How the U.S. Current Account Deficit Was Funded Last Quarter and in 2008

March 18, 2009

The table below compares funding of the U.S. current account deficit in 4Q08 to the three prior quarters and its funding in calendar 2008 to that in calendar 2007.  The deficit hovered around 5% of GDP in the first three quarters of last year but declined sharply to 3.7% of GDP in the final quarter.  A $48.5 billion drop in the deficit was augmented by a $123.4 billion increase in private capital inflows, and both were offset by a net official capital inflow that was $171.9 billion larger in the fourth quarter than in the third quarter.  Net official capital transactions generated a net outflow of $113.0 billion last year, an adverse swing of $501.6 billion from 2007.  High-quality private long-term capital inflows, that is direct and portfolio investment shown in the second from bottom row, rose by $47.9 last quarter but shrank by $163.8 billion in 2008.  The trade-weighed dollar averaged almost 11% higher in 4Q08 than 3Q08, which was consistent with a healthier balance of payments, but the U.S. currency posted a slightly lower mean value for the year as a whole.  With some hindsight, that also made sense, since improvement in the current account was dwarfed by deterioration in long-term capital inflows.

  1Q08 2Q08 3Q08 4Q08 2007 2008
C/A -176.9 -182.2 -181.3 -132.8 -731.2 -673.3
% of GDP -5.0 -5.1 -5.0 -3.7 -5.3 -4.7
Official +176.5 +102.5 -110.1 -281.9 -388.7 -113.0
Private +0.4 +79.7 +291.4 +414.8 +342.6 +786.2
Dir & Port -4.1 +68.1 +85.2 +133.1 +346.2 +182.4
Tde-Wt $ 72.0 70.9 73.5 81.4 77.7 74.4


A second table below breaks down long-term capital inflows into their component parts for both the third and fourth quarters of 2008 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. Reflecting the risk averse sentiment last quarter, investors in the U.S. and abroad were liquidating assets that they did not hold in their resident countries.  The only exception, as one would expect to this trend, was foreign purchases of U.S. Treasuries.

  3Q08 4Q08 Change
U.S. DI Abroad +52.4 +85.3 -32.9
Fgn DI in U.S. +57.3 +80.6 +23.3
U.S. + Fgn Bonds -67.8 -37.3 -30.5
U.S. + Fgn Stks -14.8 -39.7 +24.9
Fgn + Treasuries +89.1 +89.5 +0.5
Fgn + U.S. Corporates -35.5 -3.7 +31.8
Fgn + U.S. Agencies -58.8 -21.4 +37.4
Fgn + U.S. Equities +2.9 -3.6 -6.5


A third table below is analogous to the above table except that the comparison is between the two calendar years. Net foreign sales of U.S. foreign securities other than Treasuries accounted for the bulk of a $163.6 billion reduction of the inflow in private portfolio and direct investment to $182.4 billion last year.

  2007 2008 Change
U.S. DI Abroad +333.3 +317.8 +15.5
Fgn DI in U.S. +237.5 +325.3 -12.2
U.S. + Fgn Bonds +170.7 -84.7 +255.4
U.S. + Fgn Stks +118.0 -6.3 +124.3
Fgn + Treasuries +156.8 +307.6 +150.8
Fgn + U.S. Corporates +372.1 +0.6 -371.5
Fgn + U.S. Agencies +19.4 -131.0 -150.4
Fgn + U.S. Equities +182.4 +6.9 -175.5

Copyright 2009 Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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