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U.S. international transactions, first quarter 1986.

U.S. International Transactions, First Quarter 1986

THE U.S. current-account deficit was $33.7 billion in the first quarter, unchanged from the fourth. The merchandise trade deficit decreased slightly: A sharp drop in petroleum imports and an increase in nonagricultural exports were largely offset by a strong increase in nonpetroleum imports. A decrease in net service receipts was more than accounted for by a decrease in net investment income. Unilateral transfers decreased due to lower U.S. Government grants.

In the private capital accounts, net foreign purchases of both U.S. corporate and Treasury securities remained strong, due to rising stock and bond prices, lower foreign currency costs for U.S. securities, and expectations of enhanced U.S. economic performance. Net U.S. purchases of foreign securities were at a record level: Purchases of foreign stock prices rose strongly; new bond issues in the United States increased; and transactions in outstanding British bonds were unusually large. In transactoins reported by U.S. banks, claims on foreigners decreased, reflecting continued weakness in the demand for U.S. bank credit, partly due to the availability of financing alternatives in the securities markets; the increase in liabilities to foreigners was much smaller than in the fourth quarter, partly due to lower interest rates. Outflows for U.S. direct investment abroad were unchanged, while inflows for foreign direct investment in the United States decreased as there were no substantial new equity inflows.

U.S. official reserve assets increased $0.1 billion. Foreign official assets in the United States increased $2.5 billion.

The statistical discrepancy (errors and omissions in reported transactions) was an inflow of $2.9 billion.

U.S. dollar in exchange markets

The dollar depreciated 7 percent in the first quarter on a trade-weighted quarterly average basis against the currencies of 10 industrial countries and 2 percent against the currencies of 22 OECD countries (table C; chart 5). The dollar fell sharply against most major currencies except the British pound and the Canadian dollar. The decline largely reflected the course of U.S. short-term interest rates.

In the first quarter, U.S. long-term interest rates continued to decline, and short-term rates resumed their decline after several quarters of stability. Elsewhere, interet rate movements were mixed. Japanese rates began the quarter at a high level after a significant tightening of credit markets in the fourth quarter, but fell rapidly through the quarter. Canadian and British rates rose sharply early in the quarter in response to pressures on their currencies, but fell thereafter. German and Swiss rates fell, but not as rapidly as U.S. rates, and the differentials in both long- and short-term rates that had favored U.S. dollar assets narrowed.

The rapid fall in crude oil prices contributed to the decline in the dollar. While lower prices were viewed as favorable to U.S. inflation and economic growth prospects, concern grew about the impact on the petroleum industry and on banks with large exposures in energy-related loans. Lower oil prices also affected the Canadian dollar and the British pound by lowering growth prospects and by reducing exports and government revenues. In contrast, the major industrial oil importers, such as Japan and Germany, were viewed as benefiting, ans their currencies tended to stregnthen as oil prices declined.

The dollar depreciated most against the Japanese yen, 9 percent on a quarterly average basis. The dollar had depreciated 25 percent by the end of the quarter from the level prior to the Group of Five (G-5) meeting in September, when monetary authorities of those countries agreed to take joint action to lower the exchange value of the dollar. Contributing to the strong rise of the yen in the first quarter were the large continuing Japanese current-account surplus, the favorable impacts on import costs of weak or declining commodity and oil prices, and the narrowing of long-term interest rate differentials in favor of U.S. assets. However, as the quarter progressed, Japanese authorities expressed concern that the dollar had fallen too far and too fast, and the dollar appreciated slightly toward the end of March amid market concern that intervention or other steps might be taken to bolster its value.

The dollar also depreciated sharply against the major continental European currencies, 7 to 8 percent on a quarterly average basis and 16 to 18 percent from rates prior to the G-5 meeting. Within the European Monetary System, pressures on existing parities intensified early in the quarter, and several countries intervened by selling dollars and German marks to maintain parity rates. Similar pressures, related to the possibility that the new government in France would devalue the franc, built up near the end of the quarter.

In contrast, the dollar was little changed against the British pound. At times, concerns about the impact of lower oil prices caused the pound and the U.S. dollar to depreciate in tandem against other currencies.

The U.S. dollar appreciated 2 percent against the Canadian dollar. Canadian authorities intervened to slow the movement and tightened monetary conditions early in the quarter.

The U.S. dollar appreciated 6 percent against the Mexican free market peso, measured from the beginning to the end of the quarter, a marked slowdown from appreciation in the fourth quarter. The controlled peso rate used for foreign commercial and debt transactions, which began the quarter 19 percent higher than the free market rate, was devalued rapidly and by the end of the quarter was nearly equal to the free market rate. Despite the convergence, Mexican authorities indicated that the two-tier currency system would continue.

