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U.S. international transactions, fourth quarter and year 1992.

THE U.S. current-account deficit increased to $22.0 billion in the fourth quarter from $15.8 billion (revised) in the third (table A).(1) Decreases in the surpluses on both services and investment income and an increase in net unilateral transfers more than offset a decrease in the deficit on merchandise trade. [TABULAR DATA A OMITTED]

In the capital account, U.S. residents slowed their acquisitions of foreign assets, while foreign residents stepped up their acquisitions of U.S. assets.

The following are highlights for the fourth quarter of 1992: * The merchandise trade deficit fell in the

fourth quarter as exports, led by a surge in

capital goods, increased more rapidly than

imports. * The surplus on service transactions returned

to a normal level after being boosted in the

previous quarter by exceptional transactions

related to Hurricanes Andrew and Iniki. * The surplus on investment income decreased,

mostly as a result of continued

economic weakness abroad, which pushed

earnings on U.S. direct investment lower. * Net unilateral transfers increased as a result

of a bunching in U.S. Government grants to

Israel. * Net U.S. capital outflows decreased, but

outflows into foreign securities strengthened. * Net foreign capital inflows increased sharply,

as inflows into U.S. securities picked up by

very substantial amounts. * Tensions in the European exchange markets

prompted sizable activity in the foreign official

accounts within the quarter. Because

many of the inflows and outflows were off-setting,

however, there were only moderate

net official capital inflows for the quarter.

U.S. dollar in exchange markets.-the U.S. dollar appreciated sharply in the fourth quarter, rising 10 percent on a trade-weighted basis against the currencies of 10 industrial countries and 7 percent against the currencies of 22 OECD countries Plus 4 newly industrialized countries in Asia (table B, chart 1). Much of the appreciation against the European currencies occurred in October in response to the European currency crisis in September; the dollar was viewed as being safe from the uncertainties asincreased 3 percent to $10.2 billion; receipts sociated with the crisis. The dollar was particularly strong against the British pound and Italian lira, both of which had been withdrawn from the Exchange Rate Mechanism (ERM) in mid-September and promptly fell by substantial amounts. [TABULAR DATA B OMITTED]

In November and December, the dollar was supported by evidence that the U.S. economy might be growing more rapidly than previously thought and that downturns in industrial economies abroad were larger than expected. German authorities, who were reluctant to reduce interest rates further in spite of an economic downturn there, repeatedly stated their commitment to maintaining the existing relationship of the German mark to the French franc in order to maintain the narrow band of the ERM. Nonetheless, another currency crisis occurred, and several countries found it necessary to devalue within the ERM or to abandon their links to the European currency unit.

Current account

Merchandise trade.--The U.S. merchandise trade deficit decreased to $26.0 billion in the fourth quarter from $27.6 billion in the third.

Exports.--Merchandise exports increased $4.3 billion, or 4 percent, to $114.4 billion in the fourth quarter. Volume, measured in constant (1987) dollars, also increased 4 percent. Nonagricultural exports accounted for the increase in current dollars; agricultural exports changed little.

Nonagricultural exports increased $4.3 billion, or 4 percent, to $103.0 billion. Volume increased 5 percent. More than one-half of the increase in current dollars was in capital goods-completed civilian aircraft, telecommunications equipment, semiconductors, and computers, peripherals, and parts. Consumer goods and automotive products also increased strongly. A substantial increase in nonmonetary gold to Western Europe boosted industrial supplies and materials.

Agricultural exports decreased $0.1 billion, or 1 percent, to $11.4 billion, following an especially strong increase. Volume decreased 2 percent. Most major commodity categories changed little in current dollars from their high third-quarter levels. Soybeans, though down from an exceptionally strong third quarter, continued to be stimulated somewhat by their use as a substitute oil for rapeseeds, particularly in Western Europe, where rapeseeds were in short supply. Exports of wheat increased worldwide; however, they fell off sharply to the Commonwealth of Independent States (CIS) when U.S. Government credit guarantees and shipments were suspended in mid-December because the CIS fell behind on its debt repayments.(2)

Imports.--Merchandise imports increased $2.6 billion, or 2 percent, to $140.3 billion in the fourth quarter. Volume, measured in constant (1987) dollars, increased 3 percent. Nonpetroleum imports more than accounted for the increase in current dollars; petroleum imports decreased.

Nonpetroleum imports increased $3.1 billion, or 3 percent, to $126.6 billion. Volume increased 3 percent. In current dollars, the increase in capital goods was much smaller than in the third quarter, as computer shipments were off sharply. An increase in nonpetroleum industrial supplies and materials was more than accounted for by a jump in nonmonetary gold imports from Western Europe. Automotive products were boosted by a sharp increase in cars from Japan and Western Europe. Consumer goods decreased after an exceptionally strong increase in the third quarter.

Petroleum imports decreased $0.5 billion, or 4 percent, to $13.7 billion. both prices and volume decreased. The average price per barrel decreased to $17.93 from $18.56. The average number of barrels imported daily decreased to 8.39 million from 8.42 million. Consumption and domestic production increased, and inventories decreased.

Services.--Net service receipts were $12.9 billion in the fourth quarter, compared with $15.7 billion in the third.

Transfers under U.S. military agency sales contracts were down slightly to $2.5 billion. U.S. direct defense expenditures abroad were down slightly to $3.1 billion.

Foreign visitors spent $14.0 billion in the United States, up 3 percent. Receipts from overseas increased 3 percent to $10.2 billion; receipts from Canada decreased 10 percent to $2.0 billion; and receipts from Mexico increased 22 percent to $1.8 billion. U.S. travelers spent $10.0 billion in foreign countries, a 1-percent increase. Payments for overseas travel were unchanged at $8.7 billion; payments to Canada decreased 5 percent to $0.8 billion; and payments to Mexico increased 9 percent to $1.4 billion.

Passenger fare receipts increased 7 percent to $4.4 billion, and passenger fare payments decreased 2 percent to $2.9 billion. Transportation receipts increased slightly to 6.3 billion. Port expenditure receipts were boosted by higher ocean port receipts, and freight receipts were boosted by higher revenues of air carriers resulting from higher export tonnage. Transportation payments decreased slightly to $5-9 billion. Port expenditure payments decreased as nearly all major U.S. airlines reported lower port costs abroad; the decrease would have been larger except for a significant pickup in export and import freight tonnage. Freight payments were unchanged.

Receipts from foreigners for other private services decreased $0.3 billion, to $12.7 billion. Payments to foreigners for other private services increased $2.9 billion, to $7.4 billion; payments had been depressed in the third quarter by large losses recovered from foreign reinsurers for the damage caused by Hurricanes Andrew and Iniki. (Payments for insurance are recorded net of losses recovered.) Losses recovered returned to a normal level in the fourth quarter.

Investment income.--Net receipts of investment income were $0.8 billion in the fourth quarter, compared with $3.0 billion in the third.

Direct investment income.--Income receipts on U.S. direct investment abroad decreased to $11.2 billion from $12.5 billion; a drop in earnings of manufacturing affiliates more than accounted for the decrease.

Income payments on foreign direct investment in the United States shifted to small losses from profits of $0.2 billion as a result of larger operating losses.

