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U.S. international transactions, first quarter 1985.

THE U.S. current-accound deficit increased to $30.0 billion in the first quarter from $25.5 billion in the fourth. The increase was more than accounted for by an increase in the merchandise trade deficit; exports decreased slightly and imports rebounded from a sharp decrease. Net service receipts decreased slightly, largely because falling interest rates reduced receipts of income on portfolio investment more than payments; net receipts of income on direct investment also decreased. Unilateral transfers decreased due to a reduction in grants to developing countries.

Among bank-reported capital flows, claims on private foreigners increased little, while liabilities to private foreigners increased strongly. Record foreign purchases of U.S. corporate bonds newly issued abroad and moderate purchases of U.S. Treasury securities were only partly offset by the continuing net sales of U.S. stocks by foreigners and by record net U.S. purchases of foreign stocks. Exchange market intervention by foreign monetary authorities waa reflected in a large decrease in foreign official assets in the United States.

The statistical discrepancy (errors and omissions in reported transactions) was an inflow of $16.7 billion.

U.S. dollar in exchange markets

The dollar appreciated 6 percent in the first quarter on a trade-weighted quarterly average basis against the currencies of 10 industrial countries and 4 percent against the currencies of 22 OECD countries (chart 4, table C). The dollar rose in late February to record levels against most major currencies, as interest rates rose. It declined later under the combined influence of falling interest rates, heavy coordinated exchange market intervention by foreign monetary authorities (with limited participation by U.S. authorities), and concerns about both the strength of the U.S. economy and the problems of nonfederally insured thrift institutions in Ohio. By the end of the quarter, the dollar had declined to about the same level as at the beginning of the quarter.

The dollar appreciated 9 percent to a record high against the British pound on a quarterly average basis. The coal miners' strike, declines in petroleum prices, a current-account deficit, and rising unemployment all contributed to the pound's weakness. A 450 basis point rise in British interest rates early in the quarter made the real return on pound-denominated assets substantially higher than that on most other major currencies, but provided only temporary support for the pound. Late in the quarter, however, these high returns contributed to strong capital inflows; consequently, the dollar declined about 20 percent below its high of late February against the pound.

The dollar appreciated 6 to 7 percent on a quarterly average basis against European Monetary System (EMS) currencies. As with the pound, the dollar rose strongly against the EMS currencies before declining sharply towards the end of the quarter. Rising stock markets and removal of withholding taxes on German securities purchased by nonresidents also contributed to capital inflows to EMS countries.

The dollar appreciated 5 percent on a quarterly average basis against the Japanese yen. A record Japanese current-account surplus and foreign purchases of Japanese stocks and Euroyen issues were more than offset by record capital outflows to the United States and Western Europe, where higher interest rates prevailed. Outflows were also due to diversification of assets by Japanese companies following recent liberalization of some capital restrictions and to liquidation of holdings of medium-term Japanese securities at maturity by some foreign investors.

The dollar appreciated 3 percent against the Canadian dollar. A current-account surplus, sharply higher interest rates, and attempts by the new government to encourage foreign direct investment limited the decline of the Canadian dollar.

The dollar appreciated 11 percent against the Mexican peso. In March, Mexico accelerated the rate of devaluation of the controlled peso against the dollar to 21 centavos per day, equivalent to a 27-percent annual devaluation.

Merchandise trade

The merchandise trade deficit increased $4.9 billion to $29.4 billion in the first quarter. Nonpetroleum imports rebounded from the sharp drop in the fourth quarter; petroleum imports fell sharply. Agricultural exports fell, due primarily to lower grain exports; nonagricultural exports continued to increase slowly.

Imports have been exceptionally strong in the past 2 1/2 years, largely because of the high and rising exchange value of the dollar. Table D highlights th strength in imports by comparing over three-quarter periods the increases in constant-dollar imports with corresponding increases in constant-dollar gross domestic purchases of goods and structures. Beginning in 1983, imports captured an unusually large percentage of the increases in domestic purchases. Through 1983 and the first half of 1984, they captured about one-fifth of the increases in domestic purchases--a strong level of import penetration. During the most recent three quarters, however, imports accounted for 80 percent of the much smaller increase in domestic purchases. This extraordinary import strength in the face of a substantial slowdown in domestic purchases largely reflects the cumulative impact of the high exchange value of the U.S dollar, which reduced the dollar cost of imports.

Table E highlights the correspondence of changes in business inventory accumulation and changes in imports; the very large changes in imports in 1984 and 1985 have consistently been in the same direction as changes in business inventory accumulation. This correspondence reflects the fact the imports, in the period in which they enter the country, go into both kinds of gross domestic purchases--inventories and final sales.

