* Joblessness falls unexpectedly in Aug for second month
* Retail sales rise in July after two months of falls
* Manufacturing PMI shows sector close to growth in Aug
By Holger Hansen and Brian Rohan
BERLIN, Sept 1 (Reuters) - German unemployment fell in August thanks to a government work scheme and retail sales rose after two months of decline, but economists expect both measures to weaken soon after a federal election later this month.
The unemployment data -- the last to be released before the Sept. 27 vote -- could lend support to Chancellor Angela Merkel's conservatives even though most economists expect joblessness to surge in the months after the election.
"The feared collapse in the labour market didn't happen. But it will certainly hit in the autumn," said economist Ralph Solveen from Commerzbank.
Unemployment fell by 1,000 in seasonally adjusted terms in August, the second consecutive monthly decrease, but the Federal Labour Office said the decline was driven by the one-off effect of government measures to prevent mass layoffs.
If the effects of the shortened-working hours scheme were stripped out, unemployment would have risen by around 25,000.
Employers have been increasing their use of the programme, which subsidises workers' pay and benefits when they are shifted from regular to shorter working hours.
A Labour Office official told Reuters employers had registered 1.43 million employees for the scheme by the end of June, a rise of 300,000 from the previous quarter.
Economists say however a spike in unemployment is looming as firms find it too expensive to keep staff, even with the government help.
"The strength of the labour market will be put to the test in the coming weeks when the first wave of short-time work arrangements will reach their 'sell-by date'," said Carsten Brzeski from ING Financial Markets.
CLOUDED OUTLOOK
Germany emerged from its worst post-war recession in the second quarter of 2009, and rises in key measures of investor and business confidence have boosted confidence the momentum can continue into the third quarter.
In a fresh positive sign for the economy, a survey on Tuesday showed Germany's industrial sector came close to returning to growth in August on firmer output and new orders. [nLAG003700]
Retail sales figures released on Tuesday for July showed consumer spending was lending modest support to the economy. But the positive news came with a caveat as the sector will be vulnerable in the coming months to any labour market fallout.
Retail sales rose 0.7 percent on the month, slightly above expectations, after two months of sharp declines. Economists described the outlook as weak.
"Given rising unemployment and weakening support from low prices, the outlook for private consumption is clouded and we will see further falls," said Juergen Michels from Citigroup.
Despite the prospect of layoffs, Merkel's conservatives head to the federal election with a wide lead over other parties in opinion polls. [ID:nLR119298]
Merkel's predecessor, Social Democrat Gerhard Schroeder, was forced to call an early election in 2005 in part because of a surge in unemployment which hit support for his government. Schroeder narrowly lost the election.
Headline unemployment, unadjusted for seasonal swings, rose to 3.472 million in August -- its lowest level heading into a federal election since reunification in 1990.
Merkel acknowledged joblessness would rise.
"We know that unemployment will rise in the future, but we don't know by how much... The message today is a good one," she told Bayerische Rundfunk radio on Tuesday. (Additional reporting by Sarah Marsh, Paul Carrel, Noah Barkin)