Merchandise trade

The merchandise trade deficit was $36.6 billion in the first quarter, down $0.8 billion from the fourth quarter. Nonpetroleum imports increased strongly to a record level, but the increase was offset by a sharp drop in petroleum imports. Nonagricultural exports increased, and agricultural exports were unchanged.

Exports increased $0.8 billion, or 2 percent, to $53.5 billion; the increase was all in volume. Agricultural exports were unchanged at $7.1 billion; volume fell 4 percent. Agricultural exports continued to be restrained by competition from other suppliers and by increased local production, partly reflecting record or near-record crops of cotton and grains. However, prices turned up, the first increase after a steady 2-year decline that had reduced average prices by 20 percent. Spain and Portugal acceded to the European Communities (EC) on January 1. On March 1, in conjunction with their incorporation into the EC's Common Agricultural Policy, the two countries instituted various restrictions on imports of agricultural products, which may further restrain U.S. exports.

Nonagricultural exports increased $0.8 billion, or 2 percent, to $46.4 billion; the increase was all in volume. Industrial supplies and materials increased $0.2 billion to $13.6 billion; a increase in chemicals was partly offset by a drop in petroleum and products. A $0.3 billion increase in capital goods to $18.9 billion was widespread except for a small decline in civilian aircraft. Automotive products decreased $0.2 billion to $5.9 billion due to a drop in shipments to Canada as production in Canada for export to the United States was cut back. Consumer goods increased $0.2 billion to $3.4 billion

Imports were unchanged at $90.1 billion; volume increased 1 percent. Petroleum imports decreased $4.1 billion, or 29 percent, to $10.0 billion; the decrease was due to a 15-percent decline in volume to 5.09 million barrels per day and a sharp drop in the average price per barrel to $21.56 from $26.30. Expectations of lower prices may have caused U.S. importers to reduce imports temporarily. World petroleum prices began to fall rapidly in the fourth quarter; the actual world average sales price fell from over $27.00 in the fourth quarter to about $17.00 by the end of March. Spot prices fell most sharply; the price of U.K. Brent crude oil, for example, fell from around $30.00 in November to about $12.00 by the end of March. Concurrently, crude oil bought under long-term purchase contracts was increasingly priced using "netback" arrangements, which link the export price of crude oil to the eventual sales price of the products refined from that oil plus a profit margin. Netback prices fell through the first quarter as product prices declined.

Nonpetroleum imports increased $4.1 billion, or 5 percent, to a record $80.1 billion; the increase was all in volume and covered all major categories except automotive products, which declined due to a sharp drop in passenger cars from Canada.

The increase occurred despite the substantial drop in the foreign exchange value of the U.S. dollar since its peak in the first quarter of 1985. As of the first quarter, the depreciation of the dollar has resulted in only limited and selective increases in import prices, as shown, in chart 6. Several factors may explain this price behavior. First, international commodity prices remain weak. Nonpetroleum commodity prices declined 20 percent, on average between early 1984 and late 1985; agricultural prices, predominantly coffee, turned up in the fourth quarter, but metals prices remained low.

Second, the dollar has not depreciated, or has depreciated only slighlty, against the currencies of several major trading partners, most importantly Canada, Mexico, and the newly industrialized countries of Asia. Thus, all U.S. trade should not be expected to be directly affected by the depreciation of the dollar. Moreover, price competition from goods imported from these countries may tend to hold down prices of similar imports from countries whose currencies have appreciated against the dollar.

Third, the pricing behavior of foreign exporters may have mitigated the effects thus far of dollar depreciation. Some foreign exporters may have reduced profit margins to lessen price increases to U.S. consumers in order to maintain their market position.

Finally, the decline in the dollar has in some cases reduced production costs of countries exporting to the United STates, particularly major foreigh industrial importers of petroleum and other raw materials denominated in U.S. dollars. Japanese wholesale prices, for example, declined at an annual rate of over 15 percent during the first quarter.

Service transactions

Net service receipts decreased $2.0 billion to $5.9 billion, mostly due to an increase in payments of income on both direct and portfolio investments in the United States.

Receipts of income on U.S. direct investment abroad decreased slightly to $10.8 billion. Operating earnings increased; higher earnings in petroleum were partly related to improved margins for petroleum refiners in the EC. Capital gains decreased to $2.2 billion from $3.0 billion.

