After last week's bang-up start to third-quarter earnings, hopes were high that the steady stream of results coming out this week would confirm that the economy is on the mend. For the most part, earnings continued to beat expectations and management teams offered cautious guidance that the worst is behind us. But no one is yet suggesting that robust growth is around the corner.

There seem to be two major drivers of results this quarter. The first, and most heartening, is that demand is showing signs of firming up. Businesses are starting to replenish inventories depleted over the last year, and consumers have begun tentatively reopening their wallets. The other driver is continued, ruthless cost-cutting. Businesses continue to cut staff and capital spending. This has helped boost profitability, even though demand is still far off its peak. The flip side of this is a stubbornly high unemployment rate because one man's cost savings is another man's layoff. This is not a sustainable trend. At some point, hiring will have to gain traction as firms strive to meet more robust demand.

Of course, the improvement in earnings is hardly uniform. One emerging trend is a broadening gap between the so-called real economy and the banking sector. Even as industrial production numbers start to look better and consumer spending inches up, many banks are still struggling under the weight of underperforming loan books. High debt levels, elevated unemployment, and lower home values are making it hard for many consumers to stay current on their debt payments. Although some bank executives, like Ken Lewis at  Bank of America BAC, believe that credit losses have peaked, these structural problems could take some time to fix themselves. One of the open questions of this recovery is if the real economy can thrive despite a weakened banking sector.

The trouble with credit quality could be seen in the results of the big banks that expanded aggressively during the upturn. According to senior banking analyst Jamie Peters,  Citigroup's C international consumer loan losses are approaching their peak, and the bank hopes to see improvement in the United States soon. Still, several special adjustments led to a reported $3.2 billion loss in the quarter. The investment bank's results were an obvious about-face from the second quarter. Trading spreads have tightened, reducing the level of trading gains the company recognized. Bank of America is also dealing with elevated levels of credit loss, but like Citigroup, they are beginning to see some stabilization in charge-offs.

Stronger banks are unsurprisingly performing better.  J.P. Morgan JPM beat expectations thanks to strong investment banking results and principal transaction income. Peters noted that consumer credit costs continued to rise, even as early delinquencies improved. J.P. Morgan's management is not willing to call this a peak in consumer losses but points out that some metrics are suggesting that might be the case.

Morningstar analyst Michael Wong saw more muted results in  Goldman’s GS third-quarter results, following a blockbuster second quarter. The majority of the company's revenue lines were lower sequentially. Investment banking revenue was down 38% from the second quarter. Each of the company's trading revenue lines was also down sequentially. The only revenue lines that increased were the company's corporate investment-related revenue and asset-management fees. Considering the broad-based rally across asset classes during the quarter, this was to be expected. He doesn't think that underwriting and advisory revenue is going to snap back as quickly as might have been implied by the second-quarter results.

 General Electric GE also reported this week. Although not a bank, the firm's finance unit was one of the hardest hit in the quarter. Analyst Daniel Holland thinks that unit remains very weak. He also anticipates a continued decline in profits at GE Capital as the firm reduces the size of the bank, clamps down on lending, and shifts its funding from cheaper commercial paper to longer-term debt. Overall, the firm's service and industrial businesses were able to overcome the finance unit's issues, and the entire firm is now emerging from the recession.

Health care was in the news this week as reform took a big step forward by clearing the Senate Finance Committee with a vote from Republican Olympia Snowe. Although it is unknown what the final legislation will look like, the possibility of some bill making it to President Obama's desk seems to be on the rise. We also got results this week from major pharma firms  Abbott ABT and  Johnson & Johnson JNJ. Abbott exceeded expectations thanks to the strong growth of its immunology drug Humira. Senior pharma analyst Damien Conover thinks that Abbott will continue to post double-digit earnings per share growth over the next five years.

J&J posted in-line results as patent losses hurt sales growth. Conover believes these losses will continue until mid-2010, at which point he anticipates the division will return to solid growth. Offsetting some of the weakness in the pharmaceutical division, sales from the medical device group gained 4% versus the prior-year period, excluding the impact of foreign exchange rates. Even consumers contributed to the quarter, with the consumer business squeaking out 1% year-over-year sales growth, excluding the impact of foreign exchange rates.

Some of the more impressive results so far have come from tech firms.  Intel INTC had strong third-quarter results, as demand for microprocessors continued to improve. PC manufacturers have been building up chip inventories in recent months in anticipation of the launch of  Microsoft's MSFT Windows 7, due out later this month, and strong end-of-year PC demand. An area of particular strength was in chips for mobile PCs. However, analyst Andy Ng cautions that if global PC demand at the end of the year does not meet the pervasive high expectations in the PC industry, then excess inventories will build in the supply chain, causing a slowdown in Intel's business.

 Google GOOG posted a solid quarter on a number of metrics: revenue, cost discipline, and cash flow, according to analyst Larry Witt. Reported revenue increased 7% (12% excluding currency effects) to $5.9 billion. This growth is a slight acceleration from that of the last two quarters, potentially indicating that the worst of the advertising environment is over. Google also continued to cut costs. Operating costs declined, driven by reduced head count.