While the statement as such that Sauron during the 3rd age was feared more than Morgoth during the 1st is true to at least some degree (cf. MT where it said that Sauron at one point was mightier than the late M. at any rate), I would be careful, and differentiate between the people in whom the respective Dark Lords inspired fear.
M., while being generally greater and more powerful, and therefore indubitably more fearsome, had as his main adversaries the Valar, with little fear at all, and the Elves, who, as you said, knew him quite well. One might suppose that they 'respected' him more (in military terms) than they feared him. However, M. had indeed left a deep and lasting imprint on Men (cf. Athrabeth), because of which they feared him greatly, arguably more than they feared Sauron in the later ages. Men, however, were Sauron's main adversaries just then, especially in the 3rd Age.
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