How the U.S. Current Account Was Financed in the Fourth Quarter and 2011
March 14, 2012
The current account deficit widened 15.3% last quarter and to 3.2% of GDP from 2.8% in the third quarter. The increase in 2011 was only 0.5%, and there was a marginal dip last year when expressed as a percentage of GDP. The table shows the financing of that current account between official and private capital flows. The balance of payments conforms to double-entry bookkeeping standards, and the current account, private capital (including the statistical discrepancy), and official capital by definition always net out to zero. The deterioration of the current account last quarter resulted from a $6.4 billion rise of the goods and services trade deficit and an even larger $10.3 billion drop of net investment income. The current account shortfall’s increase was augmented by a swing in official capital from a $16.8 billion in 3Q to an outflow of $102.1 billion. The net private capital inflow, on the other hand, jumped by $135.4 billion to $226.2 billion, offsetting the deteriorations of both the current account and net official capital. However, all private capital inflows are not equally meaningful. Direct and portfolio investment, long-term capital inflows constitute the highest quality portion of private capital, and these rose only $5.3 billion between the third and fourth quarters.
blns of $ | 2010 | 2011 | 1Q11 | 2Q11 | 3Q11 | 4Q11 |
C/A | -470.9 | -473.4 | -118.3 | -123.4 | -107.6 | -124.1 |
% of GDP | -3.2 | -3.1 | -3.2 | -3.3 | -2.8 | -3.2 |
Official | +355.5 | +468.0 | +44.6 | +87.5 | +16.8 | -102.1 |
Private | +115.4 | +426.6 | +73.7 | +35.9 | +90.8 | +226.2 |
Dir & Port | +109.8 | -205.8 | -118.1 | -186.5 | +46.7 | +52.0 |
T-Wt USD | 75.6 | 70.9 | 71.9 | 69.8 | 69.8 | 72.4 |
A second table below focuses on the eight components of direct investment and portfolio investment. Changes in each component between 3Q11 and 4Q11 are noted in the right-most column, where 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 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. Half of the items below caused aggregated direct and portfolio investment inflows to rise, and the rest mitigated that increase to a mere $5.2 billion on balance, which except for some rounding matches the increase in the first table from $46.7 billion in 3Q to $52.0 billion in 4Q.
3Q11 | 4Q11 | Change | |
U.S. DI Abroad | +74.1 | +103.4 | -29.3 |
Fgn DI in U.S. | +67.6 | +78.3 | +10.7 |
U.S. + Foreign Bonds | +17.3 | -26.7 | +44.0 |
U.S. + Fgn Stocks | +22.8 | -9.1 | +31.9 |
Fgn + Treasuries | +118.9 | +78.7 | -40.2 |
Fgn + U.S. Corporates | -9.7 | -31.3 | -21.6 |
Fgn + U.S. Agencies | +12-5 | +11.0 | -1.5 |
Fgn + U.S. Equities | -28.3 | -17.1 | +11.2 |
A third and final table is conceptually the same as the second one except that the comparison is between the sequential calendar years 2010 and 2011 when a pronounced adverse $315.4 billion swing occurred. That figure is derived by summing the changes in the right-most column. Except for rounding error, the sum equals the magnitude of the shift from a $109.8 billion net inflow in 2010 one sees in the first table to a net outflow of $205.8 billion in 2011. Seven of the eight long-term capital flow items deteriorated last year. The two biggest factors involved reduced foreign buying of Treasury securities and lessening foreign demand for U.S. equities.
2010 | 2011 | Change | |
U.S. DI Abroad | +351.4 | +406.2 | -54.8 |
Fgn DI in U.S. | +236.2 | +227.9 | -8.3 |
U.S. + Foreign Bonds | +72.8 | +5.1 | +67.7 |
U.S. + Fgn Stocks | +79.1 | +87.8 | -8.7 |
Fgn + Treasuries | +256.4 | +141.8 | -114.6 |
Fgn + U.S. Corporates | -24.2 | -60.3 | -36.1 |
Fgn + U.S. Agencies | +1.5 | -32.4 | -33.9 |
Fgn + U.S. Equities | +143.1 | +16.4 | -126.7 |
The current account is a prominent dollar fundamental. The current account is an element of GDP measured from the expenditure side and well-known to students of macroeconomics as the (X minus M) tail in the equation GDP = C + I + G + (X – M). A shrinking current account surplus or, as in the U.S. case, rising current account deficit implies a leakage of demand and drag on incremental growth. America’s ever-present large current account deficit keeps the dollar from performing as well as other fundamental factors might suggest it should. Before the dollar was floated in 1973, analysts used to look at the “Basic Balance” for signs of balance of payments strain. The Basic balance adds together the current account, direct investment and portfolio investment. In theory, a deterioration of the Basic Balance ought to correlate with selling pressure on the U.S. currency, but that often doesn’t happen in short time periods. In the first table above, the average trade-weighted value of the dollar dropped 4.7 points (or 6.2%) to 70.9 in 2011. While the current account burden was virtually similar in the two years, the big deterioration in private long-term capital caused the Basic Balance to worsen noticeably as one might expect.
Copyright 2012, Larry Greenberg. All rights reserved. No secondary distribution without express permission.