There are plenty of economists and investors out there who think we are headed for a double-dip recession. The rising gloomy feeling notwithstanding, this is unlikely to happen.

Rapid and successive collapses in economic activity are rare and seem to be prompted by the policy mistakes of central bankers. It seems unlikely that the central bankers of major economies around the world will err at this moment in history. Despite all the talk about recession, I am not among those who believe the economy is sinking again. There's certainly fuel for further economic expansion in the form of unspent corporate cash, and I think it will be used.

However, given the most recent flow of data, including the leading indicators and newly released trade and retail figures, I need to temper my view with a note of caution.

I originally believed that the US economy would exit the most recent recession and credit crisis through a V-shaped recovery led by corporate profits. This is occurring.

We said a leveling off would follow the recovery and then a period of slower-than-trend growth followed by the return of inflationary pressures.

These days, with fears of a double-dip recession growing, the specter of deflation is the rage of talking heads and print writers.

We do not see deflation developing because, historically, deflation is characterized by massive excess capacity that forces all market players to lower their product prices below previous clearing levels, as we saw on a massive scale during the Depression of the 1930s and in Japan in the 1980s. Those conditions are not visible in the US today.

Given the slowness in the recent data flow, disinflation, not recurrent inflation, is more likely for the remainder of this year.

Second-quarter results are now in, and profits for companies in the Standard & Poor's 500 Stock Index are close to a record compared with expectations. Cash flows are as strong as the previous peak. Strong revenue growth has been seen in virtually every sector.

Historically, strong profits provided firms with the necessary cash to spend first on capital expenditure and finally on hiring, elements of a sustainable expansion.

While we believe the path of recovery to expansion is the same as previously outlined, the follow-through to the labor market will take more time. Payroll expansion continues in a trend-line pattern toward improvement, though the pace is slower than many would favor.

There are good signs. The profit story is better than anyone expected. Interest rates for borrowers and homebuyers have fallen to near-record low levels. The credit markets have improved more than it was thought possible. Business defaults have fallen below normal levels. Central Europe, which was written off four months ago because of the deficit crisis in southern Europe, is doing better than expected.

There are also, in fairness, negative factors. Commodity, energy, and food prices have risen. The US trade deficit has widened. Progress on the labor front is in the right direction, but slower than during other recoveries, with tax and election uncertainty probably delaying hiring.

Overall, the economic picture remains mixed, but economic activity is heading in a positive direction. The market, which typically tries to look six months ahead, is now wrestling with what fourth-quarter earnings and revenues for all of 2010 and first quarter of 2011 will look like.

As far as I see it, the trajectory ahead is for a quarter or two of softer growth compared with what we have been experiencing. Rates will also remain low. However, pent-up demand and affordability are still characteristics of much of the corporate and consumer economies of the US and Europe, and these two elements are the drivers of economies that are capable in themselves of bringing about sustainable growth and expansion over multiple years ahead.

The author is chief investment strategist at MFS, a global asset management firm. The opinions expressed here are entirely his own.

(HK Edition 08/20/2010 page3)