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.