How the U.S. Current Account Gap Was Financed in the Second Quarter
September 15, 2011
The dollar was on the ropes during the spring quarter of 2011, which was reflected not so much in the current account as in a combined $189.7 billion net outflow generated by portfolio and direct investment. These are the long-term capital movements. The balance of payments must zero out by accounting convention, but highest quality items are the current account, which is also a component of GDP, and long-term capital flows. An enduringly resilient currency hinges on these pillars.
The trade-weighted dollar average in 2Q11 was about 3% below the mean in the first quarter. Although the trade-weighted dollar is currently back in line with its first quarter average, the composition of the balance of payments casts doubt on how long the U.S. currency can hold onto its summer gains. Another negative omen is the fact that the dollar remains 41% lower in trade-weighted terms than its peak just over ten years ago set July 6, 2001.
The table below compares funding of the U.S. current account deficit in the second quarter of 2011 to the four previous quarters. The current account was marginally lower than forecast in both absolute size and as a percentage of GDP. The current account’s ratio to GDP was in fact strikingly stable over the past five quarters. However, official capital inflows needed to offset 73.6% of the current account last quarter, up from 37.3% required in the first quarter of this year. The remaining financing of the current account consisted of hot money and other short-term private capital inflows. Direct and portfolio investment generated the aforementioned $189.7 billion outward stampede or $63.2 billion per month in April-June. There was a $307.7 billion outflow of these high-quality capital items in the first half of 2011. That augmented a $237.6 billion first-half deficit. Together, outflows stemming from the current account and long-term capital summed to $545.3 billion in the first half of 2011 or $90.9 billion per month!
| 2Q10 | 3Q10 | 4Q10 | 1Q10 | 2Q11 | |
| C/A | -120.3 | -120.1 | -112.2 | -119.6 | -118.0 |
| % of GDP | -3.3 | -3.3 | -3.0 | -3.2 | -3.1 |
| Official | +64.1 | +135.2 | +57.8 | +44.6 | +86.9 |
| Private | +56.2 | -15.0 | +54.4 | +75.0 | +31.1 |
| Dir & Port | +8.9 | +104.3 | +12.1 | -118.0 | -189.7 |
| Td-Wt USD | 78.0 | 75.9 | 73.0 | 71.9 | 69.8 |
A second table breaks down the combined change in private direct and portfolio investment between the first and second quarters of 2011 in search of the causes of its big deterioration 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 1Q11 and 2Q11 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 negative $71.9 billion sum of the right-most column’s figures in the second table almost equals the difference in direct and portfolio investment shown in the first table (minus 189.7 minus a (minus 118.0)). Rounding error explains the minuscule discrepancy. The two largest elements of deterioration among long-term capital flows were increased U.S. direct investment abroad, and a swing from small net foreign purchases of U.S. Treasury securities to a $63.8 of net Treasury sales.
| 1Q11 | 2Q11 | Change | |
| U.S. DI Abroad | +89.2 | +134.1 | -44.9 |
| Fgn DI in U.S. | +28.5 | +47.7 | +19.2 |
| U.S. + Foreign Bonds | +11.0 | +3.4 | +7.6 |
| U.S. + Fgn Stocks | +47.1 | +26.7 | +20.4 |
| Fgn + Treasuries | +3.5 | -63.8 | -67.3 |
| Fgn + U.S. Corporates | -4.3 | -13.9 | -9.6 |
| Fgn + U.S. Agencies | -32.5 | -23.3 | +9.2 |
| Fgn + U.S. Equities | +34.2 | +27.7 | -6.5 |
Among the other U.S. data releases today,
- New jobless insurance claims advanced 11K to 428K in the week of September 10. Their four-week average of 419.5K compares to 403.5K per week in the four weeks to August 13 and an average of 416K in the 28 weeks to July 16. The trend all year has been pretty trendless at a level that does not permit enough growth in employment to cut unemployment.
- Industrial production growth slowed to a 0.2% monthly gain in August from 0.9% in July. There was a 3.4% on-year increase, and capacity usage ticked up a tenth to 77.4%.
- Consumer price inflation in August accelerated to 3.8% from 3.6% in June and July, with a core rate of 2.0%. Headline inflation averaged 2.5% per annum in the decade between August 2001 and August 2011, down from 2.6% per annum in the prior ten-year period. A slowdown of core inflation in those sequential 10-year periods from 2.7% to 1.9% was not associated with stronger and more sustainable real economic growth in the United States.
- The Empire State manufacturing index in September printed at minus 8.82, 1.1 points lower than in August and 30.5 points less than in April.
- The Philly Fed index remained in the red at minus 17.5. While better than August’s negative 30.7, September’s reading was worse than the minus 13.8 average score in July and August.
Copyright 2011, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
ShareThis