Nonepetroleum imports increased $7.2 billion, or 11 percent, to $73.9 billion; volume increased 13 percent. The rebound in all major commodity categories reversed the 12-percent decline in volume in the fourth quarter. Consumer goods increased $2.2 billion or 15 percent. Electrical appliances accounted for one-half the increase and apparel for one-quarter. Automotive products increased $1.7 billion or 12 percent. Imports from areas other than Canada increased $1.5 billion, primarily due to complete cars and parts from Japan. During the quarter, the United States indicated that it would not seek renewal of the voluntary export restraints that limited Japanese car exports to 1.85 million per year. The Japanese Ministry of International Trade and Industry announced that car exports would still be limited to 2.3 million per year, 24 percent higher than the previous ceiling, effective in the second quarter. Capital goods increased $1.8 billion or 12 percent, with the largest increase in electrical machinery. Nonpetroleum industrial supplies and materials increased $0.5 billion or 3 percent. Increases were widespread except for nonprecious nonferrous metals, which continued to weaken due to softness in industrial production. Iron and steel imports increased $0.3 billion to near-record levels. Most of the increase was from Canada, which was not a party to recent bilateral agreements with other countries restricting exports of selected iron and steel products to the United States. Foods, feeds, and beverages increased $0.5 billion, or 10 percent, due to coffee, cocoa, sugar, and fish.

Petroleum imports decreased $2.9 billion, or 20 percent, to $11.3 billion; the average number of barrels imported per day decreased to 4.61 million from 5.58 million, the lowest quarterly average since 1971. The average price per barrel declined to $26.86 from $27.59 (chart 5). The decrease in imports primarly reflected slower U.S. growth and perhaps expectations of further price declines.

Exports increased $0.5 billion, or 1 percent, to $55.8 billion; volume decreased 2 percent. Exports have recovered in 2 1/2 years only about four-fifths of the decrease that occurred in 1981 and 1982; volume increases have been somewhat less. Agricultural exports, after some initial recovery, have been flat or have declined over the past 2 years; there has been no recovery on a constant-dollar basis. Nonagricultural export growth has slowed over the past three quarters, and on a constant-dollar basis has virtually ceased.

Agricultural exports decreased $1.1 billion, or 11 percent, to $8.5 billion; volume decreased 10 percent. Wheat and other grains accounted for nearly all the decline--shipments were down $0.9 billion, or 20 percent. The high value of the dollar and good harvests abroad were contributing factors. In addition, a court ruled in February that one-half of grain exports under a U.S. Government program which combined interest free credits with export credit guarantees (blended credits) must be shipped on U.S. bottoms. This ruling raised the transportation costs of these exports to non-competitive levels and led to suspension of the program. The suspension caused cancellation of over $0.5 billion in shipments of wheat and flour, primarily destined for North Africa and Middle Eastern countries. The first-quarter impact was small; most of the canceled shipments were scheduled for the second quarter.

Nonagricultural exports increased $0.5 billion, or 1 percent, to $47.3 billion: volume was unchanged. Capital goods more than accounted for the increase; they were up $1.1 billion, or 5 percent, due to a bunching of aircraft deliveries and increases in computers and in broadcasting and telephone equipment. Automotive exports continued at record levels, up $0.3 billion or 6 percent; complete cars to Canada were up $0.3 billion or 2 percent. Industrial supplies and materials decreased $0.2 billion.

Service transactions

Net service receipts decreased $0.6 billion to $2.6 billion. A drop in net receipts of income on direct and portfolio investment more than accounted for the decrease.

Receipts of income on U.S. direct investment abroad decreased to $5.0 billion from $5.5 billion. Earnings before capital gains and losses decreased in most countries. Capital losses were unchanged at $2.4 billion. Larger losses in Canada reflected both translation losses and a write-off by a petroleum subsidiary. Capital losses were lower in Latin America and in the United Kingdom, where the pound rose sharply at the end of the quarter. Net payments of interest declined $0.3 billion, or 25 percent, to $0.9 billion, reflecting a decline in payments to Netherlands Antilles finance affiliates. Payments of income on foreign direct investment in the United States declined slightly to $2.5 billion.

Receipts of income on other private investment decreased $1.7 billion, and payments decreased $0.8 billion, largely because the lagged impact of falling interest rates affected receipts more than payments. Receipts and payments of income on U.S. Government assets and liabilities were virtually unchanged.

