BOSTON (Reuters) – Diversified U.S. manufacturer 3M Co (MMM.N) reported a 17 percent drop in quarterly profit as the recession crimps demand for its Scotch tape, optical films for liquid crystal displays and other projects.

The company also said on Thursday it now expects organic sales for the year to drop by 10 percent to 13 percent, a more modest decline than its prior forecast for a fall of 11 percent to 15 percent. It now looks for 2009 profit of $4.10 to $4.30 per share, raising the low end of its forecast from $3.90.

3M said second-quarter net income came to $783 million, or $1 payday advance.12 per share, down from $945 million, or $1.33 per share, a year earlier.

Revenue fell 15 percent.

The breadth of its operations and geographic reach make the St. Paul, Minnesota-based company a bellwether of the U.S. economy.

3M shares are up about 11.6 percent this year, outpacing a 1.2 percent rise in the Dow Jones industrial average (.DJI).

(Reporting by Scott Malone; editing by John Wallace)

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Morgan Stanley reported its third consecutive quarterly loss on Wednesday, the latest indication of the challenges the Wall Street bank faces as it tries to pull itself out of the financial crisis.

The losses reflected continuing problems with real estate investments made in the run-up to last year’s financial setbacks and its decision not to take big trading risks since it pulled itself back from the brink of collapse last year.

But the bank said the results were heavily affected by one-time items tied to the repayment of government support and an improvement in its debt valuations. Without the one-time items, the bank said, its results showed the fruits of its turnaround efforts.

The bank reported a loss of $159 million, or $1.37 a share, in the second quarter, a bigger loss than analysts had expected. In the first quarter, Morgan Stanley lost $177 million.

Including the charge to repay $10 billion in government bailout money, the bank said that its net loss was $1.26 billion, or $1.10 a share. That compared with earnings of $1.06 billion, or $1.02 a share, in the quarter a year earlier. Morgan shares fell sharply after the open but recovered and were flat in afternoon trading.

The results were in sharp contrast to rivals Goldman Sachs and JPMorgan Chase, which both reported strong second-quarter profits last week. Those two banks in particular have rebounded more quickly, mostly by taking on more risk in trading for themselves and their customers. But Morgan Stanley, which was burned more severely by the crisis, has moved to reduce its risk taking and try to build a stable, less volatile firm.

While analysts say the approach may pay off in the long run, for now Morgan’s losses are raising questions about the strategy being pursued by its chief executive, John J. Mack.

In a statement, Mr. Mack said Morgan Stanley had “delivered improved performance across many of our businesses this quarter.” But, he said, “we are not satisfied with our performance in other key areas of fixed income trading and in asset management, and we are taking steps to deliver better results in those businesses.”

This week, it shook up its fixed-income trading business by hiring Jack DiMaio from Credit Suisse to be its global head of interest rate, credit and currency trading.

Despite the loss, Morgan showed that it was eager to compete for talent on Wall Street by setting aside $3.9 billion in the second quarter for compensation, a startling 72 percent of its total revenue. This was an even higher proportion of revenue than Goldman Sachs, which last week indicated it was returning to paying big bonuses and salaries. The average for the industry is about 49 percent.

Morgan’s chief financial officer, Colm Kelleher, said that aside from the quarterly “accounting noise,” the results showed a “strong and good improvement.”

He said morale was good among employees and insisted that Morgan Stanley was keeping up with its rival Goldman Sachs on core businesses like mergers and acquisitions and underwriting.

Mr. Kelleher said the bank’s revenue of $973 million from trading in fixed income was disappointing, and in particular Morgan had missed opportunities in currencies and rates trading because of the unwillingness among some employees to take risks.

Goldman Sachs had revenue of $6.8 billion from fixed-income trading in the quarter. It achieved that by a big increase in risk taking — and is now more than double that at Morgan, executives say fast cash online.

Morgan Stanley’s value at risk, a statistic that estimates how much money a firm may lose on a single day, was $113 million in the second quarter, down from $115 million in the first. “We could have dialed risk up a bit,” Mr. Kelleher said. He indicated that the bank was becoming more comfortable with taking risk as markets stabilized, but he indicated there would be no sharp increase in overall risk-taking.

Revenue was $5.4 billion, down 11 percent from the $6.1 billion a year ago. The bank’s results were weighed down by a one-time charge of about $850 million incurred when it repaid $10 billion of taxpayer support.

It also reported $2.3 billion of losses because of improving credit spreads, a sign of improving health. As the financial system heals, banks must record losses as their credit spreads improve because they are deemed more likely to pay off all their debt.

“As Morgan Stanley is underperforming some peers for sure, we think the healing process is under way and the core earnings drivers look better once you get underneath some of the noise,” Glenn Shore, an analyst at UBS, said in a note.

The bank said its prime brokerage unit, which provides services for hedge funds and was hit hard, was showing improvements. But the bank continued to be troubled by its push into real estate just before the financial crisis, reporting a charge of about $730 million. There were also integration costs because of its Smith Barney acquisition.

Wednesday’s results included some bright spots, like investment banking, where Morgan is still among the leaders in equity underwriting, and mergers and acquisitions, according to Dealogic. The company’s executives have described 2009 as a transition year and have called for patience as the bank tries to refashion itself.

In particular, the bank — which sold a 21 percent stake to the Mitsubishi UFJ Financial Group in September for $9 billion — is trying to expand its footprint in wealth management. It entered a joint venture this year with Citigroup’s Smith Barney brokerage unit to expand its brokerage business.

The surge in trading profits recorded by Goldman Sachs in particular has prompted some analysts to question whether Morgan Stanley was being too cautious. But other experts say it is still too early to judge whether its business model will succeed. They say that risky trading could be reined in by regulations being considered in Washington, for example, requiring tougher capital requirements on the biggest firms, and that trading profits will be harder to come by once markets normalize.

Andrew Kuritzkes, a partner in the financial practice at the consultancy Oliver Wyman, said competitors like Morgan Stanley “are going to bounce back”

“A big new element,” he said, “will be regulation which is likely to be a game changer.”

Charles Calomiris, a finance professor at Columbia’s business school, said Morgan Stanley’s strategy of limiting risk might be wise given so much uncertainty about policy coming from Washington as well as the volatile markets.

“This is a good time to be conservative,” Mr. Calomiris said.

Morgan Stanley Posts Another Loss

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