06/24/2016

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

The Commerce Department said on Friday non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, decreased 0.7 percent last month after a revised 0.4 percent drop in April.

These so-called core capital goods orders were previously reported to have declined 0.6 percent in April and had been forecast rising 0.3 percent last month. Core capital goods orders have increased in only six of the last 17 months.

"Business investment is slowing and this makes us question the outlook going forward. What do companies see that we don't?" said Chris Rupkey, chief economist at MUFG Union Bank in New York.

Overall orders for durable goods, items ranging from toasters to aircraft that are meant to last three years or more, declined 2.2 percent in May after surging 3.3 percent in April.

U.S. financial markets were little moved by the report as investors weighed the implications of Britain’s vote to leave the European Union.

Despite factory surveys suggesting some stabilization, so-called hard data show no sign of reprieve for manufacturing as it struggles with the lingering effects of the dollar's surge between June 2014 and December 2015, and sluggish global demand, which have eroded export growth.

The sector, which accounts for about 12 percent of the U.S. economy, has also been undermined by lower oil prices, which have hurt profits of energy companies and forced deep cuts in capital spending budgets.

A report last week showed a decline in industrial production in May amid weakness in automobiles output.

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.

Last month, there were declines in orders for machinery, primary metals, computers and electronic products as well as transportation equipment.

With core capital goods orders falling for a second straight month in May, spending on equipment will likely remain a drag 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 an upwardly revised 0.6 percent rise in April.

Core capital goods shipments were previously reported to have increased 0.4 percent in April. Economists say uncertainty over the global economy and the upcoming U.S. presidential elections are making businesses cautious about spending. 

By Lucia Mutikani - Reuters (Editing by Andrea Ricci)