Net travel payments decreased $0.3 billion to $1.1 billion. Receipts from overseas visitors increased and payments of U.S. travelers abroad decreased. Although expenditures in the first quarter decreased compared with the fourth, the number of travelers going abroad continued to show strong year-over-year increases. Receipts from Canada and Mexico both decreased; payments to Canada increased and to Mexico decreased. Passenger fare payments were unchanged at $1.7 billion, and receipts increased slightly to $0.8 billion. Other transportation receipts were up slightly to $3.6 billion, on the strength of increases in exports on U.S.-operated liner and tramp vessels. Other transportation payments increased $0.2 billion to $3.9 billion; the fluctuations in payments have closely paralleled the large swings in imports over the past three quarters.

Transfers under U.S. military sales contracts increased to $2.8 billion from $2.5 billion. Direct defense expenditures abroad decreased slightly to $2.9 billion, as constraction activity in Saudi Arabia continued to decline.

Net unilateral transfers decreased $0.9 billion to $3.2 billion, as grants to developing countries were reduced.

U.S. assets abroad

U.S. official reserve assets increased $0.2 billion in the first quarter. Limited acquisitions of German marks, Japanese yen, and British pounds as the result of exchange market intervention were partly offset by a $0.5 billion repayment by Argentina of a bridge loan extended in the fourth quarter as part of an adjustment program sponsored by the International Monetary Fund (IMF). The U.S. reserve position in the IMF decreased $0.3 billion; holdings of special drawing rights increased $0.3 billion.

U.S. claims on foreigners reported by U.S. banks increased $0.3 billion, compared with an increase of $4.9 billion. The demand for U.S. bank credit abroad has been limited due to moderate expansion abroad and the availability of funds from Eurobond markets. Foreign lending has also been restrained because of strong domestic credit demands, relatively high U.S. interest rates, and U.S. banks' attempts to reduce foreign loan exposure and increase bank capital-asset ratios. Claims on banks' own foreign offices increased $1.5 billion: the reversal in January of large yearend outflows was offset later in the quarter by an increase in claims on Western Europe. Claims on foreign public borrowers were unchanged. Among those claims, those on Canada increased reflecting a standby revolving credit agreement between the Canadian government and a consortium of U.S. and foreign banks to supplement Canada's international reserves. A small increase in claims on Latin America reflected drawdowns of credits arranged in previous quarters and a partly offsetting large repayment by Mexico. Because of improved economic conditions, Mexico was able to renegotiate a long-term rescheduling agreement in March on more favorable terms; no new bank financing was required. Claims on unaffiliated banks and other private foreigners decreased $4.1 billion. An increase in claims on Canada and the United Kingdom was more than offset by a decrease in claims on Latin American and Asian countries.

Net U.S. purchases of foreign securities decreased $1.2 billion to $2.5 billion; net stock purchases nearly tripled to a record $1.9 billion, but net bond purchases slowed because of sales of outstanding issues. Moderate expansion abroad, the rise in major foreign stock markets, and continued dollar appreciation, which reduced the price of foreign stocks in U.S. dollar terms, all contributed to the increase. Equity purchases may also have been spurred by recent denationalization of a major British company and by limited financial deregulation in Japan. Purchases of Japanese stocks were $0.6 billion; Canadian and British stocks, $0.4 billion each; and Dutch and Swedish stocks, $0.2 and $0.1 billion, respectively. In contrast, net bond purchases slowed substantially. New issues in the United States were reduced because of high U.S. long-term rates and attractive pricing alternatives offered borrowers in the Eurobond market, where borrowing was at a record pace. Net sales of outstanding issues were $0.7 billion. Purchases in the United Kingdom slowed primarily because British gilt-edge securities with currency-hedging options offered by several major U.S. dealers were down from an especially strong fourth-quarter level.

U.S. direct investment shifted to a $0.6 billion net inflow, compared with an outflow of $5.4 billion. Net equity flows have been negligible for the past three quarters. A shift to intercompany debt inflows partly reflected the absence of large repayments of debt that occurred in the fourth quarter. First-quarter inflows related to borrowing fron Netherlands Antilles finance affiliates were substantially reduced now that U.S. corporations can borrow directly in the Eurobond markets without being subject to withholding taxes (table F).

