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U.S. international transactions, fourth quarter and year 1989.

U.S. International Transactions, Fourth Quarter and Year 1989

Fourth Quarter 1989

THE U.S. current-account deficit decreased to $20.6 billion in the fourth quarter from $22.9 billion (revised) in the third.(1) The decrease was more than accounted for by a rise in net service receipts. An increase in unilateral transfers and a small increase in the merchandise trade deficit were partly offsetting.

Merchandise trade.--Merchandise exports increased $1.4 billion, or 2 percent, to $92.1 billion. The increase was all in volume. Nonagricultural exports increased $1.0 billion, or 1 percent, to a record $82.0 billion. Volume increased 2 percent. The largest increases in value were in consumer goods, $0.7 billion, automotive products, $0.6 billion, and "other exports," $1.7 billion. "Other exports" increased as a result of a reclassification of commodities from other categories into the category of minimum value shipments; the reclassification occurred when the exemption level for filing export declarations was raised on October 1. Capital goods decreased $1.7 billion as a decrease in deliveries of completed civilian aircraft more than offset increases in other capital goods. The sharp decrease in completed civilian aircraft was due to a strike at a major U.S. manufacturer; the strike was settled on November 20. Agricultural exports increased $0.4 billion, or 4 percent, to $10.1 billion. Volume increased 8 percent. Increases in value occurred in corn, particularly to the Soviet Union, and soybeans, particularly to Japan and Western Europe. Exports of wheat and cotton decreased. Average prices of corn and soybeans decreased, and those of wheat and cotton increased.

Merchandise imports increased $1.7 billion, or 1 percent, to $120.9 billion. The increase was all in volume. Nonpetroleum imports increased $1.7 billion, or 2 percent, to $108.0 billion. Volume increased 2 percent. The largest increases in value were in capital goods, $0.7 billion, and consumer goods, $0.7 billion. Automotive products decreased. Petroleum imports were unchanged at $13.0 billion, as a decrease in volume offset an increase in price. The average number of barrels imported daily decreased to 8.04 million from 8.51 million. The average price per barrel increased to $17.67 from $16.76. Inventories and domestic production decreased, and consumption increased.

Services.--Net service receipts increased to $12.7 billion from $9.1 billion. Among major components, receipts of income on U.S. direct investment abroad increased to $18.7 billion from $15.5 billion. Both operating earnings and capital gains increased. Capital gains largely reflected appreciation of major foreign currencies against the dollar. Payments of income on foreign direct investment in the United States decreased to $3.2 billion from $3.8 billion; operating earnings from affiliates in finance, banking, and real estate dropped. Receipts of income on other private investment increased to $17.4 billion from $16.5 billion, and payments of income on other private investment increased to $19.2 billion from $18.5 billion. Lower average interest rates that were more than offset by large increases in claims increased receipts, and lower average interest rates that were more than offset by large increases in liabilities increased payments. Receipts of income on U.S. Government assets decreased to $1.6 billion from $1.7 billion. Payments of income on U.S. Government liabilities were unchanged at $8.5 billion.

Foreign visitors spent $9.1 billion for travel in the United States, a 4-percent increase. Receipts from overseas increased 1 percent to $6.7 billion; from Canada, 4 percent to $1.3 billion; and from Mexico, 28 percent to $1.1 billion. U.S. travelers spent $8.9 billion in foreign countries, a 6-percent increase. Payments for overseas travel increased 4 percent to $6.4 billion; to Canada, 10 percent to $0.9 billion; and to Mexico, 14 percent to $1.6 billion.

Passenger fare receipts decreased 1 percent to $2.5 billion, and passenger fare payments increased 3 percent to $2.1 billion.

Other transportation receipts increased 3 percent to $5.1 billion, largely as a result of an increase in ocean and air freight receipts. Other transportation payments were virtually unchanged at $5.2 billion.

Transfers under U.S. military agency sales contracts decreased $0.4 billion to $2.0 billion as a result of reductions in aircraft deliveries to Western Europe and Australia. Direct defense expenditures abroad decreased $0.1 billion to $3.5 billion.

Receipts from foreigners for other private services decreased $0.1 billion to $7.3 billion. Payments to foreigners for other private services decreased $0.1 billion to $2.6 billion. Net payments on reinsurance transactions (premium payments less losses recovered) continued to be held down by recovery of losses from damage caused by Hurricane Hugo.