Portfolio investment income.--Receipts of income on other private investment increased slightly to $12.7 billion. Payments of income on other private investment were $14.7 billion, compared with $14.1 billion, as a result of higher payments on large foreign purchases of U.S. bonds in recent quarters.

Receipts of income on U.S. Government assets dropped to $1.4 billion from $2.0 billion. Payments of income on U.S. Government liabilities were unchanged at $9.8 billion.

Unilateral transfers.--Unilateral transfers were net payments of $9.8 billion in the fourth quarter, compared with net payments of $6.9 billion in the third.

U.S. Government grants were $5.7 billion, up from $2.5 billion. The step-up was due to the recurring fourth-quarter distribution of cash to Israel ($1.2 billion), which is drawn completely in the first quarter of the U.S. Government's fiscal year as soon as funds are appropriated by Congress, and to additional funds ($13.8 billion) disbursed to Israel under the credit waiver program to finance military purchases. Grants include an estimate for small amounts disbursed to support relief efforts in Somalia.

Capital account

Net recorded capital inflows--that is, net changes in U.S. assets abroad less net changes in foreign assets in the United States--increased to $13.8 billion in the fourth quarter from $0.7 billion in the third. Foreign residents stepped up their acquisitions of U.S. assets, and U.S. residents slowed their acquisitions of foreign assets.

U.S. assets abroad.--U.S. assets abroad increased $18.5 billion in the fourth quarter, compared with an increase of $21.2 billion in the third.

U.S. official reserve assets.--U.S. official reserve assets decreased $1.5 billion in the fourth quarter, mostly as a result of a decline in foreign currency holdings of German marks from off-market activities. Transactions included an offsetting transfer of $3.0 billion from the special drawing rights account to the U.S. reserve position in the International Monetary Fund (IMF) account for payment of the U.S. share of the IMF quota increase in early December.

U.S. Government assets other than official reserve assets.--U.S. Government assets other than official reserve assets increased $0.3 billion in the fourth quarter, the same amount as in the third. Neither debt reschedulings nor repayments had a significant impact on transactions in the fourth quarter; they had only a minor impact in the third.

Claims reported by banks.--Claims on foreigners reported by U.S. banks decreased $6.8 billion in the fourth quarter, in contrast, to a $1.3 billion increase in the third. Although an increase in interbank claims payable in dollars indicated some pickup in lending by U.S. banks in the fourth quarter, reductions in other claims were more than offsetting.

Banks' own claims payable in dollars increased $9.9 billion, following a $26.4 billion decrease. This was the first quarterly rise in interbank lending in 1992, but the rise was limited by weak economic activity abroad, including weak yearend demand. Increases in claims on banks in Western Europe, Caribbean banking centers, and "other" Asia were partly offset by further cut-backs in claims on banks in Japan. Some of the rise in claims may have been prompted by the sharp appreciation of the dollar in October, as well as by tensions among European currencies in November.

Banks' domestic customers' claims payable in dollars decreased $6.8 billion after a surge of $13.3 billion, as U.S. money market mutual funds sharply reduced their holdings of Eurodollar certificates of deposit.

Banks' claims payable in foreign currencies decreased $10.5 billion, as large third-quarter borrowings were repaid.

Foreign securities.--Net U.S. purchases of foreign securities increased to a record $17-8 billion in the fourth quarter, a $3.9 billion increase over the previous record in the third quarter. The surge was paced by record net purchases of foreign stocks and continued strong net purchases of foreign bonds.

Net U.S. purchases of foreign stocks reached a record $11.8 billion, with heavy investments in Western Europe, especially the United Kingdom. Heavy demand for foreign equities was augmented by a large volume of foreign new issues placed in the U.S. market. Net purchases from Western Europe totaled $7.5 billion, up $1.1 billion, despite concerns over weak economic activity in many European countries. Partly because of this interest, British stock prices jumped 14 percent in the quarter. Purchases in France and the Netherlands were down. Purchases in Japan also fell, as the Japanese stock market gained only marginally amidst political crises that delayed implementation of key fiscal stimulus programs. Towards the end of the quarter, the Japanese Government announced a policy that propped up stock prices with intervention purchases by large pension funds.

New foreign bond issues in the United States remained heavy at $7.6 billion, the highest quarterly total since the first quarter of 1990, when a large Latin American debt rescheduling boosted new issues. Western European issues reached record quarterly levels.

Transactions in outstanding foreign bonds were about in balance, with net purchases offsetting net sales. Net purchases of British gut-edged securities soared $8.0 billion, to $9.3 billion, reflecting optimism that the recession was ending and that the British economy would fare better now that the tie of the pound to the currencies in the Exchange Rate Mechanism had been eliminated. Net sales occurred in other major markets, mainly Germany and Japan. Net sales also occurred in the Caribbean and "other" Asia.

Direct investment.--Net capital outflows for U.S. direct investment abroad increased to $8.8 billion in the fourth quarter from outflows of $3.5 billion in the third. Increases in net equity capital outflows and reinvested earnings outflows were about equal; intercompany debt shifted to net outflows from net inflows.

Foreign assets in the United States.--Foreign assets in the United States increased $32.3 billion in the fourth quarter, compared with an increase of $22.0 billion in the third.

Foreign official assets.--Foreign official assets increased 5.5 billion, in contrast to a decrease of 7.3 billion (table C). A substantial volume of activity occurred within the quarter, as Western European monetary authorities first rebuilt reserve

positions in October and then drew heavily on positions in November to finance heavy sales of dollars and to restrain the dollar's appreciation against the German mark. [TABULAR DATA C OMITTED]

Liabilities reported by banks.--U.S. liabilities to foreigners reported by U.S. banks, excluding U.S. Treasury securities, decreased $3.2 billion in the fourth quarter, compared with a $22.9 billion increase in the third. Borrowing from abroad by foreign-owned banks in the United States picked up, but this increase was more than offset by other reductions in borrowings.

Liabilities of foreign-owned banks increased $10.5 billion, partly to fund U.S. loan expansion; in contrast, liabilities of U.S.-owned banks decreased $4.0 billion. Not all of the inflows to foreign-owned banks were for loan expansion. Large interbank inflows from France, Italy, and other European countries, as well as Caribbean offices, occurred in October and November as a result of tensions between the French franc and German mark. Most of the reductions in liabilities were with Caribbean offices and Japan. Banks' own liabilities payable in foreign currencies decreased $12.7 billion, roughly paralleling the closing out of foreign currency asset positions in the quarter.

U.S. Treasury securities.--Net foreign purchases of U.S. Treasury securities were a record $20.7 billion in the fourth quarter, up from $4.9 billion in the third. Demand was particularly strong from the United Kingdom in November, a time of instability among European currencies, and from Caribbean financial centers. Demand was also strong from Japan, as it had been throughout the year. Other U.S. securities.--Net foreign purchases of securities other than U.S. Treasury securities surged to $12.3 billion in the fourth quarter, a fourfold increase from net purchases of $2.7 billion in the third. Foreign demand for U.S. securities was boosted by the strength of the dollar in exchange markets and signs that the U.S. economic expansion was accelerating. Much of the increase was in U.S. stocks, which shifted to net purchases of $3.9 billion from net sales of4.0 billion. Gross trading in U.S. stocks picked up 20 percent. Transactions in outstanding bonds shifted to net sales of $2.5 billion from net purchases of $0.7 billion. Foreign demand was weak as investors shifted to U.S. stocks and agency bonds. Agency bonds surged to net purchases of $6.1 billion from $0.5 billion; fourth-quarter purchases were mainly by Japanese, British, and Latin American investors.

