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Economists: Retail sales remain strong despite China tariffs

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Economists: Retail sales remain strong despite China tariffs

Several economists are maintaining or raising their sales forecasts for the year even as the U.S. considers tariffs on $200 billion of imported Chinese goods, which could lead to higher retail prices.

U.S. retail sales in July rose 0.5%, bouyed by higher levels of personal income and consumer confidence but experts are keeping a close eye on an escalating trade war between the U.S. and China.

Sales rose steadily in several retail sectors, including a 1.3% month-over-month rise at clothing and clothing accessories stores; a 1.2% increase at department stores; and a 0.6% increase at food and beverage stores; according to an Aug. 15 report by the U.S. Census Bureau.

New and proposed tariffs on a broad swath of imported consumer products from China could directly impact consumer prices and discretionary spending, although prices also currently appear to be in check for the time being.

The Consumer Price Index increased 0.2% in July on a seasonally adjusted basis after rising 0.1% in June, the U.S. Bureau of Labor Statistics said Aug. 10. The all items index has risen 2.9% before seasonal adjustment over the last 12 months.

The Trump administration has been embroiled in a tit-for-tat trade war with China and has already imposed tariffs on $34 billion of Chinese imports. The administration is also poised to enact another round of tariffs on $16 billion of Chinese goods slated to take effect Aug. 23.

It is the 25% tariff on $200 billion of Chinese goods currently being weighed by the Trump administration that economists are most concerned about. Those tariffs target a broad array of consumer goods, including handbags, computers, furniture, hats and appliances. If imposed, the levies could lead to an increase in retail prices.

Jack Kleinhenz, an economist with the National Retail Federation, said he is concerned about looming tariffs.

But the trade group raised its retail sales forecast for the year to 4.5% over 2017 after previously setting a 3.8% to 4.4% increase forecast in February. The NRF's forecast does not include sales of automobiles or sales at gasoline stations and restaurants.

Kleinhenz attributed this to strong sales in the first half of the year, as a result of the federal government spending package signed in February by President Donald Trump, which he said boosted the economy and created more spending and jobs.

While the NRF raised its sales forecast, the trade group said looming tariffs on Chinese imports have created an uncertain retail environment in the second half of the year.

"We are concerned," Kleinhenz said. "I worry about the confidence that could be impacted in the economy. But I don't know when they're [retailers] going to raise prices."

"The amount of uncertainty regarding the tariffs is something that we are going to have to monitor closely as we go forward in time," Kleinhenz added. "If we need to revise it again, we will consider it."

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Like the NRF, Moody's Analytics also has a strong annual sales forecast.

Ryan Sweet, director of real-time economics for Moody's, said the firm has projected a 5% yearly increase in 2018 for total retail sales, including autos, restaurants and gas stations.

Coupled with rising stock prices and home values, the consumer has more of a savings cushion to fall back on, potentially offsetting some of the increased consumer prices that may come from a tariff imposition on $200 billion of Chinese products, according to Sweet.

"It should have mixed implications for retail sales because high prices will boost sales in nominal terms and there could be some inflationary impact," Sweet said. "Consumers might substitute away for some of those goods. But it will be more difficult for some goods than others."

While tariffs on the $200 billion tranche of Chinese imports could hit consumer pocketbooks in the form of higher prices, Moody's still expects strong sales in building materials, furniture and electronics categories in the second half of the year, due in part to the $8 billion to $10 billion in extra monthly disposable income that consumers have as a result of federal tax cuts.

According to the U.S. Census Bureau, the six-month sales total through June 2018 for building material and garden equipment and supplies dealers rose 4% year over year.

Moody's does not plan to change its forecast, Sweet noted, due to tariffs' volatile nature and the ability of the administration to impose and remove them.

Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University's Robinson College of Business, said in an interview the predictability of retail sales in the current climate depends primarily on two factors: currency fluctuations and sourcing alternatives.

Currency devaluations can offset the intended impact of the tariff, Dhawan said. China has devalued the yuan by roughly 7% against the U.S. dollar since the U.S. first threatened tariffs on Chinese goods in April, according to Dhawan.

The economist said currency devaluation, which would make Chinese imports cheaper, has the ability to roughly offset U.S. tariffs if they are kept at a roughly 10% level. While Trump initially called for a 10% tariff on the $200 billion tranche, he later proposed raising the figure to the 25% that the U.S. Trade Representative's office is considering.

Should the U.S. impose a 25% tariff, which Dhawan expects, there could be major downward revision to sales forecasts because a currency devaluation could not reach that level, causing consumer prices to spike and deterring certain purchases.

The "elasticity" of a product, or whether sourcing alternatives exist for a given good, is a second factor, Dhawan said. If no alternative sources exist, which is the case for certain electronics and cell phones sourced primarily from China, consumers would have to absorb the higher cost.

However, purchases of clothing, a consumer good that can be easily sourced in other countries at a comparable price, would likely not see sales declines, Dhawan added. But finding alternative sourcing options for some goods could prove difficult, as China is the largest exporter of goods to the U.S., sending $505.5 billion worth of goods to the U.S. in 2017, according to the U.S. Census Bureau.

"The issue would be, do we have a substitute for Chinese imports?" Dhawan said. "The answer is no because China is the factory of the world. They're the bigger producer and we're the biggest buyers. The U.S. consumer will end up paying more but that gets counted as higher retail sales."