Updated from 8:18 a.m. EDT

Through the eyes of Caterpillar ( CAT), the economy is running at full steam.

The heavy-machinery giant reported another strong performance for its second quarter, and with a long backlog of orders for engines and industrial machinery heading into the back half of 2006, the company raised its sales and earnings guidance for the year.

"We do not see 2006 as a peak for the industries we serve," said Caterpillar Chairman and CEO Jim Owens on a conference call with analysts. "Housing in the U.S. is weaker, but it's not collapsing. This should still be the third-best year for housing starts since 1978."

While the stock market has been swinging wildly amid fears of an economic slowdown, the second-quarter performance from Caterpillar provides a reassuring sign that construction-related markets are still chugging along . The company's earnings climbed to $1.05 billion, or $1.52 a share, from $760 million, or $1.08 a share, a year earlier.

On average, analysts surveyed by Thomson First Call were expecting earnings of $1.42 a share.

The company's broadest top-line metric, sales and revenue, rose 13% from last year to $10.61 billion. Caterpillar's sales of machinery and engines also rose 13% to $9.96 billion, meeting Wall Street's forecasts.

While the company concedes that a slowdown in the U.S. housing market could weigh on sales going forward, it pointed to strength in commercial construction, mining and energy exploration as forces that should offset that. Meanwhile, the company noted that housing starts were still on pace to hit 1.9 million in 2006, down from last year's figure, which was just over 2 million.

"The sun and the moon and the stars are in line for Caterpillar right now, and they're finally absorbing their costs with pricing power that's been missing in recent years," says Eli Lustgarten, analyst with Longbow Research. "There's a lot of investments that are being made on global infrastructure and mining right now in a way that we haven't seen in decades."

For all of 2006, Caterpillar now sees earnings of $5.25 to $5.50 a share, up from its previous outlook of $4.85 to $5.20 a share. Analysts forecast earnings of $5.33 a share. The company now targets sales growth of 12% to 15% from a year ago, up from the previous estimate of 10%.

"We are entering the fourth year of a recovery that began in mid-2003," the company said. "The industries we serve continue to be very strong throughout the world, particularly mining, energy and infrastructure development. While it's tough to predict the future, historically, global industry recoveries have lasted six to eight years, and a variety of factors, particularly past underinvestment, should help sustain this recovery."

In the second quarter, Caterpillar's operating costs rose, due to higher manufacturing and transportation costs, but the company said materials costs were flat and not a significant factor.

It acquired Progress Rail, a supplier to the railroad industry, for $1 billion in cash and stock. Also, it repurchased 22.8 million shares and raised its dividend payment by 20%.

Shares of the Dow component were recently down down 4 cents, or 0.1%, to $69.04 as the broader market was hit by declines.