New bond issues abroad by U.S. corporations decreased $0.7 billion, to $4.8 billion, but remained moderately strong as the Euromarket calmed following volatility in the third quarter. Issues placed by nonbank financial corporations remained strong, but those of banking corporations were off sharply. The German mark emerged as the preferred European currency following the collapse of the European currency unit sector of the bond market and the liberalization of Bundesbank rules regarding bond issuance. Direct investment.--Net capital outflows for foreign direct investment in the United States were $3.0 billion in the fourth quarter, compared with $2.6 billion in the third. A decrease in net equity capital inflows and a decrease in net intercompany debt outflows were about offsetting.

The Year 1992

The merchandise trade deficit increased in 1992; merchandise imports moved sharply higher in response to the gradual pickup in the U.S. economy, while merchandise exports again slowed, restrained by weak economic activity abroad. The surplus on service transactions increased, although the rise in the surplus was smaller than in 1991. The surplus on investment income decreased, largely because income on foreign direct investment in the United States shifted to small net profits from losses. Net unilateral transfers, which had held down the current-account deficit in 1991 because of sizable cash contributions from abroad, returned to a normal level. Net capital outflows into foreign assets were significantly smaller in 1992 than in 1991 because of a large reduction in U.S. banks' claims on foreigners. Net outflows into foreign securities remained strong.

Net capital inflows into U.S. assets were substantially larger in 1992 than in 1991; inflows to U.S. banks resumed, but much of the step-up was the result of very large inflows into U.S. securities, both private and official. There were substantial net inflows into the foreign official accounts.

U.S. dollar in exchange markets.--The U.S. dollar fluctuated widely in 1992, rising strongly in the first and fourth quarters and dropping sharply in the second and third. On a December-to-December trade-weighted basis, the dollar appreciated 6 percent against the currencies of 10 industrial countries (table B, chart 1). The dollar appreciated 1 percent against most continental European currencies, but it appreciated 20 percent against the British pound and 18 percent against the Italian lira, partly as a result of those countries' withdrawals from the Exchange Rate Mechanism (ERM). The U.S. dollar appreciated 11 percent against the Canadian dollar and depreciated 3 percent against the Japanese yen.

Appreciation of the dollar against the European currencies during the first quarter of 1992 was supported partly by growing evidence of economic recovery in the United States, which contrasted with the moderating performance of overseas economies. A narrowing of interest-rate differentials also supported the dollar, as foreign rates fell slightly more rapidly than U.S. rates (charts 2 and 3). This narrowing attracted foreign investors into long-term U.S. assets, especially corporate bonds.

When expectations of U.S. growth were tempered during the second quarter, the dollar depreciated. In addition, steep declines in both short-term and long-term U.S. interest rates to their lowest levels in 2o years increased already wide interest-rate differentials against dollar assets. In contrast, interest rates rose further in Germany, as monetary authorities there continued to be concerned about the high costs of unification, high wage settlements and inflation, and a money supply that was rising more rapidly than anticipated. Considerable strains began to develop in the exchange markets between Germany and other European countries whose economies were much less robust than the German economy.

By July, prospects for a significant pickup in the U.S. economy were very uncertain. This uncertainty was influential in pushing the dollar lower in exchange markets. In addition, interest-rate differentials against dollar-denominated assets widened further, as U.S. interest rates fell faster than European rates. In response to slow U.S. economic growth, the Federal Reserve eased monetary policy, and market participants expected further easing in policy in the absence of indicators of a stronger recovery.

In the meantime, evidence accumulated that industrial countries abroad, including Germany and Japan, were experiencing substantial slowdowns in economic growth. In spite of the slowdown, German authorities tightened monetary policy in mid-July. Concerted central bank intervention. on two occasions in August did little to interrupt the dollar's decline, which approached 1991 lows against the German mark by the end of the month.

During September, pressures against the dollar ceased temporarily as most attention focused on the mark and its relationship to other currencies in the ERM and on the relationship among the currencies linked to the ERM through the European currency unit (ECU). Market participants lost confidence in the current relationships among currencies when disparities in interest rates and monetary policies became significant and when substantial reservations arose over the desirability of rapid monetary unification. Consequently, a currency crisis ensued, leading to coordinated European central bank interventions of unprecedented size, large changes in interest-rate differentials within Europe, a small cut in German official interest rates, two currency realignments, and the suspension of the British pound and the Italian lira from the ERM. The French franc came under pressure but stabilized amid intervention purchases of francs and a temporary sharp rise in French interest rates.

In October, the dollar appreciated strongly as investors sought refuge from the European currencies and the uncertainties associated with them. The European currency situation was temporarily calm in October, partly in response to Germany's willingness to let market interest rates fall significantly in late September, which in turn led to substantial declines in other European interest rates.

In November, however, another crisis in confidence occurred, particularly over the relationship between the French franc and German mark. French authorities were forced to sharply raise short-term interest rates, and German authorities repeatedly stated their commitment to maintaining the existing relationship of the French franc to the German mark in order to maintain the narrow band of the ERM. Several countries devalued within the ERM, and others abandoned their currency's link to the ECU.

The dollar was supported in November and December by evidence that the U.S. economy was growing faster than had been expected as recently as midsummer, by the perception that the incoming administration would pursue a policy of fiscal stimulus, and by a sharp boost in confidence that the economic recovery would be more rapid in the coming months.

Fluctuations of the dollar against the Japanese yen for the year were narrower than those against the German mark and European currencies, especially in the fourth quarter, when the dollar appreciated much less against the Japanese yen than against the European currencies. The Japanese economy slowed sharply over the year, Japanese stock and real estate values fell precipitously, and the differential between U.S. and Japanese short-term rates fell from 112 basis points against the holding of U.S. dollar assets at. the beginning of the year to 26 basis points against dollar assets at yearend.

The U.S. dollar appreciated significantly against the Canadian dollar, which was held down by weak economic activity in Canada, the steep decline in Canadian interest rates, and uncertainties preceding the late October referendum on constitutional reform. When the Canadian dollar's decline accelerated in the last 4 months of the year, Canadian authorities sharply increased Canadian short-term interest rates. In December, a major program to reduce government spending was announced.

Against the currencies of the newly industrialized countries in Asia, the U.S. dollar appreciated 4 percent against the South Korean won. In contrast, it depreciated i percent against the Taiwan dollar and was unchanged against the Hong Kong dollar and the Singapore dollar.

