Brexit adds headwinds to U.S. companies slowing spending

[June 27, 2016]  By Lucia Mutikani and Malathi Nayak

WASHINGTON/NEW YORK (Reuters) - U.S. business investment, already heading for its worst slowdown since the global financial crisis, could decline further as Britain's vote to leave the European Union creates more risks for companies, economists say.

With growth tepid at home, North American companies as diverse as plane maker Boeing Co, Ford Motor Co, heavy equipment manufacturer Caterpillar Inc and oil producer Exxon Mobil Corp now will find themselves trying to plan overseas spending without knowing whether Britain's departure from the EU will upend tariff rules.

"The 'leave' outcome has introduced substantial uncertainty that likely would dampen U.S. growth by delaying and or reducing business investment and consumption expenditures," said William Lee, head of North America Economics at Citigroup in New York.

Lee said U.S. multinational corporations face difficult strategic challenges - including assessing the U.K.'s future status as a gateway to the E.U. and London's role as a financial center - that could crimp spending enough to reduce potential growth levels and real incomes.

U.S. business spending on capital equipment dropped over the last two quarters and contracted in the first quarter at its quickest pace in seven years. A further decline in the second quarter would be the first time since the 2007-09 recession that it contracted for three straight quarters.

Jim Farley, top European executive for automaker Ford, had warned a "Brexit" outcome could impact "potential future investment."

Caterpillar has voiced concern any changes in trade rules for its UK base would impact its European supply chain.

While recognizing that UK exit negotiations will be complex, Caterpillar's UK chief Mark Dorsett urged leaders in a statement to ensure "single market access issues be prioritized to lessen the negative impact on business."

And Exxon, the world's largest-publicly traded oil company, said "the barrier-free movement of goods, people and capital across borders is important for a business like ours with operations across Europe."

After the Brexit vote, Boeing said in a statement that as a global business "we constantly manage changes in political circumstances and we will continue to do so now with the evolving situation in the UK and Europe."

Mark Grayson, a spokesman for PhRMA, the trade group representing pharmaceutical companies, said it is not yet clear whether Britain will move to set up its own agency to approve drugs, or opt to simply follow EU rules.

Britain's Prime Minister David Cameron speaks after Britain voted to leave the European Union, as his wife Samantha watches outside Number 10 Downing Street in London, Britain June 24, 2016. REUTERS/Stefan Wermuth

SOFTER SPENDING AT HOME

Data from the U.S. Commerce Department on Friday showed non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, fell for a second straight month in May. These so-called core capital goods orders have increased in six of the last 17 months.

"Remember too that Brexit is occurring while the U.S. economy is in the later stages of its current business cycle, meaning the U.S. is more susceptible to economic shocks," said Steve Blitz, chief economist at M Science in New York.

"There is, happily, a lot less leverage in the system than there was in 2007, meaning no recession of equal magnitude is threatened," Blitz said.

Economists said heightened uncertainty over Brexit could spill into the labor market and hurt consumer sentiment headed into November's U.S. presidential election.

"Concern over another euro area crisis could slow U.S. growth in the next couple of quarters through weak financial markets and declining business and consumer confidence," said Ethan Harris, global economist at Bank of America Merrill Lynch.

He estimates Brexit could lower gross domestic product growth by an average of two-tenths of a percentage point over the next six quarters.

"This could be reinforced by concern about the U.S. presidential election," Harris added.

(Editing by Terry Wade and Lisa Girion)

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