Record level of investors see 'Goldilocks' economy

Key Points
  • A record 34 percent of respondents to survey described the economy as being in a "Goldilocks state."
  • The key for investors is that the economy continue to grow but not at a pace that would force central banks into tightening action.
  • The Atlanta Fed has upped its second-quarter growth projection to 4.1 percent.
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After a decade that saw a recession lead into historically low growth, a large swath of investors believes conditions globally are now just about right.

Some 34 percent of market professionals responding to this month's Bank of America Merrill Lynch Fund Manager Survey described the economy as fitting the "Goldilocks" standard of "high growth and low inflation."

That's the highest ever for the survey, which draws from 213 panelists with $645 billion in assets under management.

The reading comes at a critical time as investors have been anticipating faster growth ahead that has yet to show up in most of the actual data readings. Global GDP growth likely was 3.4 percent in 2016 and is expected to pick up to 3.6 percent this year, according to International Monetary Fund estimates.

A Goldilocks economy is particularly important for investors as it implies conditions in which growth persists but not at a pace that requires central banks to tighten financial conditions at a policy faster than markets anticipate.

Still, characterizing growth as "high," as put in the BofAML report, seems a stretch so far, at least in the U.S. The first quarter saw GDP rise just 0.7 percent, and headwinds persist.

Goldilocks and the three bears
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Also, there are conflicting signs regarding inflation. The most recent readings on the Consumer Price Index indicate that inflation actually might be decelerating, though recent jobs data point to a tightening labor market that could push wages higher.

"While we've yet to see wages pick up significantly, I would caution how long Goldilocks can go on," said Marc Bushallow, managing director of fixed income at Manning & Napier. "That's certainly not our longer-term belief, that it's all just a happy place. You are building inflationary pressures in the labor market."

Central banks globally also are preparing policy changes from their ultra-loose standards adopted around the Great Recession that began in 2007. In the U.S., the Federal Reserve is on track to hike rates in June and then possibly again in December, and probably will disclose plans this year to start shrinking its $4.5 trillion bond portfolio.

Some economists, though, are preaching caution about the current economic landscape.

Some of the sentiment gauges, such as the regional Fed manufacturing surveys, have been softening lately, and Tuesday's housing starts release fell considerably short of expectations.

"The bottom line is the U.S. survey data are coming off the boil before we saw any real signs of a spillover into the actual activity figures," David Rosenberg, senior economist and strategist at Gluskin Sheff, said in his daily note.

For instance, he noted that housing starts in historical terms are running behind the widely followed National Association of Home Builders sentiment survey

But better news may be ahead for the Goldilocks scenario.

The Atlanta Fed on Tuesday bumped up its expectations for second-quarter growth all the way to 4.1 percent from 3.6 percent. If that holds, it at least would bring the first-half up to an average of 2.4 percent, which would be well ahead of the 1.6 percent pace in the U.S. for the past eight years.

And it could get better yet: UBS economists predict Q1 to get revised higher to 1 percent, which would put the first half at 2.55 percent.

So long as that doesn't push the Fed down a more aggressive path, Goldilocks probably would be safe.