Current account

The U.S. current-account deficit increased to $62.4 billion in 1992 from $3.7 billion in 1991. Cash contributions from coalition partners in Operation Desert Storm held down the current-account deficit in 1991, but no sizable contributions were received in 1992; as a result, U.S. Government grants and unilateral transfers returned to normal levels. The deficit on goods, services, and income, which does not include unilateral transfers, increased to $31.1 billion from $11.7 billion. The increase in the deficit was the result of an increase in the merchandise trade deficit and a decrease in the surplus on investment income; partly offsetting these developments was an increase in the surplus on services, but the increase was smaller than in 1991 (table D). [TABULAR DATA D OMITTED]

Merchandise trade.--The U.S. merchandise trade deficit increased to $96.3 billion in 1992 from $73.4 billion in 1991 (tables E and F). U.S. export growth again slowed, largely in response to the second successive year of weak growth in world trade and output. The slight depreciation of the dollar on average (measured on a trade-weighted year-over-year basis) had little stimulative effect on exports in 1992. U.S. import growth, which had been severely limited by weak U.S. economic activity in 1991, accelerated by a substantial amount, particularly in the last half of the year, when U.S. economic activity picked up appreciably. [TABULAR DATA E and F OMITTED]

The continued weakness in real demand and output abroad had a significant impact on U.S. trade in 1992. Output slowed sharply in Germany and Japan, grew little in Canada and the United Kingdom, and slowed somewhat in many of the other continental European countries and in many developing countries, including Mexico. The growth in U.S. real gross domestic product recovered from -1.2 percent in 1991 to 2.1 percent in 1992. Although the U.S. recovery was significantly slower than other post-World War II recoveries, it did serve as a source of export growth for many industrial and developing countries at a time when their domestic outputs were lagging.

Price changes in exports and imports by major end-use categories were not uniform in 1992 (table G). Domestic prices of exports were mixed, rising for automotive goods, consumer goods (nonfood), and capital goods excluding computers, and declining for industrial supplies and materials. As in the previous year, domestic price increases were held down by slow growth. When converted into foreign currency prices, price increases of all export categories were slightly less, as a small depreciation of the dollar (measured on a trade-weighted year-over-year basis) offset some of the increase in domestic prices (table H).

Dollar prices of most imports increased less rapidly than in the previous year, with the exception of consumer goods, which increased more rapidly. A decline in prices of industrial supplies and materials excluding petroleum reflected a small decline in metals prices; other nonfood commodity prices leveled in world markets. Prices of capital goods other than computers and aircraft were unchanged. Petroleum prices declined 4 percent. [TABULAR DATA G and H OMITTED]

Exports.--Nonagricultural exports increased $19.5 billion, or 5 percent, to $395.3 billion in 1992, compared with an 8-percent increase in 1991. Volume increased 7 percent, following a 9-percent increase. Expansion slowed significantly for capital goods and for industrial supplies and materials but increased for automotive products and consumer goods (chart 4). Three-fourths of the export growth was to developing countries in Asia and Latin America.

Capital goods increased $9.8 billion, or 6 percent, to $176.8 billion, compared with an increase of 9 percent. Volume also increased 6 percent, compared with an increase of 9 percent. The slowdown in value was attributable to a drop in exports of aircraft and parts from an especially strong pace in 1991.

Aircraft and parts to Western Europe, particularly Germany, Belgium, Luxembourg, and France declined substantially, mostly as a result of declines in economic activity and increased competition. These declines were only partly offset by a significant jump in aircraft and parts to China and Latin America.

Excluding aircraft and parts, capital goods increased at nearly the same pace as a year earlier, with the increases led by the same categories that have been the source of growth for the past several years--computers, peripherals, and parts; semiconductors; and telecommunications equipment. Computers increased at the same pace in both years, with the source of growth coming from Latin America, the newly industrialized countries in Asia (NIC's), and "other" Asia. Shipments of computers to the major markets of Western Europe, Japan, and Canada were unchanged in 1992, as they were in 1991, as a result of weak economic activity in those areas. Semiconductors increased significantly faster than a year earlier to major markets in the NIC's and "other" Asia. Telecommunications equipment also picked up significantly, particularly to "other" Asia, Mexico, and Canada.

Machine tools and metalworking machinery contributed to export growth for the first time in several years; the growth was to Mexico, but shipments remained depressed to the larger markets of Western Europe and Japan due to weak economic activity there.

Nonagricultural industrial supplies and materials decreased $0.2 billion, or less than 1 percent, to $101.6 billion, compared with an increase of 5 percent. Volume increased 2 percent, compared with a 7-percent increase. Exports of paper and paper-base products increased for the seventh consecutive year to major markets in Canada, Western Europe, Mexico, and the NIC's. Building materials also increased. Chemicals declined to industrial countries, but declines were also registered in the developing countries of Asia and China. Nonferrous metals were off sharply; however, nonmonetary gold increased sharply with substantial shipments to Western Europe, Mexico, and the NIC's, Mostly in the fourth quarter. Energy products were also off sharply.

Automotive products increased $6.6 billion, or 17 percent, to $46.7 billion, compared with a 10-percent increase. Volume increased 14 percent, compared with a 7-percent increase.

Parts continue to account for much of the expansion in automotive trade (table 1). A significant increase in parts to Canada was the first in 3 years. A strong increase in parts to Mexico reflects substantial expansion of assembly operations there over the past decade; many assemblies are subsequently shipped to the United States. The increase in both Canadian and Mexican operations in 1992 was partly in response to a 2-percent increase in domestic auto sales, the first increase since 1988. [TABULAR DATA 1 OMITTED]

Passenger cars to Taiwan increased sharply, and those to Japan increased moderately.

Consumer goods (nonfood) increased $4.4 billion, or 10 percent, to $50.4 billion, compared with a 7-percent increase. Volume increased 6 percent, compared with a 4-percent increase. Much of the step-up was to Mexico and other countries in Latin America, where U.S. exports of consumer goods have risen rapidly over the past several years. Exports to Western Europe and Japan were held down by weak economic activity there, and along with exports to the NIC's, were essentially unchanged.

Agricultural exports increased $3.8 billion, or 10 percent, to a record $43.9 billion in 1992, compared with a decrease of less than 1 percent in 1991. Volume increased 12 percent, compared with an increase of 1 percent.

Wheat increased $1.2 billion, largely to the Commonwealth of Independent States (CIS), Japan, and the developing countries in Africa. Exports to the CIS were boosted substantially throughout much of the year by credit guarantees extended by the U.S. Government. However, in mid-December, credit guarantees and shipments were halted when the CIS fell behind on its debt repayments. Corn to the CIS dropped by a substantial one-half, but this drop was offset by a sharp increase to developing countries in Africa.

Soybeans increased $0.4 billion, largely to Western Europe and Latin America. The U.S. soybean crop was 9 percent larger than in 1991, and stepped-up exports were used in part to offset shortages in rapeseed harvests in Western Europe and Canada. This was the second consecutive year of strong increases in soybeans.

Meat and poultry products increased $0.6 billion to a record, largely to Japan, Mexico, and the NIC's. Exports of these products have tripled in the past 6 years, partly as a result of initiatives to open new markets. Vegetables, fruits, and nuts increased $0.4 billion.

Imports.--Nonpetroleum imports increased $45.9 billion, or 10 percent, to $484.2 billion in 1992, compared with an increase of 1 percent in 1991. Volume increased 13 percent, compared with a 1-percent increase. The jump in both value and volume was the result of a substantial step-up in both consumer goods (nonfood) and capital goods in response to the pickup in U.S. economic activity. Industrial supplies and automotive products shifted to increases from decreases, also as a result of the pickup in economic activity (chart 4). Industrial and developing countries each accounted for about one-half of the increase in total imports. China accounted for a sharply higher share of imports from Asia.