Foreign assets in the United States

Foreign official assets in the United States decreased $11.4 billion, compared with a $7.1 billion increase in the fourth quarter (table B). Drawdowns of dollar holdings of $6.7 billion by industrial countries mostly reflected heavy coordinated exchange market intervention sales of dollars by EMS countries, Canada, and Japan. Canadian holdings increased slightly as intervention sales of dollars were more than offset by borrowings from the Eurobond market and from standby credit arrangements with U.S. and foreign banks to replenish reserves. Dollar holdings of OPEC members decreased $1.8 billion; those of other developing countries decreased $2.7 billion.

Liabilities to private foreigners and international financial institutions reported by U.S. banks, excluding U.S. Treasury securities, increased $13.0 billion, compared with $4.5 billion. Inflows from foreign banks were strongest in February and early March when U.S. interest rates rose sharply and a large overnight Eurodollar interest rate differential favored offshore borrowing.

Purchases of U.S. Treasury securities by private foreigners and international financial institutions were $2.7 billion, compared with a record $9.5 billion in the fourth quarter.

Net foreign purchases of U.S. securities other than U.S. Treasury securities increased $0.1 billion to $9.5 billion, the second consecutive record quarter (chart 6). Record bond purchases were partly offset by continued sales of stocks. New bond issues sold abroad by U.S. corporations remained strong at $9.4 billion, as corporations continued to concentrate borrowing directly in the Eurobond market (rather than through their Neitherlands Antilles finance affiliates), following the removal last July of the withholding tax. Lower interest rates abroad and dealer competition to float new issues contributed to a wide diversity of issues and favorable borrowing terms (in some cases lower rates than on U.S. Treasury issues of similar maturities). Net foreign sales of U.S. stocks were a record $1.1 billion, the fourth consecutive quarter of net sales. The attractiveness of bonds following the removal of the withholding tax and concerns about a slowdown of the U.S. economy may have contributed to the sales. In addition, the runup of U.S. stock prices in January and further appreciation of the dollar provided foreigners an opportunity to realize substantial profits. Large sales were made by Germany and the Netherlands, and smaller sales by Japan and the United Kingdom.

Net inflows of capital for foreign direct investment in the United States were $2.7 billion, compared with $4.7 billion. Intercompany debt transactions accounted for most of the decrease, as payables declined after rising strongly in the fourth quarter. In equity transactions, the purchase of a large manufacturing plant by a Japanese company was more than offset by reduced inflows from Europe and developing countries.


As is customary each June, estimates of U.S. international transactions are revised to incorporate new information. With the exception of two of the revisions for 1978-84 discussed below, all revisions were limited to 1981-84. Annual estimates for 1960-1984 and quarterly estimates for 1979-84 are presented in tables 1 and 2. Annual estimates for 1974-84 and quarterly estimates for 1983 and 1984 are presented in table 3. Annual estimates for 1982-84 and quarterly estimates for 1983 and 1984 are presented in tables 4-10. Table 10a presents annual estimates for 1982. 84.

Seasonal adjustment for selected current-account items and for changes in U.S. government assets, other than official reserve assets, were recalculated by extending through 1984 the period used to derive seasonal adjustment factors. The new factors were applied to quarterly data for 1983 and 1984.

The series on foreign direct investment in the United States have been revised to incorporate the results of BEA's 1980 benchmark survey. The previous benchmark year was 1974. When the international transactions estimates were prepared last June, preliminary estimates of foreign direct investment transactions were used because the benchmark study was not complete. Those preliminary estimates have now been replaced with final estimates for 1980-83. Methodological changes were discussed in detail in last June's SURVEY, and additional interpretive notes and supplementary data were presented in the October SURVEY.

Two changes have been made to the portfolio income accounts. Receipts of income on bank-reported claims previously were understated because interest rates were applied to a measure of bank balances that was deficient in coverage. Interest rates are now applied to a more comprehensive measure of bank balances for data from 1982 to the present. A change in the estimation method for 1982-84 for receipts of income on banks' acceptances held by banks and by other foreigners also increased receipts.

Payments of income on U.S. Government securities have been revised for 1979-84 to include payments on foreign private holdings of U.S. agency obligations, which previously had been excluded.

Exposed movie film is now included as a balance of payments adjustment to merchandise imports, to parallel the treatment with merchandise exports. The adjustments were made for 1978-84.

Line 20 has been added to table 4 to identify separately assets acquired in performance of U.S. Government guarantee and insurance obligations, and identification of the export credit transactions of the Commodity Credit Corporation has been improved.
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Title Annotation:includes technical notes, and revised table of U.S. international transactions, 1960-1984.
Author:Krueger, Russell C.
Publication:Survey of Current Business
Date:Jun 1, 1985
Previous Article:The international investment position of the United States in 1984.
Next Article:Business situation.

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