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Why a disconnect between sentiment and action matters

A jobs report that came up short of expectations Friday, coupled with data that point to modest consumer spending and overall meager economic growth during the first quarter, suggest surging sentiment among both employers and their workers could prove premature, observers say.

The apparent divergence between sentiment and spending also explains why Federal Reserve H.8 data during the first three months of 2017 painted a picture of slowing loan growth, analysts say, as many commercial clients in particular held off on borrowing to make new investments. Without a pickup in economic activity in the near term, more investors are starting to worry that enthusiasm could temper, diminishing outlooks for both businesses and the banks that lend to them.

"We are still in a steady recovery, but it is also still very slow," Jack Ablin, chief investment officer at BMO Private Bank, said in an interview. "We really have not seen any significant change yet, and I think a lot of people — consumers, business owners, investors — are confident in the possibilities but are waiting for more tangible evidence of actual change," said Ablin, a market participant and veteran public-policy observer.

Bank stocks surged following the Nov. 8 presidential election, won by Republican Donald Trump. The president vowed to reform healthcare, cut corporate taxes and substantially ease regulatory burdens — a pro-business agenda that both banks and their commercial clients embraced. They said the changes would lower costs and infuse certainty into the operating environment, enabling business owners to better plan for expansion. Banks would finance that growth, the thinking went, and the greater activity would bolster broader economic conditions, creating a virtuous cycle for all, including consumers.

Recent surveys of businesses and consumers detected lofty spirits. Results of a National Federation of Independent Business survey released last month showed that small business optimism remained near a four-decade high in February after rising sharply post-election.

The Conference Board's closely watched consumer confidence index jumped from an already strong reading of 116.1 in February to 125.6 in March, its highest level since 2000. "Consumers feel current economic conditions have improved over the recent period," Lynn Franco, director of economic indicators at the Conference Board, said in announcing the results.

But in fact conditions have not advanced notably, data show.

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While the economy continues to grow, it is forecast to have expanded at a relatively sluggish rate during the first three months of 2017. An estimate Friday from the Federal Reserve Bank of Atlanta put the first-quarter GDP growth rate at just 0.6%. The U.S. Department of Commerce said real GDP grew at an annual rate of 2.1% in the final quarter of 2016 and 3.5% in the third quarter.

"The sustainability" of recent surges in optimism, "and whether it will lead to actual economic growth depends on Washington's ability to deliver. … If the healthcare and tax policy discussions continue without action, optimism will fade," NFIB President and CEO Juanita Duggan said in the federation's March report.

A first major run at healthcare reform by Trump and GOP leaders in Congress faltered, and lawmakers have since been unable to revive momentum on that front. Tax cut efforts remain in their infancy and broad legislation aimed at deregulation, while still touted by the president, does not appear likely in the near term, Ablin said. "What is the timing and likelihood of this? It's a tough call," he said. "There obviously have been big setbacks already."

The slower GDP growth suggests modest business investment, Ablin said. Consumer spending, too, appears light, according to recent economic data. The Commerce Department reported recently that consumer spending inched ahead 0.1% in February, marking the smallest gain in seven months.

The all-important job market, a recent source of general strength, also shows signs of slowing. The U.S. Labor Department estimated that employers added 98,000 jobs in March. Experts surveyed by Bloomberg had forecast a gain of 175,000 jobs. The March figure was down from 216,000 the previous month and down from 219,000 in January. Job numbers for both January and February were revised down from previous reports.

Investors are taking note. The SNL U.S. Bank index dipped after the jobs report was released Friday. The index is up more than 20% since the election last year. But year-to-date in 2017, it is in negative territory.

The macro backdrop is vital for community banks. Loan demand at the local level, from consumers to the small businesses that many of these lenders cater to, tends to mirror economic strength.

Chris Nichols, chief strategy officer at Davenport, Fla.-based CenterState Banks Inc., said he and many of his colleagues remain optimistic about the potential of Trump's agenda, but such optimism is tinged with noticeably more caution now than just a month or two ago.

"The administration needs a win," Nichols said in an interview. "The Trump concepts are good, but the execution has obviously been lacking."