Consumer goods (nonfood) increased $15.0 billion, or 14 percent, to $123.0 billion, following a 3-percent increase. Volume increased 11 percent, following a 2-percent increase. Most of the step-up in consumer goods was from China and other developing countries in Asia and in Latin America, reflecting both cyclical and long-run trends. China now accounts for 16 percent of consumer goods imports, up from 14 percent in 1991 and just 4 percent in 1986. Much of this increase in China's share has come at the expense of the NIC's. In 1987, the NIC's supplied 52 percent of nondurable consumer goods, and China 9 percent; in 1992, the NIC's supplied only 30 percent, and China 22 percent. in 1987, the NIC's supplied 35 percent of durable consumer goods, and China 10 percent; in 1992, the NIC's supplied 22 percent, and China 15 percent.

Television, video receivers, and stereo equipment, largely from Japan and the NIC's, were up significantly for the first time in several years.

Capital goods increased $13.7 billion, or 11 percent, to $134.4 billion, following a 4-percent increase. Volume increased 22 percent, following a 9-percent increase. The two categories that contributed most to the increase in 1992 also accounted for most of the 1991 increase-computers, parts, and peripherals; and semiconductors. In 1992, Computers and parts increased from Japan and the NIC's. Semiconductors increased from major markets in "other" Asia, the NIC's, and Japan. Although imports of telecommunications equipment from Japan and the NIC's remain large, these countries have been partly replaced in recent years by other suppliers in Asia, including Malaysia, China, Thailand, and the Philippines.

Machine tools and metalworking machinery fell in 1992, mostly from key suppliers in Japan and Germany. Civilian aircraft and parts slowed.

Nonpetroleum industrial supplies and materials increased $7.5 billion, or 9 percent, to $88.4 billion, following a 2-percent decrease. Volume increased 8 percent, following a 3-percent decrease. The step-up was in chemicals, building materials, nonmonetary gold, and iron and steel products. Chemicals rose from all major areas, with substantial increases from Canada, Western Europe, and Japan. The increase in building materials was largely from Canada and Mexico, with Canada accounting for over four-fifths of the step-up in lumber and wood (largely the result of a pickup in private home construction). The increase in nonmonetary gold was largely the result of a surge from Western Europe in the fourth quarter. The increase in iron and steel products was the first in several years; it was mostly from Canada, Japan, and the NIC's. Voluntary restraint agreements between the United States and 29 countries expired in March, ending all restrictions on U.S. imports of iron and steel mill products; however, this had little effect on imports, as most exports to the United States remained below the old ceilings throughout the remainder of the year, reflecting weak U.S. prices and competitive foreign markets.

Automotive products increased $6.3 billion, or 7 percent, to $91.2 billion, following a decrease of 3 percent. Volume increased 4 percent, following a decrease of 6 percent.

Automotive parts increased 13 percent as a result of increases from Canada (13 percent), Mexico (27 percent), and Japan (10 percent). Japan's share of parts imports has remained steady in recent years, while Canada's share has declined at the expense of a larger share from Mexico, where assembly operations have expanded (table 1). The 1991-92 pickup in parts imports was the largest since the pickup in 1987-88.

Passenger cars increased slightly, as increases from Canada, Mexico, and Germany more than offset decreases from Japan and South Korea. In 1992, sales of domestic nameplates rose 3 percent, the first annual increase since 1988. Sales of Japanese transplants and imports declined 2 percent. The market share of domestic nameplates increased to 57.5 percent, while the Japanese share, including imports and transplants, dropped slightly to 34.4 percent.

Petroleum imports increased $0.2 billion, or less than 1 percent, to $151.4 billion in 1992, compared with a decrease of 18 percent in 1991. A decrease in price offset an increase in volume. The average price per barrel fell to17-37-the lowest level since 1989-from18-13. Volume increased 5 percent--to 8.1 million barrels per day from 7.7 million--but remained 3 percent below the 1990 peak. The volume increase in 1992 was the result of only a gradual pickup in the U.S. economy from recession levels in late 1990 and early 1991.

U.S. supplies of petroleum and products remained plentiful relative to demand during 1992, despite the continued U.N. ban on imports from Iraq. Although the volume of imports from OPEC members was unchanged, OPEC's share of U.S. imports declined to 53 percent from 55 Percent. The volume of imports from Venezuela increased 8 percent, raising its share of imports to 15 percent, compared with 11 percent in 1988. The volume of imports from Saudi Arabia decreased 3 percent (chart 5).

U.S. consumption of petroleum increased to 17.02 million barrels per day from 16.71 million. Domestic production and inventories decreased. Imports as a percentage of consumption increased to 48 percent from 46 percent.

Balances by area.--Capital goods imports from Western Europe and Japan and consumer goods from Asia accounted for much of the rise in total imports in 1992. Capital goods exports to Latin America (mostly Mexico) and Asia accounted for most of the rise in total exports in 1992; exports of capital goods and industrial supplies to Western Europe and Japan were lower (tables J and K, and chart 6). [TABULAR DATA J and K OMITTED]

The surplus with Western Europe decreased to $3.0 billion from $14.9 billion. Nearly all the decrease was the result of substantial increases in imports of industrial supplies and materials, capital goods, and consumer goods; exports fell.

The deficit with developing countries in Asia increased to $45.0 billion from $34.5 billion. The rise in imports was due to the substantial step-up in consumer goods from China and in capital goods from Taiwan, Singapore, and Malaysia; a rise in exports of capital goods to China and Taiwan was partly offsetting. The deficit with the NIC's changed little.

The deficit with Japan increased to $50.0 billion from $44.3 billion, mostly the result of a step-up in capital goods imports, mainly computers and semiconductors, and industrial supplies and materials, mainly chemicals; exports decreased slightly.

The surplus with Latin America and Other Western Hemisphere increased to $6.2 billion from $0.3 billion. Most of the increase was the result of higher U.S. exports to Mexico of capital goods and industrial supplies and materials. The balance on automotive products with Mexico was about unchanged.

Services.--Net service receipts were $55.1 billion in 1992, compared with $45.3 billion in 1991 (table L). [TABULAR DATA L OMITTED]

Transfers under U.S. military agency contracts were $10.9 billion in 1992, compared with $10.7 billion in 1991. Transfers increased significantly to the Middle East, mostly Egypt, Israel, and Saudi Arabia, but they declined by an equal amount to Western Europe. Transfers to Kuwait for reconstruction also increased.

Direct defense expenditures abroad were $13.4 billion in 1992, down from $16.2 billion in 1991 and $17.7 billion in 1991. The decline is the result of a U.S. Government decision to scale back U.S. military operations abroad, particularly in Western Europe, beginning in mid-1990. The early impacts of this decision were felt in 1991, and the cutbacks were accelerated in 1992. The impacts are evident across all major expenditure categories, but the largest are in personnel expenditures abroad and petroleum purchases. (Expenditures, particularly for petroleum, were boosted temporarily early in 1990 a result of Operation Desert Storm.)

