When the three-year-old Redbud Tree restaurant in this central Illinois city stopped serving meals in July and converted to a catering business, laying off half of its 50 employes, it was another casualty of the recession that has pushed unemployment in the tri-county Peoria area to 16 percent.

But this was a little different, because a part-owner of the Redbud is House Minority Leader Robert H. Michel (R-Ill.), who is fighting a battle for solvency and political survival in this tough economic year.

Chances are he will make it back for his 14th term in the House against the challenge of his heavily out-financed Democratic opponent, 30-year-old Peoria attorney G. Douglas Stephens.

But this has been an unhappy year for the 59-year-old Michel, who acknowledges "it's a lot less pleasant" campaigning than in his previous races.

He has to justify his support for President Reagan's proposals for higher taxes on business and a veto of supplemental appropriations that will cost jobs and a bridge project in his district, but he stoutly repeats his conviction that Reaganomics is putting the country on the right track.

The House redistricting plan dismembered his old territory, separating the city of Peoria from Peoria County. The new district swings west to the Mississippi River and east almost halfway to Indiana. Michel says he has 60 percent new territory and 45 percent new constituents, most of whom "don't know me from a bale of hay."

The year began with the Reagan administration's decision to slap an embargo on exports of American technology to Russia, which cut off the sale of $85 million worth of Caterpillar pipe-laying equipment and shifted the jobs -- and future contracts -- to Komatsu of Japan, the leading rival to this area's top employer.

Though privately critical of the "bureaucratic delays" that made the Caterpillar deal vulnerable to Reagan's sanctions, Michel swallowed hard and endorsed the decision.

But last weekend, he complained "that darn thing just won't go down. There are people who believe that all 8,000 of the Cat layoffs around here resulted from that decision -- instead of the collapse of their international and domestic markets."

The sanctions also brought Michel an opponent. Last winter, Stephens, the attorney for the United Auto Workers local at Caterpillar, had turned away pressure to run, saying it would take too much time away from his law practice and his new bride. But after letting the filing deadline pass with no Democrat challenging Michel, Stephens changed his mind and ran a write-in campaign to win the nomination.

His hopes were brightened considerably by a June poll of 403 voters, taken by Virginia pollster David Cooper for the National Committee for an Effective Congress. It found that even though Stephens had little personal recognition, he trailed Michel by only nine points -- 42 to 33 percent -- when each was identified to the voters as the candidate of his party for the House.

It also found that 71 percent of the voters -- and 54 percent of the Republicans--said the economy was worse than in 1980; that Michel and Reagan both had slightly negative job ratings; and that the Congress of which Michel is a leader had an 85 percent negative rating.

Finally, it confirmed Michel's "bale of hay" suspicion. While 74 percent of the Peoria-area voters could name him as their congressman, that percentage fell to 8 percent in some of the new counties, and was just 49 percent overall.

Michel took his own poll in July, and while he has not released the results, the message was similar enough to spur a burst of activity. His administrative assistant, John Schad, went off the federal payroll to run the campaign. For the first time in 20 years, Michel opened a Peoria campaign headquarters. And he ordered up television spots showing him helping farmers and elderly people with their problems.

Driving through the cornfields these days, the car radio repeatedly brings an upbeat country-western group singing, "What's Special About America is Very Special to Me." Then, the flat, familiar voice of the minority leader says, "This is Congressman Bob Michel, and Central Illinois is special to me. We've faced some tough times together, but we're going to turn America around. . . . "

The media blitz -- months earlier than Michel has ever done before -- is being paid for by part of the $225,672 war chest he had assembled by June 30, including a $1,000 gift from the Caterpillar PAC.

Stephens, at the same point, reported only $31,255 in receipts. He says the figure has doubled since then, and he hopes to double it again by November.

On the other hand, Stephens is the beneficiary of the unusual attention Michel draws to the district. There was a CBS news piece on television Monday night, and Rep. Morris K. Udall (D-Ariz.) was in to campaign for Stephens the next day. Life magazine is preparing a feature, and other big-name Democrats are offering to come help.

Stephens' basic pitch is that Michel has been drawn into the Reagan administration's power game, and has lost his voice as a spokesman for the district. "He's a nice man," Stephens said, "But his world has been Washington for 33 years including seven as top aide to the previous congressman and he knows a lot more people there than he does here.

"When the policies of this administration hurt this district," Stephens said, "you don't hear Bob Michel's voice raised in protest. He may have power, but it's not being used for our good."

Michel is not trying to shed his Reagan ties. He says he believes the administration is "basically on the right track," but concedes that "our smokestack industries will probably be the last ones to feel the turnaround."

The vexations of being both a congressman and a congressional leader are unending. During this recess, Michel has found himself explaining to businessmen why he thought he had to back higher taxes on business and why "the welfare spending can't be slashed to the extent they would like."

At the same time, he winced last week at local stories saying Reagan's veto of the supplemental appropriations bill had jeopardized the jobs of 75 senior citizens in a community-service employment program and endangered a promised $3 million repair job on a railroad bridge between Peoria and Pekin.

Michel said he would try to get money for the projects restored in separate legislation, but would work to uphold Reagan's veto.

"As leader," he said, "I can't decide my position on a $12 billion bill because of a $3 million item."

Despite the special problems he faces this year, Michel remains a clear favorite. The new territory is Republican by tradition, and he has far more money to buy name recognition in the five radio-TV markets than Stephens does.

While the poll for Stephens showed that most voters think the economy has worsened, that Reagan's policies are slanted to the rich, that the defense budget can be trimmed, and that the nuclear freeze (which Michel worked to defeat) is a good idea, there was also some good news in the poll for Michel.

Stephens is looking at data that says 54 percent of those polled think the economy will improve in the next two years, and 70 percent think "Congress should support the president's economic recovery plan by giving it more time to work."