By Steve Matthews and Anthony Feld – Jul 19, 2010
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Paul Otellini, chief executive officer of Intel Corp., speaks during an interview. Photographer: Jay Mallin/Bloomberg

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July 19 (Bloomberg) — Barry Knapp, head of U.S. equity strategy at Barclays Capital, talks with Bloomberg’s Susan Li about corporate earnings. Speaking from New York, Knapp also discusses the outlook for the U.S. economy. (Source: Bloomberg)

Intel Corp. Chief Executive Officer Paul Otellini told investors July 13 he is seeing “renewed economic momentum.” A day later, Yum! Brands Inc. Chief Financial Officer Richard Carucci predicted “sustained unemployment and a concerned U.S. consumer.”

The contrasting views of companies reporting second-quarter earnings illustrate the two-speed economic recovery: Production of business equipment has jumped 5 percent this year through June, while consumer goods have risen 0.2 percent, Federal Reserve data show.

Intel and Illinois Tool Works Inc. are benefiting as companies replace outmoded equipment and software, while Yum, the owner of Taco Bell and Pizza Hut, and toy maker Mattel Inc. are lagging behind with a 9.5 percent unemployment rate taking a toll on consumers. The durability of the investment boom and the broader recovery will depend on the household demand that makes up 70 percent of the U.S. economy, said economist Joseph Carson.

“Companies with large international exposure and particularly tied to capital spending and technology are leading the pack” among businesses reporting earnings, said Carson, director of economic research at AllianceBernstein LP in New York. “To get a sustainable recovery, you need better job growth, and the consumption will follow.”

The trend can be seen in the relative performance of PowerShares QQQ, an exchange-traded fund that mimics the Nasdaq 100 Index, and the SPDR S&P Retail ETF, which reflects retail stocks including Inc. and Best Buy Co.

Microsoft, Oracle

Since April, PowerShares QQQ, which includes Microsoft Corp. and Oracle Corp., has outperformed the SPDR, reversing its underperformance from November 2008 through March, according to data compiled by Bloomberg.

“Corporations are starting to spend again, whereas the balance sheet for consumers is still strapped and the unemployment situation is not good,” said John Massey, who helps oversee $37 billion in investments as senior portfolio manager at SunAmerica Asset Management Corp. in Jersey City, New Jersey.

Massey predicts the superior performance of technology shares such as Hewlett-Packard Co. and Microsoft will “last for a couple of years.” SunAmerica owned 1.8 million shares of Hewlett-Packard as of March 31, and also owned shares of Intel, Cisco Systems Inc. and Oracle.

Of 49 companies in the Standard & Poor’s 500 Index reporting second-quarter earnings as of July 16, 39 have exceeded analysts’ estimates, according to data compiled by Bloomberg News.

Policy Makers

The earnings reports reinforce the views of Fed policy makers, who last month trimmed their forecasts for U.S. economic growth this year to 3 percent to 3.5 percent and pledged to keep interest rates near zero for an “extended period” to sustain the recovery.

“Policy makers noted that firms’ investment in equipment and software had advanced rapidly of late, and they anticipated that such spending would continue to rise,” according to minutes of their June 22-23 meeting released last week. “The rise in consumer spending slowed in recent months after a brisk increase in the first quarter.”

Investment in equipment and software rose at an 11.4 percent annual pace in the first quarter, according to data from the Commerce Department. The percentage of businesses expecting capital spending to advance outpaced those forecasting a decline by 25 points, according to a quarterly survey by the National Association of Business Economics released today.

Topping Estimates

Santa Clara, California-based Intel, whose processors run more than 80 percent of the world’s personal computers, last week reported record second-quarter sales and topped analysts’ estimates with its forecast for the current period.

“Now that corporations have some breathing room in the economy and their budgets, you’re starting to see those machines that are four and five years old get refreshed,” Otellini said on a conference call with investors.

Sales at St. Petersburg, Florida-based Jabil Circuit Inc., which manufactures electronics for companies including Cisco Systems and LG Electronics Inc., reached a record $3.46 billion in the three months ended May 31, surpassing its pre-recession peak.

“Many companies delayed their procurement of IT-related capital expenditures throughout the recession and there’s certainly a significant catch-up,” Chief Executive Officer Timothy L. Main said on a conference call.

Glenview, Illinois-based Illinois Tool Works said revenue rose 21 percent for the three months ended May 31, with sales increasing across all its markets.

The outlook for machinery makers and technology companies remains strong, recent data indicate.

Industrial Production

The Fed’s July 15 report on industrial production showed output of business equipment rose 0.9 percent in June, the fourth straight gain. Production of consumer goods fell 0.6 percent last month, the third decline this year.

Retailers aren’t likely to do as well, with spending restrained by unemployment that’s forecast by the Fed this year to stay above 9 percent.

Confidence among U.S. consumers tumbled in July to the lowest level in a year, according to the Thomson Reuters/University of Michigan index of consumer sentiment released on July 16. The figures showed a record-low share of Americans expected their incomes will rise in the next 12 months.

Retail sales declined for a second month in June, falling a greater-than-forecast 0.5 percent, according to a report last week from the Commerce Department.

Taco Bell

Consumers are watching their spending, said David Novak, Chief Executive Officer of Louisville, Kentucky-based Yum. The company’s net income fell 6 percent to $286 million in the second quarter. Revenue rose 4 percent to $2.57 billion.

The company’s $10 pizzas have been a “huge consumer hit,” Novak said on a conference call on July 14. “Being premium- priced in this kind of environment that we’re in right now is certainly not the strategy anyone can pursue.”

Sales at Bethesda, Maryland-based Marriott International Inc., the largest U.S. hotel chain, illustrate the two-speed recovery.

“Clearly business travelers are on the road again” and “demand is rising,” Chief Financial Officer Carl Berquist said on a conference call July 15. On the other hand, leisure travel is “a little bit of a challenge,” said President Arne Sorenson.

Credit Cards

Shoppers are curtailing use of credit cards too, Citigroup Inc. reported, with purchases using Citigroup-branded cards down 7 percent in the second quarter.

Landstar System Inc., a Jacksonville, Florida-based trucking company, experienced moderating sales over the quarter, with load volume increases of 24 percent in April from a year earlier, 20 percent in May and 19 percent in June.

Slowing growth in stockpiles suggests companies are bracing for weaker sales in coming months. Inventories in the U.S. rose 0.1 percent in May, the smallest gain this year.

“I don’t think anybody is building inventories in anticipation of renewed consumer spending,” Robert Eckert, chief executive of El Segundo, California-based Mattel, said in a conference call on July 16.