Foreign visitors spent $54.7 billion for travel in the United States, up 12 percent; receipts also rose 12 percent in 1991. Travel receipts from overseas were $40.3 billion, up 17 percent, following an increase of 12 percent. Larger receipts from Western Europe accounted for about two-thirds of the step-up in 1992, and receipts from Japan for about one-tenth. Receipts from Canada decreased 2 percent to $8.3 billion; in contrast, they had increased 20 percent in 1991. The number of auto travelers, the largest component, decreased 4 percent; it was down especially sharply--17 percent--in the fourth quarter. Receipts from Mexico increased 6 percent to $6.1 billion, as the number of visitors to the interior increased 8 percent.

U.S. travel payments increased to $43.5 billion, up 18 percent, following a 1-percent decrease. Travel expenditures overseas increased 24 percent to $34.7 billion; the number of travelers is estimated to have increased 11 percent, following a 5-percent decrease. (In 1991, travel to all areas, but especially Western Europe and Japan, was severely curtailed by uncertainties created by the Persian Gulf War in the first quarter; travel recovered only slowly throughout the remainder of the year.) Because only partial data are available, these estimates on overseas travel are subject to larger-than-normal amounts of revision. Payments to Canada decreased 3 percent to $3.6 billion, largely because the amount of same-day automotive travel dropped. Payments to Mexico increased 2 percent to $5.2 billion, as the number of travelers to the border area increased 5 percent.

Passenger fare receipts from foreign visitors traveling on U.s.--flag carriers increased 8 percent to $16.9 billion, up from a 3-Percent increase last year. Passenger fare payments from U.S. residents traveling on foreign transocean carriers increase 11 percent to $11.8 billion after no change the year before.

Other transportation receipts were $24.7 billion, up $1.0 billion. A $1.1 billion jump in port expenditure receipts more than offset a $0.1 billion decrease in freight receipts.

The jump in port expenditure receipts reflected higher air port and ocean port expenditures. Air port expenditures increased $0.8 billion, reflecting a recovery in passenger traffic from the depressed 1991 level brought about by the Persian Gulf War and higher export and import tonnage carried by foreign airlines. Ocean port expenditures increased $0.3 billion, but stable import and export tonnage carried by foreign-flag vessels and a 5-percent decline in the price of bunker fuel held the gain in check.

Freight receipts decreased slightly. Receipts from air carriers continued to grow, while receipts from ocean carriers decreased because of a sharp drop in U.S. Government agricultural shipments.

Other transportation payments were 23.4 billion, just slightly higher than last year. An increase in port expenditure payments was offset by a drop in freight payments.

Port expenditure payments increased $0.3 billion as a result of increased expenses associated with the jump in passenger traffic and increased export and import tonnage carried by U.S. air carriers. The increase was limited by a decline in the cost of jet fuel and a general slowing of price increases in key countries abroad.

Freight payments fell for the second consecutive year, decreasing $0.3 billion. A decrease in ocean freight payments resulted from lower freight rates in liner and tanker services and from excess capacity, more than offsetting a significant increase in petroleum and nonpetroleum import tonnage carried by foreign-flag vessels.

Net receipts from foreigners for other private services were $26.2 billion, compared with $21.3 billion. Among transactions with unaffiliated foreigners, net receipts for education increased 14 percent, a little faster than last year. Net payments for telecommunications were slightly higher. Net receipts for business, professional, and technical services also increased, as receipts increased more than in payments. Net receipts from the sale of financial services declined; a step-up in transactions on foreign exchanges resulted in higher payments to foreign securities brokers. Net receipts on primary and reinsurance transactions included large losses recovered from foreign reinsurers for the damage caused by Hurricanes Andrew and Iniki in late August and mid-September. (The full amount of these losses is recorded when the disasters occurred, rather than when claims are presented to the insurance company.)

Investment income.--Net receipts of investment income were $10.1 billion in 1992, compared with $16.4 billion in 1991 (table L).

Direct investment income.--Income receipts on U.S. direct investment abroad edged up to $49.6 billion in 1992 (table M). Earnings of petroleum affiliates were down 16 percent; the decrease was due to the absence of the profits that affiliates earned in the first quarter of 1991 as a result of price increases associated with the Persian Gulf War and to weak economic activity in industrial countries abroad. Earnings of manufacturing affiliates were off 8 percent, also reflecting weak economic activity. Earnings "another" industries were up 13 percent, largely because of improved earnings of banking affiliates. [TABULAR DATA M OMITTED]

Income payments on foreign direct investment in the United States shifted to $0.4 billion in profits in 1992 from $3.7 billion in losses in 1991. Operating losses decreased to $5.9 billion from $11.6 billion, more than accounting for the shift. The reduction in operating losses, which was relatively widespread, may have been loosely related to the gradual pickup in economic activity in the United States, particularly for chemical and banking affiliates.

Portfolio investment income.--Receipts of income on other private investment tumbled $14.9 billion in 1992, to $53.1 billion (table N). Interest receipts on bank claims fell $11.6 billion because of the continued decline of U.S. interest rates charged to foreign customers on their loans; for the year, average interest rates fell more than 225 basis points. Income receipts on foreign securities held by U.S. residents increased $2.4 billion as a result of strong acquisitions of both bonds and stocks. [TABULAR DATA N OMITTED]

Receipts of income on U.S. Government assets were $6.4 billion, down from $8.1 billion. Most of the decline reflected the absence of $1.1 billion in interest that had been rescheduled in 1991 (table O). In addition, interest receipts declined because of lower earnings on holdings of foreign currencies. [TABULAR DATA O OMITTED]

Payments of income on other private investment dropped $13.8 billion, to $59.8 billion. Interest payments on bank liabilities fell $12.9 billion as a result of the decline in interest rates paid on U.S. bank deposits. Interest payments on foreign-held U.S. bonds increased $1.5 billion because of continued strength in foreign acquisitions.

Payments of income on U.S. Government liabilities were virtually unchanged at $38.9 billion, as the decline in interest rates was offset by an increase in foreign holdings. Unilateral transfers.--Unilateral transfers shifted to net payments of31.4 billion in 1992 from net receipts of $8.0 billion in 1991. Nearly all of the shift was accounted for by U.S. Government grants.

U.S. Government grants were net payments of $13.8 billion in 1992; in 1991, they were net receipts of $24.5 billion as a result of large contributions to the U.S. Government from coalition partners in Operation Desert Storm (table O). Only $0.2 billion remains in outstanding pledges from coalition partners.

Disbursements of grants for debt forgiveness were negligible, compared with an especially large total of $5.2 billion.

Disbursements of grants other than those for debt forgiveness increased to $5.8 billion from $3.4 billion. Grants to Israel accounted for nearly afl of the increase: Israel received funds under both the economic support program and under the waiver credit program to finance military purchases.

Private remittances and other transfers were $13.8 billion, up from $13.0 billion.

Capital account

Net recorded capital inflows--that is, net changes in U.S. assets abroad less net changes in foreign assets in the United States--increased to $75.5 billion in 1992 from $4.8 billion in 1991. Foreign residents stepped up their net acquisitions of both private and official U.S. assets by very substantial amounts. U.S. residents slowed their net acquisitions of foreign assets.

For capital flows into U.S. assets, net inflows into U.S. securities increased by substantial amounts, and net inflows into U.S. banks resumed. Net inflows into all types of foreign official assets were especially strong.

