Can U.S. consumers save the economy?

Supermarket paying

(MoneyWatch) A bevy of corporate earnings reports this week will measure the resilience of consumers, whose confidence has faltered during the partial government shutdown and ahead of a Thursday deadline to raise the nation's debt ceiling.

Although companies started reporting their latest earnings last week, roughly three-fourths of firms listed on the Standard & Poor's 500 will disclose their numbers over the next three weeks. Among the notable businesses slated to report this week are Bank of America (BAC), Charles Schwab (SCHW), Citigroup (C), Coca-Cola (KO), eBay (EBAY), General Electric (GE), Google (GOOG), Intel (INTC) and Yahoo (YHOO). With the U.S. economy slowing down in recent months, their results will offer important clues about the prospects for stronger growth heading into the key holiday shopping season and 2014.

Corporate earnings so far in the third quarter have been mixed. Of the 30 or so companies that have filed their latest earnings, 23 percent have topped both their sales and profit targets for the period. That is slightly lower than the share of companies that exceeded their targets in the previous quarter, according to Bank of America Merrill Lynch analysts.

Of the companies seeing the strongest profits, two sectors are leading the charge: telecommunications and consumer discretionary, a broad category of industries that includes retailers, restaurants, car manufacturers, hotels, apparel makers and media firms. Many businesses have sought to shore up their bottom line during the recovery by laying people off and otherwise cutting costs. But many forecasters predict stronger growth early next year, so companies are reducing the pace of layoffs and trying to position themselves for a possible rebound.

"We're at an inflection point where the economy is looking a little better," said Michael Thompson, managing director with investment research firm S&P Capital IQ. "Companies have been cutting costs, and that's still going on, but a lot of S&P 500 companies are seeing opportunities. You don't want to reduce costs and jettison capacity if you have positive growth potential in your marketplace."

S&P Capital IQ estimates overall third-quarter sales growth of just over 4 percent. Although that is well below the 10-year average of 7 percent top-line growth, it would be the fastest rate of expansion for companies since early 2012. If profits hold up, it could be the first time in four quarter that revenue growth for most companies exceeds their earnings growth.

Mark Luschini, chief investment strategist with broker-dealer Janney Montgomery Scott, also expects corporate earnings in the mid-single digits, noting that many companies are seeking to tamp down investor expectations for a big quarter. That could set stocks up for more vigorous growth in subsequent months.

Yet while retail sales recently hit an all-time high, surveys show that people's confidence is starting to waver amid the ongoing standoff in Congress over re-opening the government and lifting the borrowing cap. The U.S. Treasury Department has said that as of Thursday it won't have enough cash on hand to pay all of the nation's bills, raising the specter of an unprecedented debt default.

For now, such concerns have yet to register at the cash register, Thompson said. But consumer sentiment could darken fast if lawmakers fail to reach a deal, he warned. That would likely hurt spending and slow the recovery.

"A cautious consumer does not bode well for the important holiday retail sales season," said Kristin Reynolds, U.S. economist with IHS Global Insight, in a note to clients.

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