"There is no question, some permanent damage has been done," says Michigan Gov. William Milliken, surveying the devastating impact on the state of a three-year depression in the auto industry.

Like weights on a fishing line, autos, steel, trucking and related manufacturing tied to them have dragged down the economy of the Midwest to a level below any other region in the nation.

Michigan, at the center of the line, has fallen the farthest because of its extreme dependence on automobile production, which accounted for one-third of all manufacturing jobs in the state before the current slump began. That was in 1978, when U.S. auto production was a near-record 9.3 million units.

The grim statistics for 1981 auto production are displayed on a huge illuminated sign raised by Goodyear Tire & Rubber Co. on the route into Detroit from Metro airport. The year-end total of less than 6.2 million units made last year the worst since 1961.

United Auto Workers economist Sheldon Friedman says 193,000 auto workers were on indefinite layoff as of mid-December, most with little hope of being recalled to work soon. Since the beginning of 1980, 250,000 autoworkers have lost their jobs, probably permanently, and that number is swelled two- or three-fold by the loss of jobs related to auto production, in sales, service and parts supply.

Compared with 1978, employment in all manufacturing has fallen 17 percent in Michigan, 13 percent in Indiana, 9 percent in Illinois and 7 percent in Wisconsin. Throughout the nation, the decline in manufacturing employment for the same period was only 3 percent.

Unemployment statistics reflect the damage to the industrial Midwest. The region's jobless rate climbed above 9 percent in the second quarter of 1980, fell to 8.9 last spring, and is expected to remain above 9 percent throughout 1982, according to the Chase Econometrics Regional Forecasting Service. Michigan's rate has been the worst--Chase expects it to exceed 13 percent this quarter.

"The problem of getting a job is greater than at any time since the Depression of the 1930s," said George Cloos, vice president of the Federal Reserve Bank of Chicago.

A sharp decline in steel production weighs down the other end of the industrial states, in the steel centers of Ohio and Pennsylvania. "I'm troubled by a nationwide unemployment rate of 8.5 percent, but the rate in the industry is somewhere between 15 and 20 percent, with another 5 percent on layoff," says Donald Trautlein, chairman of Bethlehem Steel Corp. "These are real depression conditions." The industry has been weak for four years, Trautlein said. "I hope this isn't going to be forever."

In the Midwest's steep fall from prosperity, some fundamental relationships between companies and employers and producers and suppliers have been cracked and new patterns are emerging. As 1982 begins, the auto companies and the UAW will be engaged in unprecedented talks on a possible swap of wage and benefit concessions in exchange for profit sharing and job security for those who remain. In steel, there is the example of the Timken Co. of Canton, Ohio, which insisted on union concessions last year before it would agree to open a new Ohio plant.

Out of necessity, relationships between Midwest producers and suppliers have become much more reasonable and cooperative, says Neil Hamilton of Cleveland's Eaton Corp., a major supplier of parts to the auto and truck industries. There is more concern for quality, more attention to each others' problems, he said.

Gov. Milliken hopes that changing attitudes can help make Michigan and the Midwest a more attractive place for new businesses.

In his final term as governor, Milliken is promoting a campaign to welcome high-technology ventures to Michigan, using limited state funding as part of the bait. Robotics and molecular biology are two fields where Michigan can lead, Milliken says.

The teeth in this effort is a bill that Milliken pushed through the legislature last month that tightens eligibility for Michigan's $1 billion workers' compensation program in hopes of reducing employers' costs by $100 million a year in the state.

"All of us have to recognize that we're in this together," Milliken said in an interview. A telling sign of the times is the passage of his proposal last month despite all-out opposition by the UAW and Michigan AFL-CIO, which haven't lost a major fight in years in the Democratic-controlled Michigan legislature.

The sacrifices will not fall equally on all, Milliken acknowledged. Ironically, the average income of employes in Michigan is among the very highest in the nation. It's a good life for those who are working. "For those who aren't, it's awful," said Milliken. And with continuing cuts in state and federal aid to the unemployed and impoverished, the gap between haves and have-nots is widening, he said.

However the efforts to entice new businesses proceed, the Midwest will not get well until autos and steel recover, experts agree. And that won't happen until the entire economy is headed upward again.

Estimates differ on when that will be. One of the optimists is James M. Dawson, senior vice president and economist of Cleveland's National City Bank. Dawson is counting on the Federal Reserve System to provide enough financial credit to permit a healthy business expansion after the first three months of this year, with a decline in the prime interest rate to 12 or 13 percent.

"Our branch managers say that if mortgage rates are down to 13 percent, they'd be swamped with mortgage applications," said Dawson. And the same is true for autos. "I think the Federal Reserve has a stake in helping the recovery in 1982. If we don't have that recovery, I think their independence could be threatened."

John Davis, senior vice president of the Federal Reserve Bank in Cleveland, doesn't share Dawson's optimism or his view of the Fed's role, however.

"This recession is going to be more severe than most company projections have anticipated," he said. "We're going to hear, again, the argument: 'Don't choke off the recovery. Open up the money supply some.'

"If we do pump it up, we can destroy rather easily all of the progress we've made in reducing inflationary expectations and in restoring the credibility of the central bank." And that isn't in the cards, Davis predicted.

"We'll be under continuing pressure to back off and we have no intention of doing that," said Karl Scheld, senior vice president of the Federal Reserve Bank of Chicago. "We just don't gain anything from it."

These views suggest a slow, incomplete recovery for both steel and autos, and that, in fact, is what most economists expect.

"I see a recovery, but not prosperity, for the auto industry next year," says Thomas Swanson, economist for Sears, Roebuck & Co. in Chicago.

"It's clear the auto industry will never get back to where it was," says Cloos, of the Chicago Fed.

If the pattern of previous recessions holds true, the Midwest will not regain the ground it has lost, according to Roger Hinderliter and Robert H. Schnorbus, economists with the Cleveland Fed.

The cautious handling of inventories has been both a bane and a blessing for the region. Facing continuing economic instability, producers have kept tight controls over inventories, slowing down industry during the infrequent good periods in the past few years. "People are not going to maintain large stockpiles of coal, waiting for the economic upturn to come," said R.E. Samples, chairman of Consolidation Coal Co.

But when the recovery does appear there could be a rush to fill the pipeline, and if that happens, the industrial regions should rise faster than the rest of the country, say Samples and Trautlein. "It's amazing how fast things can move," said Trautlein.

"There will be a quicker reaction when the upturn comes," says Adrian T. Dillon, senior economist of Eaton Corp.

In addition to its dependence upon basic industries, the region suffers in other ways, Hinderliter says. Most new jobs are created by smaller firms, the active nerve endings of the economy, where both decay and growth occur at a rapid pace.

Larry Sears is president of Hexagram, Inc., a small Cleveland firm that manufactures automated electronic controls for machinery. In today's tough competitive environment, "companies are screaming for higher quality and productivity," said Sears--and that requires new, sophisticated machinery controls.