For capital flows into foreign assets, net outflows reflected sharp reductions in international lending activities of U.S. banks, but strong U.S. demand for foreign securities continued. U.S. assets abroad.--U.S. assets abroad increased $44.9 billion in 1992, compared with an increase of $62.2 billion in 1991.

U.S. official reserve assets.-U.S. official reserve assets decreased $3.9 billion in 1992, compared with a decrease of $5.8 billion in 1991 (table C). The decrease in 1992 was attributable to declines in holdings of German marks, which were lowered in the second, third, and fourth quarters as a result of an ongoing program with German monetary authorities to reduce U.S. holdings through a series of off-market transactions, and in the third quarter, by exchange-market intervention sales. In December, the increase in the U.S. reserve position with the International Monetary Fund (IMF) included a $3.0 billion offsetting transfer from the special drawing rights account for payment of the U.S. share of the IMF quota increase. The remaining portion of the quota increase--$9.0 billion--was paid in dollars as a letter of credit that the IMF May draw on as funds are needed. Since a letter of credit is only a contingent liability, no international transaction takes place at the time of its issuance.

Claims reported by banks.-U.S. claims on foreigners reported by U.S. banks decreased32.4 billion in 1992, in contrast to a $4.8 billion increase in 1991. Demand for U.S. bank credit abroad fell during the year, both from U.S.-owned and foreign-owned banks in the United States (tables P and Q). [TABULAR DATA P and Q OMITTED]

The main reasons for reduced activity were essentially the same in 1992 as in 1991: Weak economic activity in several industrial countries; a further pullback of Japanese banks from the U.S. market; weakening demand for syndicated bank credit that was aggravated by a further slowdown in international financing of mergers and acquisitions; alternative financing that was available in the debt securities markets at attractive interest rates; and U.S. banks' caution over the creditworthiness of borrowers and the adequacy of their own capital positions.

Interbank claims decreased $26.2 billion in response to weak economic activity in several industrial countries abroad. Declines in interbank claims were particularly large for Western Europe during the first three quarters. In the fourth quarter, the modest resumption in interbank lending to Western Europe was probably related to the turbulence of European currencies in the exchange markets and did not reflect any fundamental recovery in overall interbank activity. Interbank claims on Caribbean financial centers were curtailed in the third quarter, when U.S. banks sharply scaled back their interoffice operations there. Interbank claims on Japan were also sharply lower, as Japanese banks continued to withdraw from U.S. financial markets, both in reaction to a sharp economic slowdown in Japan and to sharp declines in Japanese asset values. This retrenchment was interrupted in the third quarter, when there was strong temporary demand for funds from banks in Japan to improve asset quality, to meet accounting requirements for the fiscal half-year close, and to meet credit demands in response to developments in the exchange markets among European currencies.

Banks' claims on foreign public borrowers were reduced $5.4 billion by repayments. Banks' claims on other private foreigners increased $13.1 billion, largely reflecting securities firms' lending to international investment funds in Caribbean banking centers through resale agreements.

Banks' claims payable in foreign currencies decreased $9.8 billion. Large credit extensions in the third quarter were repaid in the fourth, and the reductions in the first quarter repaid credit extended in the fourth quarter of 1991. The temporary surge in demand for foreign currencies by Japan and Western Europe, part of which was related to the European currency crisis in September, was met by matched borrowing of currencies from abroad.

Banks' domestic customers' claims decreased $4.0 billion, as U.S. money market mutual funds reduced their holdings of negotiable certificates of deposit issued by overseas branches of U.S. banks.

Foreign securities.--Net U.S. purchases of foreign securities were a record $48.6 billion in 1992, $3.6 billion higher than the 1991 record. This was the fourth successive year of record outflows. Net purchases of stocks increased to another record; net purchases of bonds were also stronger than in 1991 (table P).

Net U.S. purchases of foreign stocks were a record $30.7 billion, just slightly above the 1991 record of $30.2 billion. Investments were heaviest in Western Europe. U.S. investors stepped up their net purchases of British stocks to $11.5 billion from $9.4 billion in 1991, mostly in the second half of the year; strong net purchases helped boost British stock prices 14 percent in the fourth quarter after the pound was withdrawn from the Exchange Rate Mechanism. Net U.S. purchases of German stocks slowed to $0.8 billion from $1.5 billion in 1991. Prices in the German market fell over 16 percent early in the third quarter as a result of high interest rates, a strong German mark, and a sharp slowdown in economic activity; the lower prices encouraged some pickup in purchases in the fourth quarter. Net purchases from Japan, a major source of strength in purchases in 1991, decreased sharply to $4.5 billion from $13.8 billion. Declining corporate profits contributed to a 22-percent decline in stock prices, all in the first half of the year, before prices recovered somewhat in the second half. New issues of foreign stock in the United States were strong in 1992; as in 1991, some of the strength came from privatizations of Mexican companies.

Foreign new bonds issued in the United States reached a record $25.2 billion, up from $21.0 billion in 1991. Low inflation and further substantial declines in U.S. long-term interest rates encouraged stepped-up demand, particularly in the second half of the year. Canadian new issues increased to $10.4 billion from $7.8 billion, as Canadian long-term rates were 200 basis points higher than U.S. rates in the first half of the year and 100 basis points higher in the second half Western European issues increased to $8.1 billion from $7.1 billion.

Private foreign corporations placed $12.6 billion, Up 25 percent. Governments placed $10.6 billion, up 42 percent.

Transactions in outstanding bonds, though resulting in only small net sales of $0.8 billion, included very large and nearly offsetting transactions. Net purchases of $12.6 billion from Western Europe were concentrated in the United Kingdom. British long-term interest rates, though declining sharply through most of the year, remained 150-200 basis points higher than comparable U.S. rates, thus offering attractive returns even after accounting for exchange rate risk; British gilt-edged securities were especially attractive. Net sales of bonds in Japan and the developing countries of Asia and Latin America slightly more than offset net purchases in Western Europe.

Direct investment.--Net capital outflows for U.S. direct investment abroad were $35.3 billion in 1992, compared with $27.1 billion in 1991 (table M).

Net equity capital outflows decreased to $6.4 billion from $11.7 billion; most of the decrease was to Western Europe, the result of a large sale of an affiliate to its foreign parents, and to Latin America, where there were several major acquisitions in 1991, but few in 1992.

Net intercompany debt shifted to outflows of $9.9 billion from inflows of $2.4 billion. Much of the shift was due to the absence of a large loan repayment to a U.S. parent, to the repayment of loans by U.S. parents to their affiliates in the Netherlands Antilles, and to new loans made by U.S. parents to automotive affiliates in Canada and to petroleum affiliates in the Pacific Rim.

Reinvested earnings increased to $19.9 billion from $18.9 billion. Lower reinvested earnings in Europe were more than offset by higher reinvested earnings in Latin America, especially Brazil, and in Australia.

Foreign assets in the United States.--Foreign assets in the United States increased $120.4 billion in 1992, compared with an increase of $67.0 billion in 1991.

