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Finding Goldilocks: Is the Economy Just Right?

  • Oppenheimer Asset Management
  • May 3, 2019

In early 1992, economists coined the term “Goldilocks economy.”

Key Takeaways

  • On the heels of the Fed’s decision to put interest rate hikes on hold, the U.S. economy resembles Goldilocks: hot enough to spur profitability but cool enough to avoid tighter monetary policy to ward off inflation.
  • After nine years of slow but steady economic expansion, total revenue in most states has recovered from pre-recession lows.
  • States with fast-growing populations typically have strong labor force growth, above-average economic growth rates and increasing tax revenue, which helps fund infrastructure, education and various government services.
  • As investors realize the effects of tax reform, the trend of strong demand for tax-exempt investments should remain robust throughout the year, enhancing the potential for attractive returns.

Munis have long been a solid investment choice for investors seeking wealth preservation and steady income. Specifically, investment-grade munis have offered clients access to high-quality debt with lower default rates relative to other bonds. However, while munis are a familiar asset class, their most attractive features are often understated or overlooked.

We believe the tax exemption of the income is the most important benefit of municipal bonds. While many investors understand the concept of tax-free income, the stark contrast between the after-tax returns of taxable and tax-exempt bonds isn’t fully appreciated.

stock chart

A Goldilocks economy is one where the economy is hot enough to spur profitable business growth, but cool enough to keep the Federal Reserve from using contractionary monetary policy to ward off inflation. Like Baby Bear’s porridge, it is an economy that is “just right” for stocks and bonds. We believe that with Fed Chairman Jerome Powell announcing that the central bank is on hold from further interest-rate increases for the rest of 2019, the first quarter of 2019 ushered in the Goldilocks environment.

For now, it appears that the Fed has managed to pull off a soft landing. While international growth appears to be slowing, the U.S. economy has settled back into a slow but steady growth rate. The first quarter of 2019 was a good one for the tax-free bond market. Interest rates for 10-year investment grade municipal bonds decreased nearly 0.40% since the beginning of the year—leading to one of the best quarterly returns since the first quarter of 2014.

The state of the states

Come July, the U.S. economy will officially be labeled as having had the longest period of expansion in the post-World War II era, according to the National Bureau of Economic Research. Since the end of the
“great recession” in the second quarter of 2009, the domestic economy has expanded at an annualized rate of 2.3%. Historically, growth during economic rebounds has ranged between 1.5% and 6.9% with an average rate of growth of 4.1%. We believe that the subpar nature of this recovery has prolonged the cycle, as the tempered growth rate has kept the economy from forming a boom-bust scenario. From the standpoint of municipalities, the slow but steady nature of economic growth has allowed many municipalities to financially set their houses in order.

After nine years of slow but steady economic expansion, total revenue in most states has recovered from pre-recession lows. Compared to last year, states’ financial conditions for fiscal 2019 are showing marked improvement, somewhat easing the pressure on their ability to meet constituents’ demands for expanded social services. Improved credit conditions allowed states to appropriate increased funds toward education (elementary and higher education) and Medicaid services.

After modest increases in 2016 and 2017, general fund revenue increased 6.2% in fiscal 2018, according to the National Association of State Budget Directors, propelled by a sharp increase in personal income tax collections. Forty states reported revenue ahead of projections in 2018, as compared to only 18 states in 2017. Budget surpluses also allowed many states to set aside funds—either rainy-day or stabilization funds—to temper any unexpected economic downturn. Twenty-six states have more reserve funds set aside to weather the next economic downturn relative to the peak levels of fiscal 2007. Only eight states ended fiscal 2018 with less reserve funds than a year ago.

Quotation from Aenean Pretium

One of the most important statistics in determining a state or region’s economic health is population growth.

States with fast-growing populations typically have strong labor force growth, above-average economic growth rates and increasing tax revenue, all of which helps fund infrastructure, education and various government services. The fastest-growing states in the 10 years ending 2018 were predominately in the West and South. The Northeast and Midwest were home to some of the slowest- growing populations, with West Virginia and Illinois experiencing population decreases.

