Caterpillar Inc. (CAT) reported a 66% fall in second-quarter profit Tuesday but raised its full-year guidance as aggressive cost-cutting started to yield results.

The world's largest construction and mining equipment maker by sales lifted its 2009 forecast to $1.15 to $2.25 a share despite trimming revenue guidance to $32 billion to $36 billion. In April, the company projected earnings $1.25 a share on revenue of $31.5 billion to $38.5 billion.

In recent trading, Caterpillar shares were up 6.38% at $38.99 a share.

Nevertheless, the Peoria, Ill., company cautioned that demand for machinery remains weak. It expects the global economy to contract by more than 2% this year and warned that recent upbeat indications about an economic recovery may not last.

The company predicted its third-quarter sales will be the weakest of the year, as dealers hold off ordering new equipment to eliminate an estimated $1.5 billion of inventory during the second half of 2009. It's anticipating widespread temporary layoffs and rolling factory shutdowns to lower machinery production. Caterpillar said a loss from the quarter or flat earnings are possible.

"We're dealing with the worst recession since the Depression," Chairman and Chief Executive said Jim Owens said during a conference call with analysts. "The rolling-layoff concept gives us a lot of flexibility to take out costs and to take advantage of [sales] opportunities as they present themselves."

Owens said the company is seeing signs of stabilization in the global economy that could serve as the foundation for an eventual recovery. He said Caterpillar customers are being helped by improved access to credit markets and $1.7 trillion in government-sponsored economic stimulus spending on infrastructure construction projects worldwide.

For the second-quarter, Caterpillar reported income of $371 million, or 60 cents a share, down from $1.1 billion, or $1.74 a share, a year earlier.

The latest results included $85 million in costs related to job cuts. Excluding those items, earnings were 72 cents a share. Net revenue decreased 41% to nearly $8 billion. Analysts polled by Thomson Reuters expected earnings of 22 cents and revenue of $8.86 billion.

Machinery sales in the quarter tumbled 49%, and engine sales slid 32%. Meanwhile, revenue from the company's customer and dealer finance operation declined 13% to $721 million. The company said it has shed 17,100 full-time employees since the end of 2008 and cut more than 17,000 temporary and part-time workers.

Caterpillar also has imposed short-term layoffs for the remaining employees and suspended pay raises for nearly all support and management employees.

The company expects general administrative costs to decline 25% this year, along with a 15% reduction in research and development spending.

The infrastructure and commodities boom powered Caterpillar for about five years - helping it more than double its annual revenue from 2002 to 2007 - but collapsed late last year.

Analysts at Bank of America Merrill Lynch said Monday that demand for construction machinery made by Caterpillar likely reached a bottom during the second quarter and will begin a recovery during the first half of next year.

But other analysts said Tuesday's report reinforced their cautiousness about the company.

"They're hardly saying it's a boom time," said Lawrence De Maria, an analyst with Sterne Agee & Leach Inc. "It's not like the whole ship is turning around. It's still a 2011 [recovery] story to me."

-By Bob Tita, Dow Jones Newswires; 312-750-4129; robert.tita@dowjones.com

(Kerry Grace Benn and John Kell contributed to this report)