Foreign official assets.--Foreign official assets in the United States increased $40.3 billion in 1992, compared with an increase of $18.4 billion (table C). Dollar assets of industrial countries increased $16.0 billion. In the first half of the year, assets increased strongly, particularly in the second quarter when European monetary authorities, on occasion, purchased dollars in exchange markets. In the second half, assets were reduced by substantial amounts in September when European monetary authorities countered a crisis in their exchange markets. After reserve positions of European authorities were rebuilt in October, they were reduced sharply again in November to counter another currency crisis. At times during the fourth quarter, European authorities were substantial sellers of dollars against the German mark. Dollar assets of OPEC members increased $5.4 billion. Dollar assets of other countries increased $18.9 billion as a result of sizable inflows from Asia and Latin America in the first half.

Liabilities reported by banks.-U.S. liabilities to foreigners reported by U.S. banks, excluding U.S. Treasury securities, increased $14.7 billion in 1992, in contrast to a $13.7 billion decrease in 1991. Borrowing of funds from abroad was limited in the first half of the year but picked up in the second half, when foreign-owned banks in the United States borrowed to fund some U.S. loan expansion and purchases of U.S. Government securities (tables P and Q).

In the first half of the year, weak U.S. and foreign loan demand for bank credit held down borrowing from abroad. In addition, there was little incentive to place deposits in the United States because of a further widening of already large, adverse interest-rate differentials, dollar depreciation, and strong preferences for longer term fixed-income securities due to a steepening yield curve in the United States.

In the second half, the pickup was related to special factors, none of which appeared to reflect any fundamental recovery in overall interbank activity. In the third quarter, several developments reduced liabilities in July and August and sharply boosted them in September. First, in July and August, U.S.-owned banks sharply scaled back their interoffice liabilities to Caribbean financial centers. Second, largely in August, foreign-owned banks in the United States borrowed from abroad to fund a pickup in U.S loan demand that was created when a few large U.S. corporations switched their borrowing to the bank credit market from the commercial paper market. Third, throughout September, Japanese-owned banks in the United States borrowed from abroad in order to fund parent banks in Japan to improve asset quality, to meet accounting requirements for the fiscal half-year close, and to fund credit demands in response to developments in exchange markets among European currencies. Fourth, to meet temporary funding requirements, foreign-owned banks substituted overnight borrowing from the Eurodollar markets for funds previously obtained in the U.S. federal funds market.

In the fourth quarter, inflows were partly to fund U.S. loan demand of foreign-owned banks; other inflows were related to turbulence in the European currency markets, which generated sizable inflows from France, Italy, and other European countries, as well as Caribbean offices, as a result of tensions between the French franc and German mark.

Banks' liabilities payable in foreign currencies decreased $2.1 billion. The quarterly patterns and amounts of these liabilities closely matched those of banks' claims payable in foreign currencies.

Banks' custody liabilities increased $6.3 billion, mostly in the second half, as some loans were booked at banks overseas, where loan rates declined faster than U.S. loan rates. U.S. Treasury securities.--Net foreign purchases of U.S. Treasury securities were a record $35.1 billion in 1992, up from $16.2 billion in 1991; the previous record was $29.6 billion in 1989 (table P). Demand from the United Kingdom was exceptionally strong, particularly in the fourth quarter, when there were instabilities among the European currencies and the dollar appreciated sharply. Japanese demand was strong throughout the year. "Other" Asian countries also stepped up their purchases.

Other U.S. securities.--Net foreign purchases of U.S. securities other than U.S. Treasury securities were $29.9 billion in 1992, down from34.9 billion in 1991. A shift to net sales of U.S. stocks from net purchases accounted for the decrease. Net foreign purchases of U.S. corporate and agency bonds accelerated, partly offsetting a selloff of U.S. stocks (table P). Transactions in U.S. stocks shifted to net sales of $4.7 billion from strong net purchases of $9.2 billion. Net sales dominated during the first three quarters of the year; for much of this period, the dollar depreciated sharply and there was considerable uncertainty about the pace of U.S. economic activity. In the fourth quarter, foreigners shifted back to net purchases of U.S. stocks, as U.S. economic activity picked up, as European markets experienced considerable uncertainties due to currency crises, and as foreign economic activity slowed further.

Net foreign purchases of U.S. corporate and other bonds increased to $34.6 billion from $25.7 billion.

New bond issues sold abroad by U.S. corporations increased to $23.4 billion from $20.9 billion (table R). The volume of new issues was strong throughout the year, but particularly in the first half, when Eurobond rates fell to their lowest level in several years, and the U.S.-Eurobond interest-rate differential widened further in favor of borrowing in the Eurobond market. This decline in interest rates, together with a large volume of maturing issues, spurred considerable refinancing activity; little new borrowing appeared to be associated with the pickup in the U.S. economy. Most of the step-up in new issues was by nonbank financial corporations and by banking corporations; new issues of the retail and service sectors dropped sharply. [TABULAR DATA R OMITTED]

Straight fixed-rate bonds accounted for $15.2 billion in new issues, unchanged from the previous year. Floating-rate notes became popular again, at $3.6 billion, as floating-rate yields were higher than fixed-rate yields. Euro medium-term notes, at $3.1 billion, were unchanged.

New issues denominated in dollars totaled $11.9 billion and accounted for 51 percent of U.S. off-shore new issues, down from $12.2 billion and 58 percent in 1991. Demand for dollar issues remained strong, particularly in the second and third quarters, as problems with the proposed European monetary union contributed to instabilities among several European currencies. New issues denominated in marks surged in the fourth quarter following the collapse of the European currency unit sector and the liberalization of new-issue rules by the Bundesbank.

Net foreign purchases of U.S. agency bonds increased to $14.3 billion from $8.8 billion, as investors were attracted by rising U.S. bond prices and the quality of agency issues. Investors from Western Europe accounted for most of the increase; investors from Japan slowed their net purchases substantially.

Direct investment.--Capital transactions for foreign direct investment in the United States shifted to net outflows of $3.9 billion in 1992 from net inflows of $11.5 billion in 1991. The shift is a continuation of the substantial reduction in capital inflows that has occurred since 1989, when inflows peaked at $67.9 billion; equity capital and intercompany debt each accounted for about half of the reduction (table M, chart 7).

Net equity capital inflows decreased to $16.7 billion from $27.1 billion. The decline in 1992 reflected recessions in many major industrial countries and the reluctance of foreign companies to commit additional funds for expansion of U.S. operations. Japan, the United Kingdom, and continental Europe each accounted for large shares of the overall decrease in equity capital.

Net intercompany debt shifted to net outflows of $6.6 billion from net inflows of $3.6 billion. Western Europe accounted for a large share of the shift, which was dominated by insurance affiliates.

Reinvested earnings were $14.1 billion, compared with -$20.0 billion; the change reflected a sizable reduction in operating losses. Tables 1 through 10 follow. (1.) Quarterly estimates of U.S. current- and capital-account components are seasonally adjust when significant seasonal patterns are present. The accompanying tables present both adjusted and unadjusted estimates. (2) The Commonwealth of independent States comprises the republics of the former Soviet Union excluding the Baltic republics (Estonia, Latvia, and Lithuania): Armenia, Azerbaijan, Byelarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan.
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Author:Bach, Christopher L.
Publication:Survey of Current Business
Date:Mar 1, 1993
Words:11060
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