How The U.S. Current Account Deficit Was Funded in The Second Quarter
September 17, 2008
The dollar was under sustained selling pressure during the first quarter, and it showed in the balance of payments data. Likewise, the dollar’s increasingly improved tone after the rescue of Bear Stearns in mid-March was mirrored in the greatly improved quality of net capital inflows in 2Q08. The current account deficit itself has not changed dramatically, equaling 5.1% of GDP in 2Q after 5.0% of GDP in 1Q, 4.8% of GDP in 4Q07, 5.0% of GDP in 3Q07 and 5.3% of GDP in full-2007. The table below compares funding of the U.S. current account shortfall last quarter (top row) to the four prior quarters. Amounts are expressed in billions of U.S. dollars. The table’s second and third rows aggregate official and private capital, where the latter includes any statistical discrepancy. In a healthy currency situation, one likes to see long-term private capital flows, that is net direct investment plus net securities transactions or portfolio investment, comprise a significant portion of total private capital inflows. These high-quality private inflows are shown in the fourth row. In the first quarter of 2008, direct and portfolio investment produced an outflow of nearly $1 billion, and official capital funded 100.5% of the current account imbalance. In 2Q08, by contrast, official capital offset 55.6% of the $183.1 billion current account deficit, which was close to the 53.2% share in full-2007. The fifth and final row shows the period average trade-weighted dollar against a selected group of major currencies that fluctuate against the U.S. dollar. These balance of payments data were released earlier today by the Commerce Department, while the dollar index is on the Fed’s web site.
| 2Q07 | 3Q07 | 4Q07 | 1Q08 | 2Q08 | |
| C/A | -194.1 | -173.0 | -167.2 | -175.6 | -183.1 |
| Official | +88.3 | +14.0 | +122.7 | +176.5 | +101.9 |
| Private | +105.8 | +158.9 | +44.5 | -0.9 | +81.3 |
| Dir & Port | +180.4 | -19.5 | +111.2 | -0.9 | +79.2 |
| Tde-Wt $ | 79.3 | 77.0 | 73.3 | 72.0 | 70.9 |
The table below breaks down the direct investment flows into their component parts, U.S. direct investment abroad, foreign direct investment in the United States, U.S. net purchases of foreign bonds, U.S. net buying of foreign stocks, and foreign net buying respectively of U.S. Treasuries, corporate bonds, agency bonds, and equities. Amounts are again expressed in billions of dollars. The right-most column indicates the change in the flow between the first and second quarters, expressing such with a positive sign if the change involves an increased inflow or reduced outflow and a negative sign in instances involving a smaller inflow or larger outflow. Although three of the eight components have a negative sign, these high-quality capital flows taken in aggregate improved by over $80 billion. For comparative purposes, the quarterly average inflow generated by direct investment and portfolio investment during 2007 was $86.6 billion.
| 2Q08 | 1Q08 | Change | |
| U.S. DI Abroad | +65.5 | +89.1 | +23.6 |
| Fgn DI in U.S. | +93.8 | +80.4 | +13.8 |
| U.S. + Fgn Bonds | +11.1 | +8.2 | -2.9 |
| U.S. + Fgn Stks | +21.3 | +26.9 | +5.6 |
| Fgn + Treasuries | +67.0 | +63.3 | +4.3 |
| Fgn + U.S. Corporates | +50.5 | -10.7 | +61.2 |
| Fgn + U.S. Agencies | -32.8 | -18.0 | -14.8 |
| Fgn + U.S. Equities | -1.1 | +8.3 | -9.4 |
One sees from this additional dissection of the balance of payments that the greatest source of the rise in net long-term U.S. capital inflows last quarter was caused by a swing from $10.7 billion of net foreign sales of U.S. corporate bonds in 1Q08 to net purchases of $50.5 billion of them in the second quarter. Direct investment account for the bulk of the rest of the improvement. Finally, increasing net sales of U.S. agency bonds by foreigners presaged the mounting troubles of the two GSE’s that resulted in the Treasury’s seizure of both Fannie Mae and Freddie Mac earlier this month.
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