their quarterly earnings, in many cases showing dismal losses, studio chiefs and Wall Street analysts have been debating whether consumers, having been forced by the recession to break themselves of the DVD-purchase habit, will resume buying discs after the wider economy recovers.

And there are other storms on the horizon. Funding for tax-incentive programs is drying up as states like New York reduce ballooning deficits. The credit crunch is making it difficult for even guaranteed hit-makers such as Steven Spielberg to attract financing. Hedge fund cash has all but dried up, and unrest among the rank and file of the Screen Actors Guild, which has yet to sign a new contract with the AMPTP, has many people nervous. Last month, in what may be a sign of things to come, Warner Bros. announced it was eliminating 800 positions, about 10 per cent of its worldwide work force.

It's enough to make a studio executive call for a re-write.