While the main gauge of U.S. manufacturing has rebounded from the depressed levels of late 2008, smaller businesses are struggling with lackluster sales and tight credit as the recession wanes.

Since the paralysis of credit markets in last year's panic, private investors have returned to riskier assets, enabling big corporate bond issuers to borrow.

But the rising credit tide has not lifted all boats.

Many companies are too small to tap corporate bond or commercial paper markets and are unable to take advantage of firming capital markets. Typically, small companies use credit lines from regional or community banks.

But weak sales and wafer thin profits are hampering their ability to pay down debt, raising concerns about credit-worthiness and further contributing to the tightening in bank lending, economists said.

It is no surprise that credit is more difficult to obtain since sales prospects and profit trends are very weak, said Bill Dunkelberg, chief economist with the U.S. National Federation of Independent Business.

That's one reason why NFIB's Index of Small Business Optimism has recovered only modestly from its lows earlier this year, to a reading of 88.8 in September from 81.0 in March, the lowest level since 1980.

By contrast, the widely watched barometer of bigger manufacturers' health from the Institute for Supply Management has risen to 52.6 in September from a 28-year low of 32.9 in December and above the 50 mark, which divides expansion from contraction.

PRICE WARS

The small business survey indicates that to stay afloat, many small manufacturers are locked in cost-cutting battles to sell their goods more cheaply than competitors.

Ron Smithfield, president of Smithfield Manufacturing in Clarksville, Tennessee, a family-owned precision metal components maker for the medical, auto and printing industries which employs about 20 people, is facing tough conditions. A bounce in orders for the company's products in July has since begun to fade, he said.

From our customers we are hearing that things are very competitive. Everybody is looking for the best price. That is not really new, but on a level I have not seen before, said Smithfield, who has been in the business for 45 years.

Everyone I talk to is not seeing a boom in business, he added.

Despite the credit crisis, the company's own financing from local community bank, Cumberland Bank & Trust, has been unaffected, Smithfield said. By chance, his firm refinanced the mortgage on its building in July last year when the loan came up for renewal, and has recently been able to trim that expense

as rates have come down.

This year, the Federal Reserve has bought huge amounts of housing-related securities and Treasuries to lower borrowing costs.

For Smithfield's company, financing costs are about the same as a year ago, he said.

But I have a number of customers that are companies that are having trouble getting credit and that affects their ability to pay, he added.

By contrast, big companies have been able to breathe anew as U.S. corporate bond issuance has surged, surpassing last year's totals. The ravaged commercial paper market has also expanded for about two months, enabling bigger firms to get short term funds to restock shelves.

However, something has to be done to improve the financing of small and mid-sized firms, said economist Bernard Connolly, managing director of U.K.-based research firm Connolly Global Macro Advisors.

In the United States, such companies tend to be dependent on regional second-tier banks, which are exposed to residential and commercial real estate problems, Connolly said. If those banks fail, it could choke off credit for smaller companies.

President Barack Obama acknowledged the stress on Wednesday, unveiling a program aimed at offering low-cost, taxpayer capital to community banks. The program uses funds from the government's $700 billion financial rescue program and aims to boost small business lending.

(Additional reporting by Ciara Linnane; Editing by Chizu Nomiyama)

Manufacturing Tennessee