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U.S. international transactions, third quarter 1989.

U.S. International Transactions, Third Quarter 1989

THE U.S. current-account deficit decreased to $22.7 billion in the third quarter of 1989 from $32.1 billion (revised) in the second.(1) The decrease in the deficit resulted from a shift to a surplus on net service transactions, and the shift, in turn, resulted from an increase in receipts of income on U.S. direct investment abroad. These income receipts were boosted by a $7.6 billion shift to capital (currency translation) gains from capital losses as the dollar depreciated from the end of the second quarter to the end of the third.

In the capital accounts, U.S. official reserve assets increased $6.0 billion, compared with a $12.1 billion increase, and foreign official assets in the United States increased $11.2 billion, in contrast to a decrease of $5.2 billion.

In the private capital accounts, U.S. claims on foreigners reported by U.S. banks increased $20.7 billion, in contrast to a decrease of $27.2 billion. U.S. liabilities reported by U.S. banks, excluding U.S. Treasury securities, increased $25.7 billion, in contrast to a decrease of $21.4 billion. Most of the increases in claims and liabilities were related to end-of-quarter transactions with Caribbean banking centers and Japan. Net inflows for foreign direct investment in the United States were $11.4 billion, compared with $13.3 billion. A decrease in intercompany debt inflows was partly offset by an equity capital inflow related to a major acquisition. In securities transactions, net foreign purchases of U.S. Treasury securities were a record $13.0 billion, compared with $2.3 billion.

The statistical discrepancy (errors and omissions in recorded transactions) was an outflow of $2.6 billion, compared with an inflow of $33.5 billion.

U.S. dollar in exchange markets

The dollar was unchanged on a trade-weighted quarterly average basis against the currencies of 10 industrial countries, and it depreciated 1 percent against the currencies of 22 OECD countries and 4 newly industrialized countries in the Far East (table C, chart 1). However, there was substantial volatility during the quarter, and, on an end-of-quarter to end-of-quarter basis, the dollar depreciated 3 percent against the 26 countries mentioned above.

Rapidly narrowing interest rate differentials and anticipation of still lower U.S. interest rates led to a sharp depreciation of the dollar in July and early August, mostly against Western European currencies. Subsequently, until mid-September, the dollar rebounded on favorable U.S. economic and trade news and on market sentiment that U.S. interest rate declines would not continue. In late September, following continued intervention to restrain the rise in the dollar and a Group of Seven (G-7) statement that the rise was unwarranted, the dollar depreciated sharply.

For the quarter, the dollar appreciated 3 percent against the Japanese yen and 2 percen against the British pound; it was unchanged against the German mark. The dollar depreciated 1 percent against the Canadian dollar. The Canadian dollar reached its highest level in 8 years in August, partly reflecting higher interest rates in Canada than in the United States.

Against the currencies of the newly industrialized countries in the Far East, the dollar appreciated 2 percent against the Taiwan dollar, was unchanged against the South Korean won, and depreciated less than 1 percent against the Hong Kong dollar and the Singapore dollar.

Merchandise trade

The merchandise trade deficit increased to $27.8 billion in the third quarter from $27.6 billion in the second. Both exports and imports were at record levels for the fifth consecutive quarter.

Exports.--Exports increased $0.2 billion, or less than 1 percent, to $91.6 billion; volume increased 2 percent. Nonagricultural exports remained relatively strong; agricultural exports decreased.

Nonagricultural exports increased $1.2 billion, or 2 percent, to $81.8 billion; volume increased 3 percent. The increase was more than accounted for by capital goods, which increased $2.6 billion. Nonagricultural industrial supplies and materials decreased, as did automotive products to Canada.

Since the first quarter of 1987, the strongest growth in nonagricultural exports has been in consumer goods, although growth has slowed in the last three quarters (chart 2). Growth in capital goods has been consistently strong, largely reflecting sharp increases in completed civilian aircraft as foreign airlines have replaced aging fleets or expanded. Geographically, growth has been widespread (chart 3). Exports to the newly industrialized countries in the Far East have increased 117 percent; to Japan, 115 percent; to Mexico, 83 percent; to Western Europe, 59 percent; and to Canada, 26 percent. The slower growth in exports to Canada reflected both the recent slowdown in economic activity there and reduced shipments of auto parts to U.S. assembly plants in Canada in response to lower auto sales in the United States. (Automotive products account for one-fourth to one-third of U.S. nonagricultural exports to Canada.)

Agricultural exports decreased $1.1 billion, or 10 percent, to $9.8 billion; volume decreased 8 percent. The largest decreases were in corn, $0.5 billion, mostly to the Soviet Union, and soybeans, $0.4 billion, mostly to Western Europe and Japan. However, for the January-September period, agricultural exports were 10 percent above the full year 1988. Three-fourths of the increase was to the Soviet Union. Exports to Western Europe, especially soybeans, decreased substantially. This decrease resulted from policies aimed at encouraging the substitution of locally grown, alternative oilseeds for soybeans previously imported largely from the United States. Reflecting recovery from the drought-induced conditions of last year, the average prices of all major crops but cotton decreased throughout 1989; cotton prices rose strongly.