Despite the overall health of the economy, indebtedness continues to be a problem for some states. When assessing a state’s total debt load, we look at total outstanding public debt as well as unfunded public workers heath care and pension liabilities. The average debt load of the 50 states calculated as a percentage of total personal income is 6.9% for unfunded pension costs, 4.2% for unfunded healthcare liabilities and 3.7% for payment on outstanding public debt. Alaska is the most indebted state with a combined debt level of over 50% of the state’s total annual personal income. Alaska is followed by Hawaii, Illinois, New Jersey and Connecticut as the most leveraged states where credit oversight is warranted.

Finding the sweet spot

From a financial standpoint, most municipalities appear to be in the sweet spot of this economic recovery. Stronger revenue growth and modest spending increases have allowed most municipalities to put their financial houses in order while adding to rainy-day reserves. While a few states continue to struggle, the Goldilocks economy has afforded us numerous investment opportunities and allowed us to focus on areas where financial health continues to improve.

With a limited need or desire on the part of municipalities to add to debt load, supply of new issuance supply remains modest while the public’s demand for tax- free income remains strong. We expect that as investors realize the effects of tax reform, the trend of strong demand for tax-exempt investments will remain robust throughout the year, enhancing the potential for attractive returns.


Tax-Exempt Municipal Bonds are issued by state and local governments as well as other governmental entities to fund projects such as building highways, hospitals, schools, and sewer systems. Interest on these bonds is generally exempt from federal taxation and may also be free of state and local taxes for investors residing in the state and/or locality where the bonds were issued. However, bonds may be subject to federal alternative minimum tax (AMT), and profits and losses on bonds may be subject to capital gains tax treatment. Municipal securities may lose their tax-exempt status if certain legal requirements are not met, or if tax laws change. The financial condition of the issuer may change over time and it is important to monitor the changes because they may affect the ability of the issuer to meet its financial obligations. The MSRB's EMMA website ( allows investors to sign up to receive alerts about the availability of important information that may affect their municipal bonds. The MSRB makes official statements and continuing disclosures submitted to it by issuers and others available to the public for free through its EMMA website. EMMA also provides municipal securities trade price information through its Real-time Transaction Reporting System ("RTRS") and free public access to certain municipal credit ratings. See more at:

High-yield bonds, those rated below investment grade, are not suitable for all investors. The risk of default may increase due to changes in the issuer's credit quality. Price changes will occur as a result of changes in interest rates and available market liquidity of a bond. When appropriate, these bonds should only comprise a modest portion of a portfolio.Liquidity risk refers to the risk that investors won’t find an active market for a bond, potentially preventing them from buying or selling when they want and obtaining a certain price for the bond. Many investors buy bonds to hold them rather than to trade them, so the market for a particular bond, or a small position in a bond, may not be especially liquid and quoted prices for the same bond may differ. Securities are classified as high yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below.

© 2019 Oppenheimer Asset Management Inc. This commentary is intended for informational purposes only. The information and statistical data contained herein have been obtained from sources we believe to be reliable. Oppenheimer Investment Advisers (OIA) is a division of Oppenheimer Asset Management Inc. The opinions expressed are those of Oppenheimer Asset Management Inc. (“OAM”) and its affiliates and are subject to change without notice. No part of this presentation may be reproduced in any manner without the written permission of OAM or any of its affiliates. Any securities discussed should not be construed as a recommendation to buy or sell and there is no guarantee that these securities will be held for a client’s account nor should it be assumed that they were or will be profitable. Past performance does not guarantee future comparable results

Special Risks of Fixed Income Securities: There is a risk that the price of these securities will go down as interest rates rise. Another risk of fixed income securities is credit risk, which is the risk that an issuer of a bond will not be able to make principal and interest payments on time. Neither OAM nor its affiliates offer tax advice. OAM is a wholly owned subsidiary of Oppenheimer Holdings Inc. which also wholly owns Oppenheimer & Co. Inc. (“Oppenheimer”), a registered broker/dealer and investment adviser. Securities are offered through Oppenheimer and will not be insured by the FDIC or other similar deposit insurance, will not be deposits or other obligations of Oppenheimer or guaranteed by any bank or other financial institution, will not be endorsed or guaranteed by Oppenheimer and will be subject to investment risks, including the possible loss of principle invested. 2504933.1 

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