Heavy machinery maker Caterpillar Inc disappointed Wall Street with a second-quarter earnings miss on Friday, hurt by higher costs, and its shares fell nearly 6 percent, dragging down the U.S. stock market.

The maker of equipment used in mining and construction also said economic growth in the United States and other developed economies was weaker than expected and reported signs of a slowdown in China.

Although Caterpillar raised its full-year sales and profit forecast, the midpoint of its new range was below analysts' average estimate. Shareholders also noted a more cautious tone in the company's economic commentary, closely watched by investors in economically sensitive manufacturing and transport stocks.

Caterpillar shares were down $6.65 to $104.95 in afternoon trading and most other industrial stocks were also lower, though off the day's worst levels.

Rising prices of commodities like steel and copper, as well as higher transportation and labor costs, hurt profit in a quarter with elevated expectations, said Andrew Meister, equity research analyst with Minneapolis-based Thrivent Financial, which holds almost 1 million Caterpillar shares.

In a quarter where the price increases lag the increases in manufacturing costs, you have a miss like you have today, Meister said. But what it says is, the long-term outlook for Cat's products appears robust.

Caterpillar's commentary was more subdued than in the past but its forecasts may eventually prove conservative, said Meister, who called Friday's stock sell-off an overreaction.

I don't think there's anything wrong with Caterpillar, he said.

Caterpillar finance chief Ed Rapp said raw material inflation was roughly in line with what the company expected when it laid out its 2011 forecasts.

Longer-term, higher commodity prices are a net positive for the company, he said in an interview. They drive investment by producers, which in turn boosts demand for infrastructure.

3-CENT MISS

Net earnings rose 44 percent to $1.02 billion, or $1.52 per share, in the second quarter, from $707 million or $1.09 per share a year earlier.

Excluding acquisition costs, Caterpillar earned $1.72 per share, 3 cents short of analysts' average forecast, according to Thomson Reuters I/B/E/S.

Sales rose 37 percent to a record $14.23 billion.

The bottom line disappointed, said Oliver Pursche, Co-Portfolio Manager of the GMG Defensive Beta Fund that holds Caterpillar shares. Caterpillar tends to be very sensitive to macro issues.

The company faced headwinds from China and Japan, he said, but did a good job lifting sales to a record and has been especially successful expanding in Latin America.

The company said the March earthquake in Japan reduced its operating profit by $60 million by boosting costs, but the negative impact from Japan is now past.

Caterpillar said it expects its recently-closed $7.6 billion acquisition of mining equipment maker Bucyrus to add $2 billion to its sales this year and to add to earnings after this year. It now expects 2011 profit of $6.75 to $7.25 per share, excluding Bucyrus, raising its range by 50 cents on either end. Analysts expect $7.08.

The forward guidance is a little bit disappointing, said Eric Marshall, director of research for Hodges Capital Management, which recently sold its Caterpillar holdings.

The dealer statistics were so strong throughout the quarter, it built in a lot of pretty high expectations, he said. People expected a little bit more.

Asked about the company's initial 2012 estimate for earnings of $8 to $10 a per share, before acquisitions, CFO Rapp said, We're still very comfortable with that range.

Analysts' 2012 estimates currently average $9.12 per share but vary widely, from $7.54 to $9.90.

SLOWER GROWTH

Caterpillar forecast slower global economic growth this year than in 2010, and said U.S. growth was being curtailed by a lack of confidence in the business climate.

Like many U.S. multinationals, Caterpillar has been able to increase profits, despite a slow economic recovery in its domestic market, thanks to rapid expansion in other economies, including Brazil, Russia, India and China. Caterpillar derives more than a third of sales from such emerging markets.

China, however, has taken steps to cool its economy and tame inflation. Higher interest rates and other policy moves have raised concerns among investors that China's growth could slow abruptly.

We've seen some softening of growth in China, Caterpillar Chief Executive Doug Oberhelman said in a statement, but he added that expectations remain positive. China is doing a good job of balancing growth and inflation, Oberhelman said. Overall, emerging markets remain robust.

Fellow industrials General Electric Co and Honeywell International Inc also reported quarterly results on Friday.

GE shares were little changed after its profit beat forecasts, helped by emerging market demand for equipment used in energy production. Honeywell fell 2.5 percent despite higher earnings and an improved full-year forecast.

(For a Reuters Insider view on Caterpillar vs GE, see http://link.reuters.com/zur72s.)

Caterpillar's tumble, its steepest since May, was enough to keep the Dow Jones industrial average in negative territory, even as the S&P 500 index turned positive.

(Reporting by Nick Zieminski in New York and Scott Malone in Boston; Editing by Derek Caney, Matthew Lewis and John Wallace)

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