Imports.--Imports increased $0.3 billion, or less than 1 percent, to $119.3 billion. Nonpetroleum imports increased and petroleum imports decreased.

Nonpetroleum imports increased $0.5 billion, or less than 1 percent, to $106.0 billion; volume increased 2 percent. The increase was more than accounted for by consumer goods, mostly textile apparel and household goods from China and the newly industrialized countries in the Far East. Industrial supplies and materials decreased as a result of a drop in nonferrous metals.

Nonpetroleum import growth has been stable in recent quarters, as increases in capital goods and consumer goods have offset decreases in automotive products and industrial supplies and materials (chart 4). The recent increases in both capital goods and consumer goods partly reflect the continued expansion in U.S. economic activity, especially in expenditures for producers' durable equipment and personal consumption expenditures. The decrease in automotive products reflects reductions both from Canada and other countries. Not only have U.S. auto sales been stagnant, but U.S. auto plants of foreign producers have increasingly substituted domestic production for imports of passenger cars. By geographic area, import growth has been strongest from Mexico and the newly industrialized countries in the Far East (chart 5).

Petroleum imports decreased $0.1 billion, or 1 percent, to $13.3 billion. The decrease was more than accounted for by lower prices. The average price per barrel decreased to $16.85 from $18.46. The average number of barrels imported daily increased to 8.65 million--the highest level since the third quarter of 1977--from 7.97 million. For the January-September period, the volume of petroleum imports was 8 percent above the full year 1988--the highest level since 1979. As the world price dropped, imports have increased both due to higher demand and a decrease in domestic production of 5 percent.

Balances by area.--The merchandise trade deficit with the developed countries decreased to $11.7 billion in the third quarter from $14.0 billion in the second, mostly from a drop in imports. Since the peak deficit of $20.4 billion in the fourth quarter of 1988, imports have been stable while exports have grown at a slowing rate. The deficit with the OPEC countries increased slightly to $5.1 billion in the third quarter of 1989 and is up substantially from the fourth quarter of 1988 as a result of both higher prices and a higher volume of petroleum imports. The deficit with other developing countries increased to $10.9 billion in the third quarter from $8.6 billion in the second and from $9.9 billion in the fourth quarter of 1988; export growth has only partly offset import growth.

Service transactions

Transactions in the service accounts shifted to a surplus of $8.7 billion in the third quarter from a deficit of $1.7 billion in the second. Receipts increased to $63.1 billion from $54.5 billion. The increase was in direct investment income; portfolio income decreased. Payments decreased to $54.4 billion from $56.2 billion; most of the decrease was in portfolio income.

Direct investment income.--Receipts of income on U.S. direct investment abroad increased to $15.7 billion from $7.7 billion. The increase was mostly accounted for by a shift to capital (currency translation) gains from capital losses, reflecting the decline in the value of the dollar on an end-of-quarter to end-of-quarter basis. Affiliates in Western Europe, Japan, and Australia accounted for much of the shift. Operating earnings rose $0.4 billion to $12.9 billion.

Payments of income on foreign direct investment in the United States decreased to $4.2 billion from $4.7 billion. The decrease was due to a drop in capital gains, which had boosted payments in the second quarter. Operating earnings decreased slightly to $2.1 billion.

Portfolio income.--Receipts of income on other private investment abroad decreased to $16.4 billion from $17.8 billion. The decrease was mostly due to the lagged impact of lower interest rates. U.S. Government receipts increased $0.6 billion to $1.7 billion, due to rescheduling of interest on U.S. Government credits and a rise in interest earned on holdings of foreign currencies.

Payments of income on other private investment in the United States decreased to $18.5 billion from $19.5 billion, also mostly due to lower interest rates. U.S. Government payments were nearly unchanged at $8.5 billion.

Other services.--Travel receipts increased $0.3 billion to $8.5 billion. Receipts from overseas, Canada, and Mexico all increased. Travel payments increased $0.1 billion to $8.5 billion. Passenger fare receipts increased $0.1 billion to $2.4 billion, and passenger fare payments increased $0.2 billion to $2.2 billion.

Other transportation receipts were unchanged at $5.2 billion. A decrease in ocean freight receipts due to a drop in tonnage was offset by an increase in air freight receipts. At $5.2 billion, other transportation payments were also unchanged.

Receipts from foreigners for other private services were $7.4 billion, compared with $7.1 billion; a rise in receipts for educational services accounted for part of the increase. Payments for other private services were $2.7 billion, compared with $3.3 billion. Most of the decrease was in net payments for reinsurance, that is, premium payments less losses recoverd. Losses recovered were unusually large in the third quarter because of extensive damage from Hurricane Hugo. (See "Business Situation" in the November issue of the SURVEY OF CURRENT BUSINESS for additional details on insurance losses resulting from the hurricane.)