Payments of income on foreign direct investment in the United States increased $1.3 billion to $2.1 billion. Fourth-quarter payments had been unusually low, reflecting large operating losses by a petroleum company and a construction company and a smaller loss by a European manufacturing company. Improved earnings for some of these companies accounted for most of the increase in the first quarter. There was a shift to capital gains in the first quarter, following a large capital loss of a petroleum service company in the fourth.

Receipts of income on other private investment decreased $0.3 billion to $11.9 billion, as the effects of lower interest rates and reductions in U.S. bank claims more than offset that of increased U.S holdings of foreign securities. Payments increased $0.5 billion to $9.6 billion; over one-half the increase was due to interest paid on foreign holdings of U.S. corporate bonds.

Receipts on U.S. Governments assets increased $0.2 billion to $1.6 billion; payments on U.S. Government liabilities increased $0.3 billion to $5.7 billion, mostly due to the continued increase in foreign holdings of U.S. Treasury bonds.

Net travel and passenger fare payments decreased to $2.2 billion from $2.4 billion. Receipts from foreign visitors increased $0.2 billion to $3.1 billion. Increases in expenditures by visitors from overseas and Canada were partly offset by a drop in those from Mexico. Payments by U.S. travelers increased $0.1 billion to $4.3 billion. Automobile travel to Canada and visits to the Mexican border region increased. An increase in the number of overseas travelers was partly offset by slightly lower average expenditures. Passenger fare receipts were unchanged at $0.8 billion; payments were down slightly to $1.8 billion.

Other transportation receipts decreased $0.2 billion to $3.5 billion, due to lower air and ocean port receipts. Payments decreased $0.3 billion to $4.0 billion. Freight payments decreased due to the drop in petroleum imports.

Transfers under U.S. military agency sales contracts increased $0.2 billion to $2.1 billion, primarily due to increased shipments to Western Europe. Direct defense expenditures abroad decreased $0.1 billion to $3.1 billion.

Unilateral transfers decreased $1.2 billion to $3.0 billion, due to a drop in U.S. Government grants. In the fourth quarter, Israel drew its entire economic support fund grant for the fiscal year; a small part was returned in the first quarter.

U.S. assets abroad

U.S. official reserve assets increased $0.1 billion, compared with $3.1 billion in the fourth quarter, when there were intervention purchases of foreign currencies. In the first quarter, a $0.2 billion increase in foreign currencies was due to interest earned on foreign currency holdings. Special drawing rights increased $0.3 billion, and the U.S. reserve position in the International Monetary Fund decreased $0.3 billion.

Net U.S. purchases of foreign securities were a record $6.1 billion, compared with $1.4 billion. Stock purchases were a record $2.1 billion as prices appreciated strongly in most foreign markets. Over one-half of the purchases were in Japan, where stock prices rose 15 percent and the yen's appreciation continued.

New foreign bond issues in the United States were $1.9 billion, up $0.4 billion. Issues were limited to a small number of top-quality borrowers from Canada, an international organization, and Australia and New Zealand.

Net purchases of outstanding foreign bonds were $2.8 billion. In the United Kingdom, there were continuing large purchases of gilt-edge bonds and additional purchases of non-British bonds. Partly offsetting were large sales in Japan, as investors realized price and exchange rate gains.

U.S. claims on foreigners reported by U.S. banks decreased $7.8 billion, in contrast to an $8.5 billion increase. Claims of U.S.-owned banks on their own offices decreased $6.1 billion, mostly due to a reversal of large year-end outflows. Foreign-owned banks in the United States increased claims on their foreign offices by $5.7 billion. Claims of foreign-owned banks on Japan had increased strongly in the fourth quarter, when credit conditions were tightened and short-term Japanese rates rose sharply, but the increase slowed in the first quarter as rates fell. A rise in claims on Canada reflected a tightening of credit conditions early in the first quarter and drawings by the Canadian Government on stand-by lines of credit with U.S. banks, partly to support the Canadian dollar in exchange markets.

Claims on unaffiliated foreign banks decreased $5.7 billion, and claims on public and other foreign borrowers were unchanged as international demand for U.S. bank credit remained weak. Increased demand for foreign currencies and readily available funding through securities markets contributed to the weak demand.

Claims in dollars of banks' domestic customers decreased $5.7 billion; most of the decrease was with United Kingdom. Claims payable in foreign currencies increased $4.3 billion; part of the increase reflected a higher dollar value of foreign currency balances.

Net outflows for U.S. direct investment abroad were unchanged at $10.1 billion. Reinvested earnings decreased as distributions from earnings increased. In intercompany debt flows, larger outflows primarily reflected shifts to outflows by several petroleum companies in developing countries. Net equity capital outflows were $0.1 billion.

