How the U.S. Current Account Was Funded in the Third Quarter
December 15, 2011
The U.S. balance of payments strengthened in 3Q. This improvement was not associated with a stronger average dollar than in 2Q, but it foreshadowed the appreciating trend being seen lately. The current account deficit narrowed 11.6% last quarter and to 2.9% of GDP from 3.3% in the second quarter. Private capital inflows, including the statistical discrepancy, financed five-sixths of the deficit last quarter. High-quality long-term capital inflows embodied in direct and portfolio investment generated a $77.8 billion net inflow in 3Q, a favorable $264.4 billion swing from an outflow of $187.0 billion in the previous period.
3Q10 | 4Q10 | 1Q11 | 2Q11 | 3Q11 | |
C/A | -120.1 | -112.2 | -119.6 | -124.7 | -110.3 |
% of GDP | -3.3 | -3.0 | -3.2 | -3.3 | -2.9 |
Official | +135.2 | +57.8 | +44.6 | +87.5 | +19.0 |
Private | +15.0 | +54.4 | +75.0 | +37.2 | +91.3 |
Dir & Port | +104.3 | +12.1 | -118.0 | -187.0 | +77.8 |
Td-Wt USD | 75.9 | 73.0 | 71.9 | 69.8 | 69.8 |
A second table breaks down the combined change in private direct and portfolio investment between the second and third quarters of 2011 in search of the causes of its big improvement in the latest reported period. The eight elements of long-term capital 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 changes between 2Q11 and 3Q11 are shown in the right-most column below. 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 connection between these two tables is that the $264.6 billion sum of the right-most column’s figures in the second table closely approximates the difference in direct and portfolio investment shown in the first table ($77.8 billion minus a (minus 187.0)). Rounding error explains the minuscule discrepancy. A surge in safe-haven demand for U.S. Treasury securities by foreigners were responsible for almost 70% of the positive swing in direct and portfolio investment inflows. Reduced U.S. direct investment abroad lent additional support to the balance of payments, and net foreign demand for U.S. agency bonds swung to a net inflow from an outflow in the second quarter.
2Q11 | 3Q11 | Change | |
U.S. DI Abroad | +138.5 | +70.8 | +67.7 |
Fgn DI in U.S. | +52.1 | +75.3 | +23.2 |
U.S. + Foreign Bonds | +3.5 | +4.8 | -1.3 |
U.S. + Fgn Stocks | +26.9 | +22.8 | +4.1 |
Fgn + Treasuries | -59.3 | +123.8 | +183.1 |
Fgn + U.S. Corporates | -15.0 | -8.9 | +6.1 |
Fgn + U.S. Agencies | -23.4 | +13.0 | +36.4 |
Fgn + U.S. Equities | +27.6 | -27.1 | -54.7 |
The balance of payments release were not the only U.S. report with favorable properties today.
- Manufacturing surveys from the New York and Philly Federal Reserves improved strongly in December. The Philly Fed index rebounded to 10.3 after dropping to 3.6 in November from 8.7 in October. The index ended 2011 some 41 points above its August reading. The Empire State manufacturing index advanced to a seven-month high of 9.53 from 0.61 in November and minus 8.48 in October.
- New jobless insurance claims dropped 19K to 366K last week, producing a four-week average of 387.75K versus 396.75K in the previous four weeks on average. It has taken a bit over seven months to reverse the sharp deterioration from 389.5K in the four weeks to April 2nd and 431.25K over the next four weeks to April 30.
Not all today’s news was encouraging, however.
- Industrial production recorded a surprise 0.2% drop last month, and capacity usage dipped to 77.8% from 78.0% in October.
- The Treasury monthly data on capital flows in October revealed substantial deterioration. Net long-term inflows dropped to $4.8 billion from $68.3 billion in September, and the broadest Treasury-reported aggregate, which includes short-term capital, swung from a September inflow of $65.0 billion to an October outflow of $48.8 billion. October developments are dated by now, and the dollar’s strong advance suggests a return to big net inflows.
- PPI inflation in November of 0.3% on month was a tick higher than expected. Core PPI inflation edged higher to 2.9% from 2.8%.
Copyright 2011, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: U.S. current account