Heavy machinery maker Caterpillar Inc disappointed Wall Street with a second-quarter earnings miss on Friday, hurt by higher costs for raw materials and labor, and its shares fell 6.5 percent in morning trading, 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 forecasts, the midpoint of its new range was below analysts' estimates. 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 $7.12 to $104.49 in morning trading, and other industrial stocks also fell.

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 across several funds.

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.

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. He said he may buy more of the shares if they fall below $100.

Caterpillar tends to be very sensitive to macro issues, Pursche said.

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

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

Caterpillar said it expects its recently closed acquisition of mining equipment maker Bucyrus to add $2 billion to its sales this year. It estimated 2011 revenue of $54 billion to $56 billion.

Excluding acquisition costs, Caterpillar expects 2011 profit of $6.75 to $7.25 per share, 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.

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 the BRIC countries Brazil, Russia, India and China. Caterpillar derives more than a third of its sales from such emerging markets.

China, however, has taken steps to cool its economy and tame inflation, now at multiyear highs. 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 added that expectations remain positive. China is doing a good job of balancing growth and inflation, he said.

Caterpillar has benefited in recent quarters from strong demand in emerging markets for machinery used in construction and from mining and other industries flush from high commodity prices. Emerging markets remain robust, the company said.

Fellow industrials General Electric Co and Honeywell International Inc also reported quarterly results on Friday. GE shares were little changed after it posted better-than-expected profit, helped by strong emerging market demand for equipment used in energy production. Honeywell fell 3 percent after its revenue fell below analysts' forecasts.

Caterpillar's slump pulled down shares of its main rivals, including Terex Corp, Joy Global Inc and Manitowoc, all of which were down about 2 percent in mid-morning trading.

Caterpillar's tumble, its steepest since May, was enough to pull the Dow Jones industrial average into negative territory.

Caterpillar closed its $7.6 billion acquisition of Bucyrus earlier this month.

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

Caterpillar Fall