Transfers under U.S. military agency sales contracts increased $0.6 billion to $2.6 billion as a result of a bunching of aircraft deliveries to Western Europe and Australia. U.S. direct defense expenditures abroad increased $0.1 billion to $3.6 billion.

Unilateral transfers

Net unilateral transfers were $3.7 billion, compared with $2.9 billion. U.S. Government grants accounted for much of the increase.

U.S. assets abroad

U.S. assets abroad increased $47.2 billion in the third quarter, in contrast to a decrease of $0.4 billion in the second. A large swing in bank claims accounted for much of the shift.

U.S. official reserve assets.--U.S. official reserve assets increased $6.0 billion, compared with an increase of $12.1 billion. Exchange market intervention purchases of German marks and Japanese yen, mostly in September, contributed to an increase in foreign currency holdings. Also, U.S. holdings of Mexican pesos increased as part of a short-term credit arrangement with Mexico.

Claims reported by banks.--U.S. claims on foreigners reported by U.S. banks increased $20.7 billion, in contrast to a decrease of $27.2 billion. Banks' own claims payable in dollars increased $8.3 billion, following a decrease of $13.9 billion. Four-fifths of the increase was in claims on banks in Japan. Much of the increase was on own foreign offices at the end of September and was reversed in October. Claims on banks in the Caribbean, Australia, and Asian countries other than Japan also increased.

Banks' own claims payable in foreign currencies, mostly on Japan, increased $7.9 billion, also at the end of the quarter. These, too, were reversed in October.

Banks' domestic customers' claims increased $4.5 billion, in contrast to a decrease of $3.3 billion. Most of the increase was in dollar deposits by U.S. money market mutual funds at non-U.S. banks in the Caribbean and United Kingdom. Customers' claims also included transactions in which U.S. banks acted as trustees for foreign governments that raised dollar funds in U.S. capital markets to prepay existing U.S. Foreign Military Sales credits that carried high interest rates.

Foreign securities.--Net U.S. purchases of foreign securities were $10.1 billion, compared with $5.7 billion. Net U.S. purchases of foreign stocks nearly doubled to $8.1 billion. Over one-half of the third-quarter purchases was due to the issuance of foreign stocks in the United States in exchange for stocks in a British company that acquired a direct investment position in a U.S. pharmaceutical company. Net U.S. purchases of outstanding stocks, mainly British stocks, decreased.

Net U.S. purchases of foreign bonds were $2.1 billion, compared with $1.7 billion. New issues of foreign bonds in the United States wre $1.6 billion, compared with $1.5 billion. New issues have been flat since the fourth quarter of 1988 even though U.S. long-term interest rates have dropped significantly relative to those in many key countries.

Net purchases of outstanding foreign bonds were $1.5 billion, compared with $1.2 billion. Higher interest rates in the United Kingdom and Canada than in the United States contributed to $2.8 billion in purchases of British bonds and $0.8 billion in purchases of Canadian bonds. In contrast, lower interest rates than in the United States in some other countries, particularly in Japan, resulted in net sales of outstanding bonds (chart 6). Japan accounted for $1.6 billion of the total $2.1 billion in net sales. Redemptions of outstanding bonds were unchanged at $1.1 billion.

Direct investment.--Net outflows for U.S. direct investment abroad were $11.0 billion, compared with $5.8 billion. The increase was more than accounted for by an $8.3 billion rise in reinvested earnings that reflected the previously mentioned shift of $7.6 billion to capital (currency translation) gains from capital losses. The shift reflected depreciation of the dollar from the end of the second quarter to the end of the third. Equity capital shifted to a net outflow of $0.5 billion from an inflow of $0.3 billion. The shift to net outflows to the United Kingdom resulted from purchases of snack food affiliates and realty holdings that more than offset the sale of a North Sea petroleum property by a U.S. producer. The shift to net inflows from Japan resulted from the sale of an equity holding by a U.S. auto company in a Japanese auto company. Intercompany debt outflows were $1.1 billion, compared with $5.0 billion. Most of the decrease was to the United Kingdom and Japan.

Foreign assets in the United States

Foreign assets in the United States increased $72.5 billion in the third quarter, in contrast to a decrease of $1.8 billion in the second. Large swings in bank liabilities and in foreign official assets in the United States accounted for much of the shift. Inflows for foreign direct investment in the United States remained strong. [Charts 1 to 6 Omitted] [Tabular 1 to 2 Omitted]

(1)Quarterly estimates of U.S. current and capital-account components are seasonally adjusted when substantially significant seasonal patterns are present.
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Author:Murad, Howard
Publication:Survey of Current Business
Date:Dec 1, 1989
Words:2745
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