How the U.S. Current Account Deficit Was Funded in 4Q10 and 2010
March 16, 2011
The table below compares funding of the U.S. current account deficit in 4Q10 to the three prior quarters and its funding in calendar 2010 to 2009. The deficit narrowed to 2.9% of GDP in 4Q from 3.4% in the two prior quarters but widened to 3.2% in 2010 from 2.9% in 2009. The 2008 current account deficit had equaled 4.9% of GDP. Official capital inflows counterbalanced 43.2% of last quarter’s current account deficit and 64.6% of the 2010 shortfall. High quality long-term private capital inflows, that is portfolio and direct investment, contracted by a sharp 80% last quarter to $21.9 billion from $108.8 billion in 3Q10 but were comparable in size flows in the first half of last year. The quarterly average of the trade-weighted dollar was 3.8% weaker last quarter than in 3Q10 and down 6.4% compared to its second quarter of 2010 mean value, but its drop between 2010 as a whole and full-2009 was just 2.7%. Although the current account deficit has dropped considerably from it’s pre-recession peak, a shortfall of more than 3% of GDP still raises doubts about long-term sustainability, limiting the U.S. scope for appreciation. Three to five years from now should see the dollar significantly weaker than current levels against a spectrum of emerging market currencies, and the directional change versus the currencies of other advanced economies is somewhat more likely to be negative than positive.
1Q10 | 2Q10 | 3Q10 | 4Q10 | 2009 | 2010 | |
C/A | -108.7 | -122.8 | -125.5 | -113.3 | -378.4 | -470.2 |
% of GDP | -3.0 | -3.4 | -3.4 | -3.1 | -2.9 | -3.2 |
Official | +81.2 | +41.0 | +132.6 | +49.0 | +93.9 | +303.7 |
Private | +27.5 | +81.8 | -7.1 | +64.4 | -560.7 | -166.6 |
Dir & Port | +11.8 | +21.0 | +108.8 | +21.9 | -319.3 | +163.5 |
TW$ | 75.5 | 78.0 | 75.9 | 73.0 | 77.7 | 75.6 |
A second table below breaks down long-term capital inflows into their component parts in the third and fourth quarters of 2010. The changes between those two quarters are shown in the right-most column. A positively signed change indicates 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. Reduced foreign direct investment in the United States and smaller purchases of Treasuries, corporate bonds and Agency securities collectively were responsible for seven-eighths of the $87 billion drop in direct and portfolio investment inflows to $21.9 billion from $108.8 billion in 3Q. Foreigners bought $306.4 billion of long-term Treasuries last year, up from just $22.8 billion in 2009. The sum of the figures in the column labeled “change” corresponds to the difference between the third quarter and 4Q10 entries in the above table in the line labeled direct and portfolio investment. The match is not precise because of errors due to rounding.
3Q10 | 4Q10 | Change | |
U.S. DI Abroad | +78.1 | +92.1 | -14.0 |
Fgn DI in U.S. | +68.9 | +55.8 | -13.1 |
U.S. + Fgn Bonds | +33.7 | +21.3 | +12.4 |
U.S. + Fgn Stocks | +16.7 | +28.9 | -12.2 |
Fgn + Treasuries | +64.5 | +37.5 | -27.0 |
Fgn + U.S. Corporates | -16.9 | +2.0 | -14.9 |
Fgn + Agencies | +50.4 | +28.9 | -21.5 |
Fgn + U.S. Equities | +36.7 | +39.9 | +3.2 |
A final table below is the same as the second one except applied to the successive calendar years of 2009 and 2010. Three elements saw improvement of more than $90 billion each between the two years: foreign buying of 1) Treasuries, 2) corporate bonds, and 3) agency bonds. Much greater U.S. direct investment abroad represented the largest source of enhanced capital outflows in 2010.
2009 | 2010 | Change | |
U.S. DI Abroad | +268.7 | +345.6 | -76.9 |
Fgn DI in U.S. | +134.7 | +194.5 | +59.8 |
U.S. + Fgn Bonds | +144.9 | +88.6 | +56.2 |
U.S. + Fgn Stocks | +63.3 | +78.6 | -15.3 |
Fgn + Treasuries | +22.8 | +306.4 | -283.6 |
Fgn + U.S. Corporates | -130.6 | -27.2 | +103.4 |
Fgn + Agencies | -5.7 | +86.0 | +91.7 |
Fgn + U.S. Equities | +136.4 | +116.7 | -19.7 |
Copyright Larry Greenberg 2011. All rights reserved. No secondary distribution without express permission.