The economy is in a classic, mid-cycle slowdown rather than facing an inevitable recession, found the latest quarterly Russell Investment Manager Outlook survey.

   Managers identified a slowing economy as the most significant potential threat to market performance during the second half of 2008. While 46% of surveyed managers had economic growth at the top of their minds, 40% were watching inflation, and 38% thought both the credit markets and energy costs could still wreak havoc in the markets. Survey respondents were asked to select two factors they thought could negatively affect equity performance during the second half of 2008. The survey polled more than 330 investment managers.

   Managers were bullish on domestic large-cap growth stocks, although less so than they were last quarter. Of those surveyed, 57% were bullish on that asset class, a decline of seven percentage points from 64% last quarter and off 18 percentage points from a year ago. Mid-cap bullishness remained essentially unchanged at 49%, but small cap increased to 40% from 36% last quarter.

   Manager bullishness for the health-care sector dropped 17 percentage points from 71% to 54% from last quarter, and bullishness for the consumer staples sector fell 10 percentage points, from 47% to 37% over the same time period. For the quarter, manager bullishness fell for a majority of equity sectors.

   "Relatively slow economic growth and muted corporate earnings have dampened manager enthusiasm for the near term, but they remain guardedly optimistic for an economic and market recovery," says Erik Ristuben, Russell chief investment officer for multi-strategy solutions.

   Andrew Lindsay, Fidelity Investments portfolio manager, adds, "We are close to a tipping point where further energy price increases will have a negative impact on both equity and bond markets through lower growth and higher inflation. Should oil prices fall from here, the market outlook will brighten."