(FORTUNE Magazine) – Consumer confidence has been tumbling for four straight months. According to University of Michigan polls, it is now at the lowest point since February, and consumers are even more depressed than they were a year ago when the economy was softer than it is today. Clearly, Americans are not about to shop till they drop. But grab your binoculars and take a field trip to the consumers' natural habitats, malls and shopping centers. There you'll spot the morose critters engaged in traditional rites of window shopping -- and some of them in actual buying. Talk to retailers who understand what the consumer wants -- good quality at low prices -- and you'll find that these business folk are even modestly upbeat. What happens at the malls and other outlets is crucial for the economy, because the goods sold there -- from autos to Ziploc bags -- account for almost a third of the gross domestic product. Total retail sales this year are running about 4% ahead of last year's $1.84 trillion. Half the gain is inflation and half is growth in volume. No question about it, 2% real growth is paltry for an economic recovery. But consider the alternative -- real sales fell 1.9% last year and edged up just 0.3% in 1990. Despite the lousy job market and pervasive gloom, the retail sales trend has been solidly up throughout the year. The main reason: Real incomes have been growing at about 2% annually. People may be willing and able to spend their raises because they have lightened their debt burden over the past year. Higher income and lower debt service bodes well for the make-or-break holiday season when some retailers ring up 35% or more of annual sales. Says consumer economist Sandra Shaber of the WEFA Group: ''This will be the best Christmas for general merchandise and specialty apparel in four years.'' In September apparel stores racked up a year-over-year gain of nearly 10%, pushing year-to-date sales up 5.4% (see chart, next page). Home furnishing sales are doing almost as well, with September up 7% from a year earlier. General-merchandise retailers, like department and discount stores, are also up some 7%. Even auto dealers, for God's sake, have been moving some iron -- especially minivans and other light trucks -- for over a year. Can these cockamamie government numbers be believed, given the free-floating anxiety of businesses and consumers? Yes, says Rosalind Wells, analyst with NPD Group, a Port Washington, New York, research firm that monitors purchases and prices paid in 16,000 households nationwide. ''A lot of pent-up demand is coming through,'' she says. The volume of apparel sales could even be better than the government numbers indicate, because NPD detects less inflation. Wells points out that, overall, people are shopping more at discount stores and wholesale clubs. These outlets are underrepresented in government price surveys. INDEED, retailers who view 1992 with guarded optimism do so because they have kept their prices down. J.C. Penney reports that all its lines of business -- home furnishings and men's, women's, and children's apparel -- have done well this year thanks to permanent price reductions made last year. Target Stores, the discount chain owned by Dayton-Hudson, doesn't expect the economy will improve much but is cautiously hopeful about sales because of its low prices. Goran Carstedt, president of IKEA North America, the furniture megastore company, says despite the weak economy his typical customer is spending more than he or she did a couple of years ago. The successful formula, says Carstedt, is everyday low prices in tandem with do-it-yourself assembly that saves the consumer money. One indication that this combination is alluring: surprisingly strong sales to denizens of Manhattan who are willing to take a 30-minute ride, often by bus, to IKEA's store in Elizabeth, New Jersey. The price that merchants must pay for increased sales is squeezed profit margins and a general queasiness. Though 64% of retailers told Dun & Bradstreet they expect higher fourth-quarter revenues, only 52% expect higher profits. Retailer confidence is up from a year ago, but it is just getting back to where it was before the onset of recession in mid-1990. Similarly, sales volume is only now returning to pre-recession levels. So while the trend over the past year has been in the right direction, it hasn't been strong enough or profitable enough. Recent improvements in volume notwithstanding, the American Furniture Manufacturers Association describes the industry as ''having been in a no-growth mode for five years.'' For thousands of other businesses, the unappetizing truth is that consumers are more than metaphorically tightening their belts. The National Restaurant Association figures that people are both eating out less and trading down. Hence a two-tier market: Fast food is enjoying a good year, while full-service restaurants are finding the economy's woes indigestible. Dick Monroe, a vice president of the 567-unit Red Lobster chain, says falling consumer confidence always hurts casual dining. ''A person's decision to eat out now is driven more by pricing than anything else,'' he notes, and then adds, ''What is new is the nature of this recovery, with lots of middle managers losing their jobs.'' The downsizing of good restaurant customers isn't over yet. According to a survey by the American Management Association, middle managers are ''special targets'' for layoffs. While they make up about 8% of the work force, they accounted for a record 22% of the jobs lost this year. Eric Greenberg, who directed the survey, predicts that this percentage will hit a new record in 1993. People who are cutting down on restaurant meals are not binging at home, either. Grocery store volume is about flat vs. last year. Americans aren't eating less, they're buying more for the buck. Says Paul Bernish, director of public relations at Kroger, which operates 1,266 food stores nationwide: ''Consumers prefer anything on sale. They're not buying high-cost products if they have a choice. Products that have coupons are doing well. Private- label brands are doing better than national brands.'' No matter where you turn, the economic cry is: ''Jobs! Jobs! Jobs!'' But right behind it, especially for the 92.5% of the labor force that is employed, the cry is: ''Price! Price! Price!'' Companies that go for a quick profit fix by boosting prices are likely to see their volume gains disappear. At the same time, unless the pressure on profits eases, companies won't be hiring. So consumer incomes will poke along at around 2%, not enough to take the chill completely out of the winter selling season.

BOX: OVERVIEW

-- Consumers are buying when the price is right. -- Retailers head for their best Christmas in years. -- But sales are still not strong, and no surge is in sight.

CHART: NOT AVAILABLE CREDIT: RENEE KLEIN FOR FORTUNE CAPTION: Total retail sales SHOPPERS LEND A HAND Retail sales are up 4% this year, led by apparel, home furnishings, and vehicles. After inflation, the growth is 2%, the same as income.

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: Apparel Home furnishings Autos Food stores Restaurants