SAULT STE. MARIE, ONTARIO -- When an ambitious Boston businessman named Francis H. Clergue came to this sleepy canal town in 1894, folks thought it was a gift from heaven.

Clergue founded the Consolidated Lake Superior Co., an industrial empire of pulp mills, ore mines and steel factories that, boosted by generous incentives by the Ontario government, grew to a $117 million conglomerate by 1901 and helped give the province economic dominance in Canada.

Only two years later, however, Consolidated Lake Superior was bankrupt, federal troops were battling 3,500 rioting workers and an overextended Clergue was picking up the pieces of his ruined businesses.

While no one in Canada's biggest and richest province is predicting a repeat of Sault Ste. Marie's disaster in the face of the country's first economic recession since 1981-82, hard times have definitely come again to this once prosperous industrial city situated between Lake Superior and Lake Huron.

What is unsettling, economists said, is that Sault Ste. Marie is a microcosm of the industrial and financial heartland of Ontario, which, in turn, has traditionally set the pace for the economy of the whole of Canada. Late last month, Canada officially entered a recession after six consecutive months of economic shrinkage recorded by the central statistics bureau, and the effects of the downturn are clearly visible here.

Shops are empty, "For Sale" signs hang outside failed businesses, the city has had to increase its welfare budget by almost one-third and unemployed workers drive across the international bridge to Michigan to stretch their budgets by filling up with less expensive gasoline.

"It hasn't been a good year," Mayor Joseph Fratesi said, reflecting on the twin curses of an economic slowdown and a debilitating 110-day strike by 6,000 workers at the sprawling Algoma Steel works, which, although settled earlier this month, is likely to result in layoffs because of a continuing decline in the demand for steel in North America.

One of the few signs of economic activity in downtown Sault Ste. Marie is construction of a new provincial headquarters for the Ontario Lottery Corp., which locals said is a bitter irony because for many workers, winning the lottery could become the only way of avoiding personal bankruptcy.

Another irony to which local business officials point is that a war in the Persian Gulf and a disruption of oil production there might help a one-industry city like Sault Ste. Marie: A boom in Canada's oil fields would almost certainly boost Algoma Steel's tube mill operations and create new jobs.

"Historically, Algoma has been mother to everyone. It's hard to make people understand that maybe it's not going to be mother to everybody forever," said D. James Rudack, president of the Sault Ste. Marie Development Corp.

Much of Sault Ste. Marie's steel goes into making cars, and with automobile sales off more than 5 percent in each of the last two years, Algoma reported net earnings last year of only $8.4 million (Canadian), compared with $81.2 million the year before. The outlook for this year is just as bleak, company officials said.

Rudack said, "The time hasn't come for the last man here to turn out the lights, but I assure you, we've got to diversify more if we're going to weather recessions like this. We're trying to do that, but it takes time."

First in Booms, Busts Historically, Ontario is the first province to benefit from a booming economy in Canada, but it also is the first to show the effects of a downturn. This year has shown no deviation from that pattern.

The Ontario economy came out of the 1982 recession full tilt, as the manufacturing sector thrived on pent-up consumer demand and the depreciation of the Canadian dollar. The unemployment rate dropped to less than 5 percent from more than 10 percent between 1983 and 1989; residential and commercial construction boomed; investment in manufacturing and mining increased dramatically; and wages steadily rose as workers poured in from less prosperous provinces.

"It was Fat City around here," Rudack said. "We're dead center in the continent, you know. If you're interested in having both U.S. and Canadian markets, what better than doing business in Sault Ste. Marie? Two nations, one city. What's better than that?" he asked, referring to the proximity to Sault Ste. Marie, Mich.

When the U.S.-Canada free-trade agreement became the central issue in the 1988 federal election, Rudack recalled, even the trade unions, which opposed it almost everywhere else, supported it in Sault Ste. Marie.

All that has changed now, partly because of a tight monetary policy, imposed by the government of Prime Minister Brian Mulroney in an effort to curb inflation, and the resulting high interest rates and a steadily rising value of the Canadian dollar. Manufacturers said this has hurt exports because there has been little incentive to take advantage of free-trade opportunities across the border.

"We are having some tremendous difficulties. Our overall competitiveness has deteriorated quite significantly, and we are having a hard time against a whole lot of very aggressive global competitors," said Paul Nykanen, vice president of the Canadian Manufacturers Association.

The association estimates that in the year ended last July, 97,000 manufacturing jobs, mainly in Ontario, were lost because of closed or reduced operations, and it said that the cutbacks are likely to increase next year. The Conference Board of Canada, an Ottawa-based independent study group, has predicted a 0.8 percent growth for Ontario's economy next year, less than the 1 percent growth forecast for the Canadian economy as a whole.

Also, Ontario continues to lead the country in bankruptcies, with 2,230 declared last month, a rise of 112 percent from the 1,052 declared in October. So far this year, 33,938 individuals and 9,407 businesses across Canada have entered bankruptcy proceedings, an increase of nearly 40 percent from the first 10 months of 1989.

A Bleak Outlook In a gloomy report to the provincial legislature, Ontario Treasurer Floyd Laughren predicted this past week that no new jobs will be created in the province either this year or next, resulting in a 2 percent increase in the unemployment rate in 1991, to 7.3 percent.

"We're not looking for as tough a year as 1981-82, but I can tell you we know it's going to be a difficult eight to 12 months," Laughren said.

Last week, Statistics Canada reported that the national economy shrank 0.3 percent in the third quarter, the second consecutive quarterly drop this year, meaning the country is officially in a recession, according to the generally accepted definition.

The government statistics agency said that corporate profits have been sliding for six quarters and businesses have had increasing difficulty financing investment and expansion, suggesting that Canada will not be out of its recession until late next summer.