U.S. Balance of Payments Dissected
September 16, 2010
Today, the Commerce Department released its second-quarter report on U.S. international transactions, the most comprehensive compilation of the balance of payments, and the Treasury Department published its more timely July monthly figures on international capital flows. Both releases contain a slew of items at varying levels of aggregation. Here are some highlights.
The current account deficit did not widen quite as much as expected because the deterioration of merchandise trade was partly offset by improvement elsewhere. As a percentage of GDP, the current account gap equaled 3.4%, up from 3.0% in the first quarter and a full percentage point larger than in the second quarter of 2009. A deficit of more than 3% of GDP was considered very vulnerable in prior decades like the 1980s, but the imbalance now didn’t draw much attention even though it was the biggest in six quarters, since it remains far below the 6%+ highs reached prior to the Great Recession. The dollar value of the deficit grew by $14 billion to $123.2 billion.
Net private capital inflows accounted for almost 62% of the current account’s funding last quarter, up from an unusually small 25.6% share in the first quarter. However, the most reliable source of private financing, long-term capital documented in the net direct investment and portfolio investment accounts, showed continuing low support, rising by just a modest amount. The trade-weighted dollar according to the Fed’s “major currency” index, posted an average value in 2Q10 of 78.0, about 6% higher than two quarters earlier but still below its 79.4 mean in the second quarter of 2009.
The following table breaks down the U.S. current account shortfall and the broad sources of its financing last quarter and compares these to the previous four calendar quarters. Double-entry accounting for all international transactions constrains the sum of the current account, private capital flows and official capital movements to a sum of zero. The figures are expressed in billions of dollars, and private capital flows include the statistical discrepancy. Sums may not exactly add up because of rounding errors. The final row of the table shows period averages in the trade-weighted dollar, which rose 6% between 4Q09 and 2Q10.
| 2Q09 | 3Q09 | 4Q09 | 1Q10 | 2Q10 | |
| C/A | -84.4 | -97.5 | -100.9 | -109.2 | -123.3 |
| % of GDP | -2.4 | -2.8 | -2.8 | -3.0 | -3.4 |
| Official | +318.8 | +105.3 | +164.0 | +81.2 | +47.1 |
| Private | -234.3 | -78.3 | -63.1 | +28.0 | +76.2 |
| Dir & Port | -146.8 | -30.8 | -51.6 | +11.7 | +18.3 |
| TW$ | 79.4 | 75.4 | 73.6 | 75.5 | 78.0 |
The health of direct investment and portfolio investment can be studied further by breaking such down into their eight key components: 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. This is done in a second table below. Amounts are expressed in billions of U.S. dollars. In the columns marked 1Q10 and 2Q10, a “plus” sign indicates net purchases, while a negative sign connotes net sales. In the right-most column labeled “Change,” a positive sign indicates either an increased net inflow, a reduced net outflow, or a swing from a net outflow to a net inflow. Those items below with a positive sign in the “Change” column made a greater contribution to financing the current account deficit in the second quarter than they did in 1Q. The $6.7 billion sum of the changes in this column corresponds to the increase in direct and portfolio investment between $11.7 billion in 1Q and $18.3 billion shown in bolded lettering in my first table above.
| 1Q10 | 2Q10 | Change | |
| U.S. DI Abroad | +102.9 | +81.5 | +21.5 |
| Foreign DI in U.S. | +51.6 | +27.2 | -24.4 |
| U.S. + Fgn Bonds | +35.4 | -1.5 | +36.9 |
| U.S. + Fgn Stocks | +10.8 | +22.2 | -11.4 |
| Foreign + Treasuries | +103.1 | +99.0 | -4.1 |
| Fgn + U.S. Corporates | -28.1 | -18.1 | +10.0 |
| Foreign + Agencies | -1.5 | +8.1 | +9.6 |
| Fgn + U.S. Equities | +35.6 | +4.2 | -31.4 |
The largest beneficial shift between the two quarters above involved reduced U.S. buying of foreign bonds, but that item was neutralized almost fully by reduced foreign purchases of U.S. equities. U.S direct investment abroad and foreign direct investment in the United States each shrank last quarter and by similar and thus counterbalancing amounts. The continuing popularity of the risk avoidance trade was underscored by $99.0 billion of net foreign buying of Treasury securities in 2Q after $103.1 billion of net purchases in the first quarter.
The Commerce Department data for July, which exclude direct investment, do not dovetail with the dollar’s improved performance against the euro after early June. The so-called TIC data revealed significantly greater net capital inflows in July than June. The inflows, measured under three different degrees of aggregation and expressed as monthly averages in billions of dollar, exceeded the levels in 2008 and 2009 as shown below.
| Blns of USD | July | June | 2009 | 2008 |
| Narrow definition | 61.2 | 44.4 | 36.8 | 40.8 |
| In between | 44.0 | 23.5 | 19.8 | 24.3 |
| Broadest definition | 63.7 | -5.2 | -24.0 | 56.3 |
The Treasury Department figures are more up-to-date than what the Commerce Department reports. Nonetheless, they are still old and often suggest a story that cannot be reconciled with observed currency movement during the same time frame.
Copyright Larry Greenberg 2010. All rights reserved. No secondary distribution without express permission.
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That is exactly the way in which things should be analyzed. Why doesn’t this simple clear and clean perspective conduct national discussion of the US economy?
The US is buying more goods than it sells. To make up for that it loans money and it sells bits of the national stock of capital (an article complains: Letting the Japanese Buy Our Land, Our Industries, Our Financial Institutions…)
The US can buy even more since it prints world money called dollars… NO WONDER THE ECONOMY DOESN’T GROW!!