How the U.S. Current Account Deficit was Funded Last Quarter and in 2009

March 18, 2010

The table below compares funding of the U.S. current account deficit in 4Q09 to the three prior quarters and its funding in calendar 2009 to 2008.  The deficit widened to 3.2% of GDP in 4Q from roughly 2.9% in the first three quarters of 2009 and the year as a whole.  The 2008 current account deficit had equaled 4.9% of GDP.  Inflows of official capital financed not only covered last quarter’s $115.6 billion current account imbalance but also $60.6 billion of net private capital outflows including $43.4 billion of high-quality portfolio and direct investment.  The latter showed a $377.8 billion adverse shift from a net inflow of $118.4 billion in 2008 when there was a stampede of incoming safety seeking money to a net outflow of $259.4 billion last year.  The trade-weighted dollar had trended upward from a quarterly average low of 70.9 in the second quarter of 2008 to a high of 82.7 in the first quarter of last year but settled back to a 4Q09 mean value of 73.6 by the final quarter of 2009. The current quarter has seen the dollar recoup some of those losses with an average trade-weighted value so far of 75.4.  Net official capital inflows nearly reached one trillion dollars last year and were twice as big as the year’s much reduced current account gap.

  1Q09 2Q09 3Q09 4Q09 2008 2009
C/A -104.2 -97.7 -102.3 -115.6 -706.1 -419.9
% of GDP -2.9 -2.8 -2.9 -3.2 -4.9 -2.9
Official +314.0 +314.4 +132.5 +176.2 -47.4 +937.1
Private -209.8 -216.7 -30.2 -60.6 +753.5 -517.2
Dir & Port -55.4 -112.5 -48.2 -43.4 +118.4 -259.4
TW$ 82.7 79.4 75.4 73.6 74.4 77.7

 

A second table below breaks down long-term capital inflows into their component parts in the third and fourth quarters of 2009 and calculates the change between the quarters (positively signed changes indicate an increased net inflow, a reduced net outflow, or a swing from a net outflow to a net inflow).  The eight elements of long-term capital movements are U.S. direct investment abroad, foreign direct investment in the United States, U.S. buying of foreign bonds, U.S. purchases of foreign equities, foreign buying of Treasuries, foreign purchases of U.S. corporate bonds, foreign buying of U.S. agency bonds and foreign purchases of U.S. stocks.  The biggest adverse effect was delivered by increasing net U.S. purchases of foreign bonds, while a swing from net foreign sales to net foreign purchases of U.S. Treasuries was the main beneficial factor.

  3Q09 4Q09 Change
U.S. DI Abroad +68.5 +63.5 +5.0
Fgn DI in U.S. +47.5 +43.6 -3.9
U.S. + Fgn Bonds +20.8 +42.9 -22.1
U.S. + Fgn Stocks +26.2 +2.8 +23.4
Fgn + Treasuries -8.9 +15.6 +24.5
Fgn + U.S. Corporates -28.8 -23.5 +5.3
Fgn + Agencies +6.4 -7.2 -13.6
Fgn + U.S. Equites +51.1 +37.4 -13.7

A final table below is the same as the second one except applied to the successive calendar years of 2008 and 2009.  Three elements saw deteriorations between the two years of more than $150 billion each: foreign direct investment in the United States, net U.S. buying of foreign bonds, and net foreign purchases of long-term Treasury securities.

  2008 2009 Change
U.S. DI Abroad +332.0 +221.0 +111.0
Fgn DI in U.S. +319.7 +152.1 -167.6
U.S. + Fgn Bonds -62.1 +152.9 -215.0
U.S. + Fgn Stocks +1.3 +68.6 -67.3
Fgn + Treasuries +196.6 +37.6 -159.0
Fgn + U.S. Corporates +1.0 -86.6 -87.6
Fgn + Agencies -184.8 -50.2 +134.6
Fgn + U.S. Equites +57.1 +130.2 +73.1

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.

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2 Responses to “How the U.S. Current Account Deficit was Funded Last Quarter and in 2009”

  1. marcusdelavita says:

    Hi,

    I found the tables above to be quite confusing. For example, US DI abroad went from 68.5 to 63.5 billions between 3Q09 to 4Q09. Do the individual values represent net inflows (repatriation)? If so, the 5 billion change represents a decrease in repatriation, and thus a “net outflow”. Is this correct?

  2. larrygreenberg says:

    The balance of payments can be confusing. Net U.S. direct investment abroad, shown as line 51 in http://www.bea.gov/newsreleases/international/transactions/2010/pdf/trans409.pdf does not represent repatriations. It is money spent by a U.S. firm abroad for a capital investment, say Ford building a plant in Britain. (Note, the table is at the end of the release.) This is an ouflow and is thus shown with a negative sign for both 3Q (minus 68,537) and 4Q (minus 63,453) even though U.S. direct investment abroad increased during both quarters. But the increase was smaller in 4Q than 3Q because of a shift from an increase to a decrease in net intercompany debt investment abroad. A smaller net outflow in 4Q than 3Q has the same effect as a bigger net inflow, and that is why you’ll notice that the rightmost column on line 51, which shows the change in net U.S. direct investment abroad between the third and fourth quarters has a positive sign and amounts to +5,084. As noted in my post, the effect of U.S. net investment abroad was more dollar-supportive in 4Q than 3Q. Another way to the same answer is simply to realize that my articles column marked “change” is the difference between the value in 3Q and 4Q. Minus 63,453 minus (minus 68,537) is the same as minus 63,453 plus 68,537, or +5,084.

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