Although anyone riding along M Street between Connecticut Avenue and Key Bridge may not find this credible, the number of restaurants in the District of Columbia actually declined in 1978.

The dropoff wasn't severe, from 1,080 licenses to about 1,000, and it was more than offset by increases in the suburbs. But leaders of the local restaurant industry awarded two mild frowns rather than four smiling faces as they rated the year just past.

"Our real growth was around 3 percent," said Jack Cockrell, who directs the Restaurant Association of Metropolitan Washington. That figure isn't high enough to make those who direct the nation's economy happy, and the restaurateurs feel no differently.

Their industry fought to keep expense- account tax provisions unchanged (the much publicized battle over the "three-martini" lunch) and won. It has been working on the side of those trying to rescind scheduled increases in the minimum wage.

Restaurateurs agree that the old yardstick of comfort and success, a yearly gorss of $1 million or more, is meaningless today. "You'd be surprised at ones that do $2 million and more," said Cockrell. "There are hundreds that do $1 million." He volunteered than the local industry is "probably overbuilt to some extent."

"Business was all right; no, pretty good," said David Young of Paul Young's Restaurant on Connecticut Avenue. "But the bottome line is way down."

Young cited increased food, labor and energy costs, trends of which the public is well aware. High rent is another factor that is said to put downtown restaurants, particularly those in new buildings, behind an operationsl eight ball.

Another factor, less publicized, is insurance. John Faracalas of Adam's Rib on Pennsylvania Avenue and 21st Street NW and a former president of the Restaurant Association, said his insurance payments jumped almost 33 percent last year; he is expecting further increases. "It shocked me," he said. "So many expenses n ot related to food costs are going up."

Young pointed to the workmen's compensation contributions local restaurants pay. The rate is ties to the federal maritime scale for longshoremen and, according to Young, is the highest in the country. He estimated that Paul Young's will chip in $27,000 this year.

"It's a terrible burden," he said. "We had three claims all last year. Three knicked fingers. That's all. If the District came down to the national median, it would be a relief."

Faracalas and others believe the squeeze on profits is felt most severrly by those restaurants Cockrell defined as "middle of the road, ordinary." Fast-food chain outlets were crowded, though their profitability varied widely.

Most of the restaurants catering to the expense-account trade prospered. But the small, neighborhood restaurant, usually family-owned and -run, has suffered from the high cost of doing business and a change in dining habits.

"Young working people, singles or couples, will eat fast food during the week then go to an expensive restaurant or a place with music on the weekend," said one observer. "They don't bother with anything in between."

"I've been in the business 31 years," Adam's Rib's Faracalas said, "and trying to keep prices moderate the last year or so has been the most difficult task of all."

Trends most cited in local restaurants were toward smaller size, more casual stmosphere and expanded hours. "We've had lines out the door at 4 a.m.," said Mark Caraluzzi of Georgetown's American Cafe. "How do you explain that?"

Caraluzzi and his two partners, all still in their 20s, are building a commissary kitchen and a second American Cafe on Capital Hill. They feel their handcrafted restaurant and menu is riding the crest of another trend.

"People are seeking out quality like never before," Caraluzzi said. "There are the fresh fruit stands on the st reet and specialty food stores. In our place, ingredients are a topic of conversation. Pople are responding to seasonal dishes and asking for recipes. Maybe it's because there's more interest in cooking among men, so they pay more attention. Also I think diners' tastes have expanded. They are more willing to experiment."

Others supported that last statement and pointed to the willingness of Dominique D'Ermo of Dominique's on Pennsylvania Avenue to fly to South America in search of feesh asparagus and fish. "Maybe it was a gimmick," a rival said. "But people go there to try the things he puts on the menu. They're looking for something different labeled "fresh'."

On the other hand, the raft of openings of so-called trendy restaurants -- those with elaborate decor featuring wood and plants and with limited menus -- slowed considerably during the past year.

One theory is that investors have had only limited returns or, in some cases, substantial losses, in these restauarant ventures, many of which were managed and staffed by novices. "You can survive on atmosphere and service for a while," said one veteran. "But if you don't serve good food, you won't make it in the long run."

"The smart operator is still doing well and making money," said a restaurant supplier. "But he has a lot more headaches than he ever did before."

There is no sign, however, that the local restaurant business is at a standstill.Washington's reputation as a restaurant town has grown immeasurably around the country in recent years. "Sure we've lost some (restaurants," said Jack Cockrell. 'But what's come in has been bigger and better."

There will be more in the future.

"Don't you think this town could still use a really good seafood restaurant downtown?" asked one owner.