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

December 16, 2009

The $108.0 billion current account deficit in 3Q09 equaled 3.0% of GDP, similar to the ratios of 2.8% in 2Q09 and 2.9% in the first quarter but well below a deficit equal to 5.1% of GDP a year earlier.  The value of the deficit was $10.1 billion or 10.3% wider than in the second quarter.  Officials generated a $132.5 billion net capital inflow, $181.9 billion less than in 2Q.  However, the net outflow attributable to the private sector was only $24.5 billion, $192.0 billion less than in 2Q.  Thus, a greatly diminished net private capital outflow not only offset the wider current account shortfall but also the sharp decline in net official capital inflows.

The swing in official capital flows between the two quarters mainly reflected the “reversal of swaps initiated under temporary reciprocal currency arrangements between the Fed and foreign central banks.”  Short-term capital and the unexplained statistical discrepancy were responsible for 70% of the shift in private capital.  Direct and portfolio capital, the high-quality items one likes to see entering an economy, generated a net outflow that was $57.0 billion less than in 2Q and accounted for the other 30% of the shrinkage in net private capital outflows between the second and third quarters.  Reduced U.S. purchases of foreign bonds was the largest element of the reduction of net portfolio and direct investment outflows.

The table below compares major balance of payments items last quarter to the flows in the four previous quarters.  Figures with positive signs represent net inflows.  The final line of the table has the quarterly average values of the trade-weighted dollar, which by last quarter had almost squandered all the appreciated ground acquired in the fourth quarter of 2008 and first quarter of this year, when wealth in search of the safety of Treasury securities flooded into the United States.

  3Q08 4Q08 1Q09 2Q09 3Q09
C/A -184.2 -154.9 -104.5 -98.0 -108.0
% of GDP -5.1 -4.3 -2.9 -2.8 -3.0
Official -110.6 -284.4 +314.0 +314.4 +132.5
Private +294.8 +439.3 -209.6 -216.4 -24.5
Dir & Port +65.4 +134.8 -54.8 -111.9 -55.0
TW$ 73.5 81.4 82.7 79.4 75.4

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



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