U.S. business spending weak in May, Brexit seen adding more pressure

By Lucia Mutikani

WASHINGTON (Reuters) - New orders for U.S. manufactured capital goods unexpectedly fell in May as demand declined broadly, indicating business spending will remain a drag on economic growth in the second quarter.

The subdued business investment persists despite data on retail sales, housing and layoffs suggesting the economy has regained speed after growth stalled at the start of the year.

Economists say uncertainty over the global economy and the upcoming U.S. presidential elections are making companies cautious about spending and that uncertainty is likely to be exacerbated by Britain's shock vote to leave the European Union on Thursday.

"The surprising 'leave' outcome of the British referendum will result in the intensification of these uncertainties, potentially hampering business capital investment," said Millan Mulraine, deputy chief economist at TD Securities in New York.

The U.S. Commerce Department said on Friday non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, fell 0.7 percent last month after dropping 0.4 percent in April. These so-called core capital goods orders had been forecast to rise 0.3 percent in May.

Core capital goods orders have increased in only six of the last 17 months. With core capital goods orders falling for a second straight month in May, spending on equipment will likely continue to weigh on economic growth in the second quarter.

Shipments of core capital goods, which are used to calculate equipment spending in the government's gross domestic product measurement, slipped 0.5 percent last month after rising 0.6 percent in April. Shipments were little changed in March.

U.S. business spending on equipment has declined over the last two quarters. It dropped in the first quarter at its quickest pace since the second quarter of 2009.

Should spending on equipment fall in the second quarter, that would be the first time since the recession of 2008 that it would have contracted for three straight quarters.

Weak business spending and uncertainty over the so-called "Brexit" referendum make it unlikely that the Federal Reserve will raise interest rates in the near-term.

A separate report on Friday showed U.S. consumer sentiment ebbed in June as Americans anticipated slower economic growth in the year ahead.

U.S. financial markets were little affected by the durable goods orders data on Friday as investors were more concerned about the costs of Brexit. The U.S. dollar jumped against a basket of currencies and prices for U.S. government debt rallied on safe-haven bids while U.S. stock prices tumbled in line with share markets globally.

GROWING UNCERTAINTY

Following the weak core capital goods orders figures, the Atlanta Fed lowered its second quarter GDP estimate by two-tenths of a percentage point to a 2.6 percent annual rate. The economy grew at a 0.8 percent pace in the first quarter.

With business spending remaining weak, manufacturing is showing no signs of pulling out of the slump that started in mid-2014 which was precipitated by a surge in the U.S. dollar.

Manufacturing has also been undermined by lower oil prices which have put pressure on producers of energy-related equipment and efforts by businesses to reduce an inventory overhang have also inflected pain.

Manufacturing accounts for about 12 percent of the U.S. economy.

Last month, overall orders for durable goods, items ranging from toasters to aircraft that are meant to last three years or more, fell 2.2 percent after surging 3.3 percent in April.

There were declines in orders for machinery, primary metals, computers and electronic products as electrical equipment, appliances and components. Orders for transportation equipment plunged 5.6 percent as demand for automobiles fell 2.8 percent.

After the U.S. dollar retreated this year against the currencies of the United States' main trading partners and with oil prices gradually rising, there had been hope that the worst of the manufacturing downturn was over.

But economists now worry that Britain's departure from the European Union could spur fresh economic weakness which could hurt global growth, and put downward pressure on oil prices and boost the appeal of the U.S. dollar.

"For the U.S. industrial sector, the outlook for global demand looks weaker this morning than it did just a day ago given the added uncertainties surrounding the U.K. and euro area economies," said Tim Quinlan, a senior economist at Wells Fargo in Charlotte, North Carolina.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci and Clive McKeef)