Unilateral transfers.--Net unilateral transfers were $4.5 billion in the fourth quarter, compared with $3.5 billion in the third. Major cash grants to Israel were paid in full after funds were appropriated by Congress in the first quarter of the new fiscal year.

U.S. assets abroad.--U.S. assets abroad increased $50.9 billion in the fourth quarter, compared with a $44.7 billion increase in the third. U.S. official reserve assets increased $3.2 billion, following a $6.0 billion increase. Intervention purchases of German marks and Japanese yen early in October accounted for most of the increase. Other U.S. Government assets increased $0.2 billion, compared with a $0.5 decrease; a drop in repayments more than accounted for the shift. Repayments had been boosted by substantial debt reorganizations in the third quarter.

U.S. claims on foreigners reported by U.S. banks increased $31.7 billion, following a $20.7 billion increase. Interbank claims payable in dollars increased strongly in October and November in response to a surge in foreign demand for dollars that had begun midway in the previous quarter. Strong lending by foreign-owned banks in the United States to Japan and by U.S.-owned banks to their offices in the Caribbean accounted for nearly all of the increase in claims. The acceleration in the demand for dollars in Japan was encouraged by the sharp rise in interest rates in Japan and the continued decline in rates in the United States. The acceleration in the demand for dollars by offices in the Caribbean was partly to offset deposit withdrawals from those offices by U.S. nonbank residents and partly to fund lending to other banks in the United States by those offices. Additional lending by U.S.-owned banks to their offices in the United Kingdom occurred at yearend to meet temporary demands for credit. For the ninth consecutive quarter, dollar claims on Latin America decreased.

Banks' own claims payable in foreign currencies decreased $5.5 billion, largely on Japan, compared with an increase of $7.9 billion.

Banks' domestic customers' claims increased $2.4 billion, compared with a $4.5 billion increase.

Net U.S. purchases of foreign securities were $3.9 billion, compared with $10.4 billion; purchases of stocks fell and transactions in bonds shifted to very small net sales. Net U.S. purchases of stocks dropped to $3.9 billion from $8.3 billion; however, if a single large transaction that boosted purchases in the United Kingdom in the third quarter is omitted, net purchases in the fourth quarter would be slightly above those in the third. Net purchases strengthened in continental Europe, particularly in West Germany and Switzerland, and in Japan.

Net U.S. purchases of foreign bonds shifted to very small net sales from net purchases of $2.1 billion, largely because U.S. residents slowed their purchases of British gilt-edged securities to only $1.2 billion, less than one-half their purchases in the third quarter. Demand for bonds in other countries was also restrained by rising interest rates and increased concerns about potential inflation in Western Europe and Japan.

Foreign new issues in the United States increased to $1.8 billion from $1.7 billion.

Net capital outflows for U.S. direct investment abroad were $12.0 billion, compared with $9.9 billion. The increase was more than accounted for by a $4.8 billion increase in intercompany debt outflows to $5.4 billion. Net outflows were especially strong to finance affiliates in the United Kingdom. A shift to equity capital inflows and a decrease in reinvested earnings that was more than accounted for by a step-up in dividend distributions partly offset the increase in intercompany debt outflows.

Foreign assets in the United States.--Foreign assets in the United States increased $67.7 billion in the fourth quarter, compared with a $70.7 billion increase in the third. Foreign official assets decreased $7.0 billion, following a $12.1 billion increase. Dollar assets of industrial countries decreased $2.2 billion, partly reflecting intervention sales of dollars by foreign monetary authorities. Dollar assets of OPEC members decreased $1.4 billion, and dollar assets of other countries, including the newly industrialized countries in the Far East, decreased $3.4 billion (table B).

U.S. liabilities to private foreigners and international financial institutions reported by U.S. banks, excluding U.S. Treasury securities, increased $41.0 billion, compared with an increase of $25.2 billion. Heavy borrowing by both U.S.-owned and foreign-owned banks from the Caribbean and continental Europe funded lending to banks' own foreign offices, especially in October and November. Strong borrowing from banks and nonbanks in Japan funded both domestic and foreign operations of U.S. branches of Japanese banks in November and December.

