(Adds details, analyst comments, updates markets)
* Factory orders increase 0.4 percent in May
* Core capital goods orders, shipments revised up
By Lucia Mutikani
WASHINGTON, July 3 (Reuters) - New orders for U.S.-made goods unexpectedly rose in May, pointing to a strengthening manufacturing sector, but business spending on equipment appeared to have slowed further in the second quarter.
Manufacturing, which accounts for about 12 percent of the U.S. economy, is being boosted by strong domestic and global demand, but growing shortages of workers as well as import tariffs are starting to strain the supply chain.
The Trump administration has imposed tariffs on a range of imported goods, including steel and aluminum, to protect domestic industries from what it says is unfair competition from foreign manufacturers. Major trade partners, including China, Canada, Mexico and the European Union, have retaliated with their own tariffs, raising the specter of a trade war.
"Trade tensions will remain a key source of risk for U.S. manufacturers," said Michael Ferlez, an economist at Moody's Analytics in West Chester, Pennsylvania. "Even if tensions don't erupt into a trade war, the mounting uncertainty will likely eventually weigh on new business investments."
Factory goods orders increased 0.4 percent amid strong demand for machinery, the Commerce Department said on Tuesday. Data for April was revised up to show orders falling 0.4 percent instead of the previously reported 0.8 percent decrease.
Economists polled by Reuters had forecast that factory orders would be unchanged in May. Orders increased 8.7 percent on a year-on-year basis in May.
U.S. financial markets were little moved by the data in quiet trading ahead of Wednesday's Independence Day holiday. The dollar fell against a basket of currencies while prices of U.S. Treasuries rose. Stocks on Wall Street were trading slightly lower.
An Institute for Supply Management survey of manufacturers published on Monday showed bottlenecks in the supply chain, with a measure of supplier deliveries hitting a 14-year high.
Manufacturers said the import tariffs and "lack of predictability" of trade policy were causing "general business instability" and were a "drag on growth for investments." They also complained about an acute shortage of workers, especially truckers, and some manufacturers said transportation costs had "gone through the roof" as a result.
In May, orders for transportation equipment fell 1.1 percent, weighed down by a 7.0 percent plunge in the volatile orders for civilian aircraft. Transportation orders declined 6.1 percent in April. Motor vehicle orders rose 0.3 percent in May.
Orders for machinery increased 1.2 percent, extending April's 1.7 percent surge. That reflected an 8.9 percent jump in orders for industrial machinery, which eclipsed a 3.9 percent drop in demand for mining, oil field and gas field machinery.
Orders for primary metals and fabricated metal products declined as did those for electrical equipment, appliances and components, and computers and electronic products.
Pointing to sustained strength in manufacturing, unfilled orders at factories increased 0.5 percent in May while inventories rose 0.2 percent. Unfilled orders have risen in six of the last seven months. The unfilled orders-to-shipments ratio fell to 6.68 in May from 6.73 in April. The inventories-to-shipments ratio was unchanged at 1.35.
The Commerce Department also said orders for non-defense capital goods excluding aircraft, which are seen as a measure of business spending plans, rose 0.3 percent in May instead of falling 0.2 percent as reported last month. Orders for these so-called core capital goods jumped 2.0 percent in April.
Shipments of core capital goods, which are used to calculate business equipment spending in the gross domestic product report, rose 0.2 percent in May instead of dipping 0.1 percent as reported last month. Core capital goods shipments increased 0.8 percent in April.
Business spending on equipment likely moderated further in the second quarter after growing at a 5.8 percent annualized rate in the January-March period. It recorded double-digit growth in the second half of 2017.
"Business equipment spending in the second quarter is expected to be lackluster," said Scott Anderson, chief economist at Bank of the West in San Francisco.
Moderate business investment in equipment could undercut the White House's argument that lower corporate tax rates would boost investment. Some companies like Apple Inc have used the tax windfall for share buybacks and dividends.
Morgan Stanley reported last week that its capex plans index declined in June for a third straight month. It said while the index still indicated a positive outlook for equipment spending in the second half of the year, it was past its peak. (Reporting by Lucia Mutikani Editing by Paul Simao)