WASHINGTON -- Manufacturing activity increased in all sections of the country during May and June, and loan demand was up slightly as well, according to the Beige Book, the Federal Reserve System's regional summary of economic activity.

The report, which is based largely on anecdotal information, confirms that a recovery is under way, albeit weakly.

Most of the Federal Reserve System's 12 district banks also reported improvements in residential construction and consumer spending for nonautomotive items.

Not Out of the Woods Yet

Nevertheless, Sung Won Sohn, chief economist with Minneapolis-based Norwest Corp., said there are problems that could stall the recovery.

"Right now there is a greater danger of the economy faltering as opposed to booming," said Mr. Sohn who has been bearish. "I don't think we should be lulled into thinking things are rosey."

His caution is shared by James Chessen chief economist of the American Bankers Association: "I wouldn't say we are out of the woods yet. The economy is like a baby learning how to walk. It takes a few steps forward and then falls down. It just isn't at the point of testing its legs and bolting on with big improvement. There are too many things we see that are troubling."

Mr. Sohn said the danger signals are: high long-term interest rates, which have discouraged corporations and individuals from borrowing and spending; slow growth in the money supply, which can be blamed in part on the banking industry's cautious lending; and shaken consumer confidence.

"Consumers are still very cautious about buying big-ticket items," he said. "They are not likely to go on a spending spree anytime soon."

Mixed News on Loan Demand

Nevertheless, the Fed noted a number of encouraging signs. Loan demand increased slightly in most regions, including Atlanta, Dallas, and Kansas City. Philadelphia, however, described demand as "soft," and the St. Louis district said loan demand there has weakened in recent weeks.

Residential construction activity was healthy in Atlanta, Kansas City, Minneapolis, Richmond, Va., and St. Louis. In the St. Louis district, for example, many builders reported "double digit" increases in April housing permits from a year ago.

Most districts saw increases in consumer spending. The Dallas district noted greater improvement at mid-to-upper scale stores than at discounters, while San Francisco had increases at both department and discount stores.

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