Banks' own liabilities payable in foreign currencies decreased $6.0 billion, largely to banks in Japan, following a $3.5 billion increase. Banks' custody liabilities increased $1.3 billion, following an increase of $2.5 billion.

Net foreign purchases of U.S. Treasury securities were $5.9 billion, compared with $12.7 billion. Demand slackened, especially by Western Europeans, as U.S. interest rates declined. Net sales in October and December were partly offset by net purchases at the U.S. Treasury auction in November. Rapidly rising interest rates on bonds of foreign governments may have also curtailed demand for U.S. Treasury securities.

Net foreign purchases of U.S. securities other than U.S. Treasury securities were $11.5 billion, up from $10.5 billion. Transactions in stocks shifted to net sales and purchases of corporate and other bonds doubled.

Foreign investors shifted to net sales of stocks of $0.9 billion from net purchases of $4.8 billion. Foreign demand declined following the sharp drop in the market in early October. In addition, sharp depreciation of the dollar and attractive prospects in Western European stock markets encouraged investors to shift their funds there. Net sales by France, West Germany, and Switzerland increased and net purchases by the United Kingdom, Belgium, and the Netherlands decreased. Japan's net purchases slowed to $1.2 billion from $1.7 billion.

New bonds issued abroad by U.S. corporations were $4.6 billion, compared with $3.9 billion.

Net foreign purchases of agency bonds nearly doubled to $5.7 billion from the previous quarter. The United Kingdom, at $2.3 billion, and Japan, at $2.1 billion, accounted for most of the step-up. Other bonds shifted to net purchases.

Net capital inflows for foreign direct investment in the United States were $16.4 billion, compared with $12.4 billion. Intercompany debt inflows increased to $7.0 billion from $0.6 billion, largely as a result of heavy repayments from foreign parents to their U.S. finance affiliates. U.S. finance affiliates had extended large loans to their parents in the third quarter. Equity inflows slowed to $9.2 billion from $10.7 billion. Reinvested earnings dropped to $0.2 billion from $1.2 billion; the drop was partly accounted for by a step-up in dividend payments.

The statistical discrepancy (errors and omissions in reported transactions) was an inflow of $3.7 billion, compared with an outflow of $3.1 billion.

U.S. dollar in exchange markets.--From September to December, the dollar depreciated 7 percent on a trade-weighted average basis against the currencies of 10 industrial countries and depreciated 2 percent against the currencies of 22 OECD countries and 4 newly industrialized countries in the Far East. The dollar depreciated 7 to 11 percent against the continental European currencies, 2 percent against the British pound and the Canadian dollar, and 1 percent against the Japanese yen (table C, chart 3). The dollar's depreciation primarily reflected buoyancy of the German mark, which was traceable to accelerated economic activity and rising interest rates. Political developments in Eastern Europe were also expected to have favorable implications for the German economy. The dollar depreciated slightly less against the other European currencies linked to the German mark in the European Monetary System; interest rates in most of those countries also rose strongly. In contrast, the pace of economic activity in the United States slowed, and U.S. interest rates declined further. Japanese demand for dollar assets remained strong even though interest rate differentials in favor of the dollar continued to narrow. Small amounts of coordinated intervention sales of dollars were carried out to restrain the dollar against the yen in November and early December. The British pound stabilized against the dollar despite uncertainty regarding the future direction of British economic policy.

The Year 1989

For the year 1989, the merchandise trade deficit decreased to $113.2 billion from $127.2 billion. The decrease was augmented by an increase in net receipts on service transactions other than investment income to $20.6 billion from $13.1 billion. Net receipts of investment income changed little. As a result, the current-account deficit decreased to $105.9 billion from $126.5 billion.

In the capital accounts, changes in U.S. assets abroad reflected, in the official accounts, a large step-up in capital outflows for U.S. official reserve assets and, in the private accounts, a large step-up in capital outflows for U.S. direct investment abroad and U.S. purchases of foreign securities. Changes in foreign assets in the United States reflected, in the official accounts, a sharp drop in capital inflows for foreign official assets in the United States and, in the private accounts, a moderate step-up in capital inflows for purchases of U.S. Treasury and other U.S. securities. The statistical discrepancy shifted to unrecorded net inflows from unrecorded net outflows.

