THE TEA-LEAF reading with regard to welfare reform continues. It is clear enough that the rolls are sharply down, but less clear what that means. Partly because of the increased dispersion of responsibility among the states, no one quite knows what is happening to the people, either those now off the rolls or those still on. Nor is it clear what will happen when the economy weakens, except that it seems the safety net has been weakened too.

A new report by an advocacy group that thought reform too harsh notes that child poverty has continued to decline in the three years since reform, but at a slower rate. Meanwhile the severity of poverty among those who remain poor has increased. They are farther below the poverty line, census data show.

The good first trend derives in part from the strong economy, which in some respects has masked the underlying policy shifts. Poverty always declines when jobs are plentiful. But more than that is happening. Tough new rules in the states have commendably caused more people who might otherwise have remained on welfare to find work, and the federal earned-income tax credit, which acts as a supplement to low wages, has made that work more rewarding. All that news is positive. The increase in self-reliance would be a valuable accomplishment whether it added to family income or not.

The second trend is the troubling one. It reflects the weakening of the safety net. Of families with children that remain poor, fewer are receiving cash assistance -- welfare. Fewer also are receiving food stamps.

The report leaves out two other elements. Welfare used to be the gateway to Medicaid. That nexus has broken down, and many families still legally eligible for Medicaid no longer receive it. The feds have stepped up pressure on the states to find and sign these people up. Thus far, the effort has met with limited success.

Meanwhile many states appear to have reduced their own spending on the poor. Welfare, like Medicaid, was a matching program in the past. The states paid a little less than half the cost. The decline in the rolls has saved them large amounts of money; they are enjoying a welfare dividend. The dividend is the greater because, under welfare reform, the federal payments to the states now are fixed. They have not declined with the caseload, as would have happened in the past.

The reform legislation included maintenance-of-effort provisions, in theory limiting the extent to which states could divert to other purposes money they previously spent on the poor. If not on benefits, they would have to spend it in some other way -- on increased child-care subsidies, for example, so that welfare mothers could afford to work for the entry-level wages they were likely to receive. But the maintenance-of-effort rules are porous; indications are strong that the states have cut back spending considerably.

Welfare reform represented a shift of responsibility to the states. A weak federal guarantee of support for low-income families with children was replaced by none. The question -- part of it, anyway -- was how well the states with their limited resources would step up to the responsibility, particularly in harder times. The answer isn't in, but the auguries aren't as good as the euphoria over the decline in the caseload would suggest.