10/19/2007 5:13:05 PM

By James B. Kelleher(/a)

CHICAGO(/a) (Reuters(/a)) - Caterpillar Inc(/a) (CAT.N), the world's top maker of earth-moving equipment, diesel engines and gas turbines, posted higher quarterly earnings on Friday but missed analysts' expectations, and cut its full-year earnings outlook. Its shares fell more than 5 percent.

The company also sounded an alarm about the outlook for the wider U.S.(/a) economy, suggesting the housing downturn was spreading to other parts of the economy and pulling the broader market lower.

Caterpillar(/a) warned that several key U.S.(/a) industries it serves, including trucking and nonmetal mining, were "in recession," and said its machinery sales to nonresidential builders were being hit as hard as its sales to the residential building industry, which it said was in "severe recession."

"That's definitely a trend that's somewhat disconcerting," said John Kearney(/a), an analyst at Morningstar in Chicago(/a). "If commercial construction starts to go the way of residential construction, that's going to create some pretty difficult headwinds in 2008, 2009."

In an interview with Reuters(/a) following the release of the earnings, Dave Burritt(/a), the company's chief financial officer, said the pain might spread. Burritt(/a) said the U.S. Federal Reserve(/a) had to "get the balance just right" to keep the current slowdown from morphing into an outright recession next year.

"We've put (the chance of a) recession in probably a 50-50 type range," Burritt said.

Doug Oberhelman(/a), Caterpillar(/a) group president with responsibility for engines, told analysts in a conference call that the North American trucking market is going through what may be the worst downturn in more than 50 years.

"We won't know until spring or early summer where freight tonnage is going to land. We're worried about it. Certainly the winter is going to be slow for truck and truck engine production," Oberhelman said.

Caterpillar(/a) said third-quarter earnings rose 21 percent as strong sales overseas offset a slump in the U.S.(/a) residential construction market, but the results fell short of Wall Street(/a) expectations.

The Peoria(/a), Illinois(/a)-based company reported a net profit of $927 million, or $1.40 a share, up from $769 million, or $1.14 a share, a year earlier.

Analysts, on average, had expected $1.43 a share, according to Reuters Estimates(/a).

Revenue rose 9 percent to $11.44 billion, topping an average Wall Street(/a) forecast of $10.33 billion.

Caterpillar(/a) said a number of factors weighed on results, including higher manufacturing and material costs, which increased core operating costs by $294 million.

The company lowered its forecast for full-year earnings to $5.20 to $5.60 per share, from $5.30 to $5.80, and left its revenue forecast unchanged at $44 billion.

Jim Owens(/a), Caterpillar(/a)'s chief executive, said the record third-quarter results -- which came as the company grapples with the effects of the housing slump and a downturn in its on-highway diesel engine business -- demonstrated how its huge and growing overseas business stabilizes its earnings.

"We continue to see remarkable growth outside of the United States(/a), with particular strength in key industries like mining, oil and gas, electric power and marine engines," Owens(/a) said in a statement.

The company said the tightening of the credit markets in recent months has not had a significant impact on its own borrowings. However, loan delinquencies of more than 30 days at its Cat Financial(/a) unit, which finances equipment purchases by the company's customers, jumped to 2.52 percent at September 30 from 1.89 percent a year earlier, most of it related to the downturn in the housing market.

Allan Meyers(/a), co-manager of the AHA Diversified Equity(/a) Fund, which holds Caterpillar(/a) shares, said, "To us, it's kind of a continuation of the same theme.

"International continues to be strong, and domestic (the company is) working through the slowdown in engines and in the housing market ... The guiding down is obviously bad, but they are very conservative anyway."

Caterpillar(/a) shares fell $4.09, or 5.27 percent, to $73.57 Friday on the New York Stock Exchange(/a).

(Additional reporting by Ben Klayman(/a))