President Bush last week acknowledged a new and puzzling reality about the economy: The country is going through a period of slow growth that has extended for a longer time than any other in modern American history.

"We've got a problem that is of far greater magnitude today because we've had a much slower economy than anybody predicted," Bush said Friday in explaining why he had reversed course on the tax issue, bowing to the need for additional revenue to deal with a growing federal budget deficit.

The economy slipped into a lower gear last fall. Then, instead of either weakening further or turning upward, as it usually has in the past, the economy has continued to only inch ahead. The most common forecast now is that more of the same is in store for the nation. "It looks as if the economy has gone to sleep and will stay that way," said one government economist.

With growth so weak, Bush and congressional leaders face a vexing challenge: How to reduce the budget deficit without triggering a recession. The measures needed to bring the budget closer into balance -- higher tax revenue and reduced federal spending -- both take money out of the economy, and thus tend to slow it down.

Already, fewer jobs are being created than at any other time since the current expansion began 7 1/2 years ago.

Except for the hiring of census takers by the federal government in April and May, there would have been virtually no increase in employment across the country, according to the Labor Department.

The mainspring of the U.S. economy, consumer spending, has come unwound recently with retail sales dropping each month from March through May.

Similarly, housing construction keeps falling, with starts of new units now at the lowest level since the 1981-82 recession.

Businesses nationwide have sensed the slowdown in the economy.

William Alling, chief financial officer of Coyne Textiles Services, a Syracuse, N.Y., firm that rents industrial uniforms, said in an interview Saturday that cuts in defense spending already have showed up in his business. Customers with defense contracts have laid off employees, and "when employment goes down, clearly the number of uniforms being rented goes down," he said.

"Foreign trade is really the only area of strength, but it's enough to keep manufacturing moving ahead," said Gary Schlossberg, senior economist with Wells Fargo Bank in San Francisco.

"We are looking for growth of less than two percent through 1991," he said, but caution is in the air. "It is possible that the economy will slip into a mild recession," he said. "We're right at the edge now."

The sentiments are similar on many fronts: the entrepreneur who finds venture capital less easy to come by; the department store owners who see fewer customers looking a bit more closely before they buy; the builder or real estate sales agent who cannot sell new houses or office space.

Now, the improved prospects for a budget agreement that combine spending cuts and tax increases have added new uncertainty to the economic outlook.

Depending on how financial markets and other parts of the economy respond, the restraining effect of tax increases and fewer federal purchases -- a deficit reduction perhaps totaling $50 billion or more -- could tip the nation into a recession, a number of economists have said. There is little margin for error.

A substantial number of the economists, however, believe reducing the deficit is important enough to run that risk. They hope that a budget agreement would lead quickly to lower interest rates because the government would be borrowing less. Lower interest rates, in turn, could boost the economy.

At a Senate Banking Committee hearing a few days ago, Sen. John F. Kerry (D-Mass.) expressed his deep concern about what is happening to the economy, particularly in his home state.

In contrast to the national picture, the unemployment rate in Massachusetts has increased by two percentage points in the past year, construction activity has stalled and some financial institutions are in trouble.

"In the past few months, almost all the data that I've seen indicates that nationally, not just in Massachusetts, the economy is grinding to a halt," Kerry said.

Federal Reserve Chairman Alan Greenspan, testifying before the committee, would not go quite that far, but he replied: "It is certainly the case that the economy has slowed down. It is puzzling in many respects because the unemployment rate, as you know, has not gone up as a consequence ... we're not quite certain exactly what the dynamics of that is."

Part of the slowdown stems from the Fed's effort to keep inflation under control, an effort that included raising short-term interest rates during most of 1988 and the first half of last year. In the second half of 1989, rates fell by about 1.5 percentage points, but the Fed has not cut rates at all this year.

The central bank's strategy this year has been to slow the economy just enough to cause a small increase in unemployment and a little more breathing room in the nation's production capacity. This would reduce inflationary pressures in the market for both labor and goods and services.

The slow growth rate for the economy, somewhere between a 1 percent and 2 percent annual rate of increase in the gross national product, is about the target at which the Fed has been aiming.

Another serious concern arises from the tougher regulatory pressures on banks to restrain higher-risk lending, particularly in real estate. Officials fear that banks may overreact by making loans hard to get for credit-worthy businesses as well as for more vulnerable borrowers.

sw Greenspan told the Senate Banking Committee that so far there does not appear to have been such an overreaction, except perhaps in New England.

For its part, the Bush administration, like many private economists, has marked down its forecast for growth for the rest of this year and for 1991.

"We've lowered our growth for the year from 2.6 percent down to around 2.2 percent or so," Michael Boskin, chairman of the president's Council of Economic Advisers, said recently.

Nevertheless, Boskin said, "The odds of a recession are quite low. I think the economy is most likely, after this lull, to ... gradually improve as this year progresses." For that to happen, he said, the Fed must help out by ensuring sufficient credit to create growth.

"And if it looks like the economy is not going to be rebounding from its current, rather slow pace, {the Fed} will have to move accordingly," Boskin said. "We want to make sure we don't have a recession."

It remains to be seen how the president and Congress will write the next chapter of the budget debate -- and, if there is a deal, whether the tonic of lower interest rates will serve to pick up an economy slowed by higher taxes and reduced federal spending.

The Federal Reserve's top policy-making group, the Federal Open Market Committee, will be trying to figure out how to respond to the slowdown and the improved outlook for a budget deal at a two-day meeting that begins here today at which it must set a course for monetary policy for coming months. Many Fed observers expect the officials to make no immediate move toward lower rates.

However, some analysts believe the Federal Open Market Committee will decide to lean in that direction, so that rates could be brought down quickly if there is new evidence that growth is lagging.

This evidence could come later this week when the Labor Department issues its report on employment and unemployment for June.

Staff writer Susan Schmidt contributed to this report.