Comment on U.S. Current Account Data

March 21, 2017

U.S. President Trump has cast great attention on the U.S. trade and current account deficits, calling such a drag on the growth of U.S. real GDP and jobs and insinuating that the deficit expanded and the jobs and GDP situations deteriorated under his predecessor’s stewardship.

The facts indicate otherwise otherwise.

  • The current account deficit averaged 2.5% of GDP in the second half of 2016, down from 2.7% in the first half of the year, so the trend was improving just before the baton was passed from the 44th to the 45th president.  The deficit averaged 2.65% of GDP over all eight Obama years, about half as much as 4.7% of GDP in 2008 and 5.0% of GDP in 2007.
  • Obama inherited America’s sharpest economic downturn since the 1930s, but positive growth was restored slightly less than a half-year into his first term. Thereafter, real GDP advanced in 28 of the ensuing 30 calendar quarters, including the last eleven quarters of his presidency. The current account’s negative contribution to real GDP growth in 2016 was only a half percentage point.
  • Non-farm payroll employment climbed 11.5 million workers during Obama’s 8-year presidency in spite of the very negative momentum in 2009. The prior eight years saw jobs rise just 1.6 million on net. Expressed as growth per annum, jobs rose at a net 1.0% rate versus a 0.1% rate in 2001-8.

The current account balance includes net merchandise trade, net trade in services, net investment income, and net transfer payments into and out of the United States. A country’s current account is determined by the imbalance between its investment and savings. The current account is the flip side of net flows of all capital flows from official and private sources and both of a short- and long-term nature. Since the U.S. economy takes in more capital than it sends out, it has to have a current account deficit.

Not all capital flows have the same impact on the dollar’s external value. For supporting the dollar, it’s nice to see strength in long-term capital, both direct and portfolio investment. Going from 2015 and 2016, the excess of foreign direct investment in the United States over U.S. direct investment abroad went up by $44.7 billion. Likewise, foreign net purchases of Treasuries and other U.S. debt instruments net of U.S. purchases of foreign debt went up by $66.0 billion. Two-way capital flows involving equities however, generated an outflow that was $179.3 billion more disadvantageous to the dollar.

The U.S. current account deficit in 2016 was 3.9% or $18 billion wider than the 2015 deficit. As a percent of U.S. GDP, it continued to be manageable in size. The capital movement that financed last year’s deficit had a composition that was somewhat less supported by long-term portfolio and direct investment and accordingly more reliant upon short-term capital. More importantly, about four-fifths of the deterioration in the quality of the current account funding transpired in the final quarter of the year. That’s a development that bears watching.

Copyright 2017, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



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