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Economists: US retail sales will grow at a moderate pace in Q3

A tight labor market and continued wage growth are expected to drive moderate retail sales growth in the third quarter, although global trade concerns could slightly slow down consumer spending, according to economists.

U.S. retail sales rose 0.5% in May, according to the U.S. Census Bureau. The Bureau also revised April’s retail sales report to a 0.3% rise from the initially reported 0.2% drop.

Moody's Analytics estimates a 2.6% year-over-year growth rate for retail sales, while IHS Markit has a projection of a 3.5% growth rate. However, the consensus remains that a strong labor market and continued wage growth will drive retail sales growth in the coming months.

"As long as the job market holds up, the consumer will continue to spend because the job market is tight, we're getting a little bit stronger wage growth, that will support consumer spending," said Ryan Sweet, director of Real Time Economics at Moody’s Analytics.

Average hourly earnings in May rose 6 cents to $27.83 for all employees on private nonfarm payrolls and 7 cents to $23.38 for private-sector production and nonsupervisory employees.

The unemployment rate remained unchanged at 3.6% in May, the lowest rate since 1969, according to the Bureau of Labor Statistics.

"The point is that the job market is tightened. That means that income growth is solid and is going to be dependable," said David Deull, principal economist for IHS Markit. "Income and wage growth is really what drives consumer spending and retail sales as a consequence."

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Global trade uncertainties

However, Deutsche Bank Securities Chief Economist Matthew Luzzetti said the trade war between the U.S. and China, the uncertainty of U.S. trade policies with Mexico and the potential auto tariffs are beginning to weigh on business sentiment.

"That will ultimately feed into slower income growth and slower jobs growth in the second half of the year and the consumer will slow their spending as a result of this," Luzzetti said.

Jobs growth significantly slowed down in May with the addition of 75,000 jobs compared to the 263,000 jobs in April and the 196,000 jobs added in March.

In May, the Trump administration raised tariffs to 25% from 10% on $200 billion of Chinese imports and has threatened to impose a 25% tariff on an additional $300 billion of Chinese imports if a trade deal is not reached.

Joel Naroff, president and founder of Naroff Economic Advisors, said although additional tariffs on Chinese imports could slow down consumer spending, the impact on overall consumer spending will be minimal.

"Since the Chinese goods tend to be more on the consumer side, it may start affecting low to middle-income households more … then over time that's going to dig into spending power … but in comparison to all that consumers spend, it's relatively small," Naroff said.

President Donald Trump indefinitely suspended proposed tariffs on Mexican imports following an agreement with Mexico on immigration enforcement measures. Luzzetti noted that talks about tariffs on Mexican imports could potentially resurface later in the year.

On the auto front, President Trump in May delayed his decision on whether to impose tariffs on cars and auto parts imports by six months to further negotiate with the EU and Japan.

"With global uncertainty, businesses are going to be likely less willing to invest and as part of that, employment is also likely to slow[down]," Luzzetti added.