1989 Mercury 9.9 2 stroke do I have a sealing problem?

I have a mercury 9.9 and recently redone the water pump and is pumping water nicely. But today when running in a tank I noticed what looked like exhaust bubbles and a little water coming out of where the shift rod comes out of the lower unit and before the shift rod guide? Any help would be appreciated. Doesn't look like there any and seals or rubbers on the diagram?

More than likely that is just exhaust gases escaping there.

Is that normal? Could it be harmful to the motor?

No....engine has to get rid of exhaust. There is always exhaust leaking, every older 2-stroke has areas that leak. No big deal. Comes out the exhaust reliefs at idle and as the pressure builds up in the exhaust housing other places will allow the exhaust to escape. If you run the engine on a hose and look around at places that are drilled for water drainage on the exhaust housing you will usually see exhaust leaking there as well. The area around the shift shaft definitely should not be a tight fit in the exhaust housing.