(FORTUNE Magazine) – Good news: A sharp rebound in confidence marks FORTUNE's latest quarterly survey of the business mood. Half the 265 executives who responded say they are optimistic that the economy can sustain growth over the next couple of years, vs. fewer than one-third three months ago. But increasing anxiety about what the government is up to is keeping confidence from returning to the high level it reached immediately after the election (see chart). The swing toward a more optimistic outlook coincides with signs of improvement in the economy right now. Almost without exception, the statistics on activity in the past month or so have turned more positive. Employment rose by 177,000 in October, compared with an average of 122,000 per month during the summer, and manufacturing jobs increased for the first time since February. Industrial production appears to be on a sustained upturn, with October's 0.8% gain added to four previous smaller monthly advances. Total retail sales jumped 1.5% in October -- the largest gain since April -- according to preliminary data, and early November sales of cars and light trucks indicate a continued healthy pace for consumer spending. Housing starts, running at an annual rate of 1.4 million in October, reached a high last seen before the recession. These data jibe with what executives are reporting: Two-thirds say that their own business is good or very good. Though the mood lightened in all broad categories of businesses, wide differences exist between specific industries. For example, banking and other service-industry companies are generally much more optimistic than manufacturers. But machinery and fabricated-metals companies, along with food processors, are among the most confident in the survey. Manufacturers of chemicals and textiles, in contrast, are decidedly pessimistic. Among retailers, auto dealers are more optimistic than average. That's true whether they're selling imports, production from transplants, or cars with domestic nameplates. When asked to explain their optimism, managers pointed to low interest rates more than anything else. ''Any recovery we're seeing is due to low rates; they're the whole kit and caboodle,'' says the manager of a St. Louis department store. Low interest rates are noted for helping businesses with their own financing. But equally important, say executives, is that they help by lessening the mortgage burdens on customers, leaving people more money to spend. Business executives make no bones about what worries them. Most of their concerns are concentrated on government and the President. The tax package still concerns them, along with a general sense of regulatory bother and interference. ''The economy appears to be growing slowly despite the Administration,'' quips a Midwestern car dealer. ''The recovery is under way, but Clinton keeps rocking the boat,'' adds another. A Birmingham, Alabama, clothing store manager sums up: ''Big government is getting bigger and more involved.'' The prospect of the government's potential involvement in health care has many sputtering. Among the biggest fears is that President Clinton's health care plan will shift the cost burden to small companies. ''Small-business hiring will be on hold until the cost of health care becomes known,'' says a St. Louis banker. (See Economic Intelligence for an analysis of the longer- term employment effects.) Referring to the cost of extending health benefits to the uninsured, the CFO of a San Francisco forest products company comments: ''Good goals, fairy-tale financing.'' Adds the manager of a Missouri clothing distributor: ''The prescription is going to be expensive, but we don't have a choice.'' Altogether, 53% of the survey respondents said they oppose the plan. Despite the fury, 16% actually favor the plan, and the other 30% answered that they had no opinion.

The business executives' worry list also makes clear what high-profile subjects are not bothering them. One big yawner -- the budget deficit. It has almost disappeared from the collective business consciousness, judging from the survey. Six months ago, more survey respondents were worried about the deficit than about health care reform or government regulation. The only topic that caused more consternation then was higher taxes. One reason for today's lack of concern is the effectiveness of the 1990 and 1993 budget and tax acts, which have put the deficit on a declining track for now. The fiscal 1993 deficit, huge as it is at $255 billion, is $35 billion less than in 1992, and another reduction is due in fiscal 1994. Of course, many people are probably expressing concern about both taxes and the deficit indirectly. When they worry about the cost of government programs such as the health package, for example, they no doubt expect one or the other to increase. Businesses' own plans reflect their cautious optimism about the future. More executives are taking an aggressive stance on capital and advertising budgets than at the start of 1993 -- 34%, vs. only 26% then. Inventories are reported to be in good shape in most industries. But fewer than half the managers say they are willing to invest in extra stock to cover unexpectedly good sales. Businesses continue to be conservative about hiring. They expect to add just under 1% to payrolls in the next year. Retailers say they want to increase employment by 3%, and manufacturers would still like to cut a bit. But over half the companies in the survey are planning no changes in staff size. All in all, this quarter's reading of the business mood holds the promise of continued, moderate economic growth.

BOX: OVERVIEW

-- Low interest rates lend cheer to managers . . . -- But outlooks differ sharply among industries . . . -- And business worries about the cost of federal programs.

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: MANAGERS' CONFIDENCE PERKS UP. . . . . .ALONG WITH BETTER SALES. . . . . .AND SPENDING PLANS IMPROVE