Foreign assets in the United States

Foreign official assets in the United States increased $2.5 billion, compared with a $1.3 billion decrease in the fourth quarter. Dollar assets of industrial countries decreased $0.4 billion following a $2.4 billion decrease in the fourth quarter that was mostly due to drawdowns related to intervention. Dollar assets of OPEC members increased $1.3 billion. Assets of other countries increased $1.4 billion; inflows from Asia were partly offset by declines from Lating America and Africa.

Net purchases of U.S. Treasury securities by private foreigners and international financial institutions were $8.3 billion, compared with $5.7 billion. Most of the increase was accounted for by a shift in bills to net purchases of $1.2 billion from sales of $1.4 billion, largely due to shifts to purchases by Canadian and international financial institutions. Net bond purchases rose slightly to $7.1 billion.

Japanese purchases of Treasury bonds fell to $0.6 billion, following much larger purchases in the threee previous quarters. The slowdown was probably due to the decline in the dollar relative to the yen, to a narrowing of the interest differential favoring U.S. issues, and to some switching to U.S. corporate issues. The drop in purchases from Japan (which apparently was reversed during the second quarter) was offset by a shift by the United Kingdom to net purchases after three quarters of net sales. Falling long-term rates in the United Kingdom and the comparative stability of the dollar-pound exchange rate were probable contributing factors. International financial institutions accounted for most of the remaining net purchases.

Net foreign purchases of U.S. securities other than U.S. treasury securities were $18.8 billion, down $3.6 billion from the record fourth quarter. Strong inflows continued, attracted by rising stock and bond prices and the drop in the foreign currency cost of U.S. securities.

Net foreign purchases of U.S. stocks were a record $6.1 billion. Purchases were strongest late in the quarter. Most of the purchases were from Western Europe, primarily the United Kingdom and Switzerland.

Falling long-term interest rates contributed to the still strong net bond purchases of $12.7 billion, down $5.7 billion from the fourth quarter. Lower rates spurred U.S. corporations to issue a record volume of bonds during the past two quarters; about 20 percent of the borrowing was overseas. However, in the first quarter, the more rapid decline in U.S. rates than in Eurobond rates, and the longer maturities available domestically, caused an increase in the share of domestic issues. Also, foreign investors, concerned about the decline in the dollar, were increasingly interested in foreign currency issues. Consequently, about 40 percent of new U.S. issues abroad were denominated in foreign currencies (mostly in Japanese yen and Swiss francs) or were dual currency issues. Generally, the proceeds of the foreign currency issues were swapped with other foreign investors for U.S. dollars. Most issues were placed in the United Kingdom, but a substantial volume of foreign currency issues was placed in Japan and Switzerland.

Liabilities to foreigners and international financial institutions reported by U.S. banks, excluding U.S. Treasury securities, increased $8.6 billion in the first quarter, compared with $20.4 billion in the fourth. The slower increase probably was due to lower interest rates, the decline in the dollar, and the increased attractiveness of long-term investments and other currencies. Liabilities of foreign-owned banks in the United States to their own foreign offices increased $3.9 billion, reflecting a partial reversal of substantial yearend funding of these banks by their own foreign offices and a slowdown in lending to domestic customers. Liabilities of U.S.-owned banks to their own foreign offices decreased $1.8 billion.

Liabilities ot unaffiliated foreign banks increased $1.1 billion. Liabilities to other private foreigners decreased $0.5 billion. Inflows from Canada occurred early in the quarter when the Canadian dollar came under exchange market pressure.

Liabilities payable in foreign currencies increased a record $6.0 billion, compared with $2.4 billion. Most of the increase was due to a step-up in inflows, although some reflected the higher dollar value of the foreign currencies. Foreign-owned banks accounted for most of the increase, one-half of which was with Japan.

Net inflows of capital for foreign direct investment in the United States were $1.3 billion, the smallest increase in 8 years. Equity capital inflows were $0.3 billion; outflows to Europe reflected the repurchase by a U.S. company of its stock from its foreign parent and the return by another U.S. company of a capital contribution. There were no major acquisitions of U.S. companies by foreigners. Intercompany debt inflows were $0.6 billion, primarily from Japan and Canada. Reinvested earnings shifted to an increase reflecting higher reported earnings after an exceptionally low fourth quarter.

