How the U.S. Current Account Deficit Was Funded in the Third Quarter

December 17, 2008

The U.S. current account gap narrowed almost 4% last quarter but at $174.1 billion still equaled a pretty sizable 4.8% of GDP. That ratio has hovered between 4.8% and 5.1% over the past year. The table below compares funding of this deficit during 3Q08 with 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. The last row tabulates the index for the average value of the trade-weighted dollar in each quarter. The dollar did well in the third quarter. Both total private capital inflows and the portion represented by long-term capital strengthened in the quarter, but the major offset to a big adverse swing in official capital movements was concentrated in short-term private capital. Last quarter saw a $211 billion deterioration of net official capital, which surpassed the $6.8 billion shrinkage in the current account deficit and needed to be offset by bigger private capital inflows. The outsized drop in net official capital was caused mainly by drawings on temporary reciprocal currency arrangements, also know as swap lines, between the Fed and other central banks.

  3Q07 4Q07 1Q08 2Q08 3Q08
C/A -173.0 -167.2 -175.6 -180.9 -174.1
Official +140.4 +122.7 +176.5 +102.5 -108.5
Private +158.9 +44.5 -0.9 +78.4 +282.6
Dir & Port -19.5 +111.2 -0.9 +70.4 +96.4
Tde-Wt $ 77.0 73.3 72.0 70.9 73.5


A second table below breaks down long-term capital inflows into their component parts for both the second and third quarters and their respective changes between those quarters. The components include 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 again are expressed in billions of dollars. Positive signs in the middle two columns indicate net purchases, whereas negative signs reflect net sales. For the column entitled “change,” a positive sign indicates an increased net inflow, a reduced net outflow, or a swing from a net outflow to a net inflow. Thus, only those long-term capital flows with a positive figure in the “change” column contributed to the somewhat bigger inflow from direct and portfolio investment.


  3Q08 2Q08 Change
U.S. DI Abroad +56.9 +84.0 +27.1
Fgn DI in U.S. +66.1 +105.3 -39.7
U.S. + Fgn Bonds -72.0 +12.0 +84.2
U.S. + Fgn Stks -14.8 +21.4 +36.2
Fgn + Treasuries +89.5 +65.7 +23.8
Fgn + U.S. Corporates -34.7 +50.6 -85.3
Fgn + U.S. Agencies -57.0 -32.8 -24.2
Fgn + U.S. Equities +2.5 -0.7 +3.2


In liquidating markets, U.S. net sales of foreign securities surged last quarter, two-way direct investment flows diminished, and foreigners rotated out of corporate and agency bonds and into U.S. Treasuries in a big flight to quality. The seminal event of the period, the failure of Lehman brothers, occurred just two weeks from the end of the period. More asset wealth destruction occurred in the ensuing quarter, that is 4Q08. Dollar strength also ebbed sharply this month, a development that was not foreshadowed in today’s Commerce Department report on U.S. International Transactions.



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