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

June 17, 2009

The current account deficit narrowed by $53.4 billion to $101.5 billion in 1Q09 from $154.9 billion in the final quarter of 2008 and to 2.9% of nominal GDP from 4.4% of GDP.  However, the deterioration of high-quality long-term net capital, that is portfolio investment and direct investment flows, amounted to $156.7 billion or almost three times as much as the improvement of the current account last quarter.  The balance of payments therefore worsened on the whole.  Although the trade-weighted dollar (TW$) was 1.6% firmer on average last quarter than in 4Q08, data released today by the U.S. Commerce Department on all international transactions foreshadow an underlying trend of dollar depreciation.  Despite its recent resilience, the TW$ is presently more than 5% weaker than its first-quarter average level in trade-weighted terms.

Benchmark revisions were announced for the U.S. current account deficit in past quarters and years.  The combined current account deficit for the four years from 2005 to 2008 was revised upward by $63.3 billion or an average of $15.8 billion per year.  The deficit’s peak year remains 2006 at $803.5 billion instead of $788.1 billion as reported previously.  The peak quarter was 3Q06, a full year before the onset of the financial crisis, when the deficit stood at $214.8 billion not annulaized.  This was revised upward from $210.9 billion calculated previously.  The deficit-to-GDP ration was 4.9% in 2008, 5.3% in 2007, and 6.1% in 2006.  The deficit last quarter was America’s smallest since a $88.3 billion shortfall in 4Q01 just following the 9/11 attacks.

The table below compares funding of the U.S. current account gap in 1Q09 to the four quarters of 2008.  The nearly $600 billion improvement in official capital movements was mainly attributable to “a shift from net drawings to net repayments on temporary reciprocal currency arrangements between the U.S. Federal Reserve System and foreign central banks.”  Such so-called swap drawings enabled other central banks to acquire dollars, which were then pumped into their local markets when money markets became extremely dysfunctional last autumn.  Among private capital flows, the aforementioned deterioration of net portfolio and direct investment was supplemented by a swing in short-term capital, that is all other private capital items including the statistical discrepancy, from a collective inflow of $304.5 billion in the final quarter of 2008 to a net outflow of $190.8 billion in the first quarter of 2009.

  1Q08 2Q08 3Q08 4Q08 1Q09
C/A -176.3 -187.7 -184.2 -154.9 -101.5
% of GDP -5.1 -5.3 -5.1 -4.4 -2.9
Official +211.6 +136.0 -110.6 -284.4 +314.3
Private -32.3 +51.8 +294.8 +439.3 -212.8
Dir & Port -77.2 -4.5 +65.4 +134.8 -21.9
TW$ 72.0 70.9 73.5 81.4 82.7


A second table below breaks down long-term capital inflows into their component parts for both 4Q08 and the first quarter of 2009 and indicates the change between those two 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 quarterly 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 six long-term capital flows with a positive figure in the “change” column contributed to the adverse swing from a $134.8 billion inflow on direct and portfolio investment in 4Q08 to an outflow of $21.9 billion last quarter. Rounding accounts for the marginal discrepancy between the sum of the right-most column figures in the table below and the difference in direct and portfolio investment between 4Q08 and 1Q09 in the table above.

  4Q08 1Q09 Change
U.S. DI Abroad +84.5 +24.0 +60.5
Fgn DI in U.S. +96.8 +35.3 -61.5
U.S. + Fgn Bonds -34.9 +33.8 -68.7
U.S. + Fgn Stks -35.1 +1.5 -36.6
Fgn + Treasuries +81.5 +56.9 -24.6
Fgn + U.S. Corporates -3.8 -15.5 -11.7
Fgn + U.S. Agencies -21.4 -45.3 -23.9
Fgn + U.S. Equities -3.9 +6.0 +9.9

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



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