Technical Notes

As is customary each June, estimates of U.S. international transactions are revised to incorporate new information and improved methodologies. With the exception of one revision for 1960-85 discussed below, revisions are limited to 1982-85. For U.S. international transactions, tables 1 and 2 present revised annual estimates for 1960-85 and quarterly estimates for 1980-85. For merchandise trade, table 3 presents revised annual estimates for 1975-85 and quarterly estimates for 1984 and 1985. For account and area detail, tables 4-10 present revised annual estimates for 1983-85 and quarterly estimates for 1984 and 1985. For selected country detail, table 10a presents revised annual estimates for 1983-85.

Seasonal adjustment for selected current-account items and for repayments on U.S. Government credits and other long-term assets, other than official reserve assets, were recalculated by extending through 1985 the period used to derive seasonal adjustment factors. With some exceptions, the new factors were applied to quarterly data for 1984 and 1985. For merchandise trade, new factors were applied to the "actual" trade data for 1983-85, which were presented in the December SURVEY OF CURRENT BUSINESS (see technical note, pp. 63-64). For travel payments and other transportation payments estimates, new factors were applied to quarterly data for 1983-85 because new source data became available for those years. For the U.S. direct investment abroad income and capital accounts, new factors were applied for 1982-85 because benchmark survey data for 1982 became available.

Change in presentation: fees and royalties.--Changes have been made in the presentation of transactions in royalties and fees because new data from direct investment benchmark and annual surveys are now available. Beginning in 1982, lines 7 and 22 of table 1 are redefined to include only net receipts and net payments, respectively, for the use or sale of intangible property rights, including patents, industrial processes, trademarks, copyrights, franchises, designs, know-how, formulas, techniques, and manufacturing rights. Net receipts and net payments for other direct investment services--which include fees for management, professional, and technical services; charges for the use of tangible property; film and television tape rentals; and other charges and fees--are shown in lines 9 and 24, respectively. Data on the redefined basis are not separately available prior to 1982. With the change, the treatment of affiliated transactions parallels the treatment of unaffiliated transactions.

Change in classification: membership contributions to international organizations.--Membership contributions to international organizations have been reclassified from payments for miscellaneous services (purchases) by the U.S. Government (table 1, line 26) to other unilateral transfers of the U.S. Government (line 34) for 1960-85. The rationale for the previous classification was based on the concept that a sovereign government, as part of a membership in an international organization, received services in exchange for financial contributions. Such contributions were considered to be in the nature of dues payments, and the services received were in matters pertaining to health, food, education, transportation, security, and similar services; increased international cooperation; and various economic and political considerations of a reciprocal nature. The previous classification also recognized that contributions for program budgets of international organizations were distinct from contributions for services. Consequently, contributions for program budgets for projects of a purely humanitarian character were considered as grants or gifts for charitable purposes, and hence were carried in the unilateral transfer account.

Although the rationale for considering membership contributions "in the nature of dues payments" has not necessarily weakened, increased difficulty in separating these transactions from "charitable contributions" to the many international programs in which the United States participates makes the change in treatment desirable on pragmatic grounds. The change also brings the treatment into conformity with international guidelines for balance of payments reporting established by the International Monetary Fund.

Other transportation accounts. --Other transportation receipts and payments (table 1, lines 6 and 21, respectively) have been revised for 1983-85 to reflect recalculations of merchandise imports that were introduced in December 1985. These recalculations recorded more correctly the arrival dates of waterborne imports; associated tonnage data were used in preparation of the other transportation estimates.

Direct investment accounts. --For the years 1982-85, estimates for the U.S. direct investment abroad accounts (lines 7, 9, 12, and 46 of tables 1, 2, and 10, and lines 1-36 of table 5) have been revised to incorporate the results of the 1982 benchmark survey of U.S. direct investment abroad. Previously, estimates were based on the 1977 benchmark survey.

For income (line 12), royalties and license fees (line 7), and fees for other services (line 9), the revisions were relatively small in most years. For capital outflows, the revisions were more sizable, particularly for 1982 and 1983.

The reasons for the revisions were: (1) The nonreported part of the universe for the years between benchmark surveys when only sample data were available was over- or underestimated; (2) data were incorrectly reported in the sample surveys but correctly reported in the benchmark survey; (3) the prior and current estimates were based upon different accounting standards; and (4) the reported data used to generate the prior and current estimates reflected differences in timing. There were no changes in definition from the prior to the current estimates. For a more detailed discussion of the reasons for the revisions, see the technical note in "The International Investment Position of the United States in 1985," in this issue of the SURVEY.
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Author:Krueger, Russell C.
Publication:Survey of Current Business
Date:Jun 1, 1986
Previous Article:The international investment position of the United States in 1985.
Next Article:The business situation.

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