U.S. dollar in exchange markets

From December 1988 to December 1989 the dollar changed little against the continental European currencies, as a 7 to 11 percent appreciation from December 1988 through September 1989 was reversed in the last 3 months of the year. The dollar appreciated 18 percent against the Japanese yen and 16 percent against the British pound from December 1988 through September 1989 and changed little against both currencies thereafter.

Investors were confident about the dollar early in the year. Strong U.S. economic growth and tight monetary policy were interpreted as signs of higher interest rates in the future. A further tightening of monetary policy in late February increased already large interest rate differentials in favor of U.S. assets. Interest rates abroad, where growth and price pressures remained moderate, increased more slowly than U.S. rates (charts 4,5). Political uncertainties in Japan also increased the demand for dollars.

The demand for dollars intensified from April through mid-May; by mid-May, the dollar was 6 percent higher against the German mark and 7 percent higher against the Japanese yen than in early April, and had reached levels not equaled since the Louvre Accord of 1987. In June, additional demands for

dollars in the Far East reflected tensions in China and a sharp drop in the Hong Kong stock market. Especially large coordinated intervention sales of dollars were needed to limit further appreciation, even though sharp drops in U.S. short-term interest rates from their peaks in late March had narrowed interest differentials in favor of the dollar.

In July and August, the dollar backed off sharply from its highs but remained strong. Economic growth abroad, particularly in Germany, was shown to be more buoyant than expected, and monetary authorities in Germany and several other continental European countries raised official interest rates. Subsequently, through mid-September, the dollar rebounded on favorable U.S. economic and trade news and on market expectations that U.S. interest rate declines would not continue.

By late September, the dollar approached its June highs against the German mark and the Japanese yen. A meeting of the G-7 finance ministers reaffirmed commitments to the principles of the 1987 Louvre Accord and was followed by another round of coordinated intervention sales of dollars. Although interest rate differentials in favor of the dollar had narrowed significantly without much effect on the dollar since late March, the further decline in U.S. short-term interest rates, combined with strong increases in interest rates abroad, led to a sharp depreciation of the dollar against the German mark and the currencies linked to it in the European Monetary System during the fourth quarter. An acceleration in economic activity in Germany and political developments in Eastern Europe late in the year contributed to the demand for marks. The dollar changed little against the Japanese yen and the British pound during these 3 months.

The U.S. dollar depreciated 3 percent against the Canadian dollar for the year. The Canadian dollar reached a 9-year high in November.

In 1989, the dollar depreciated against the currencies of the newly industrialized countries in Asia. From December 1988 to December 1989, the dollar depreciated 7 percent against the Taiwan dollar, 2 percent against the South Korean won, and 1 percent against the Singapore dollar; it was unchanged against the Hong Kong dollar. Most of the depreciation against the Taiwan dollar occurred in the first 5 months. Over the past 3 years, the depreciations against the Taiwanese and Korean currencies have totaled 27 and 22 percent, respectively.

Merchandise trade

The U.S. merchandise trade deficit was $113.2 billion in 1989, compared with $127.2 billion in 1988 (tables D,E,F).

Exports increased $42.6 billion, or 13 percent, to $361.9 billion; volume increased 12 percent. Nonagricultural exports increased $39.3 billion, or 14 percent, to $320.4 billion, and agricultural exports increased $3.3 billion, or 9 percent, to $41.4 billion. The 14-percent increase in nonagricultural exports followed increases of 27 percent in 1988 and 13 percent in 1987.

Imports increased $28.7 billion, or 6 percent, to $475.1 billion; volume also increased 6 percent. Nonpetroleum imports increased $17.7 billion, or 4 percent, to $424.9 billion; they had increased 11 percent in 1988 and 10 percent in 1987. Petroleum imports increased $10.9 billion, or 28 percent, to $50.3 billion.

The slowdown in growth of real demand, both abroad and in the United States, dominated developments in trade in 1989. Growth in real demand abroad slowed to 3.5 percent (based on trade-weighted industrial production) from an exceptional 6 percent in 1988, but remained strong, particularly in continental Europe and Japan. U.S. demand weakened to 2.9 percent (based on real gross national product) from 4.4 percent, and slowed expenditures on imports as well as on domestically produced goods.

Price changes of exports and imports by major end-use categories were not uniform (table G). Prices of exports in 1989 were mixed, rising moderately for capital goods, automotive products, and consumer goods (non-food) and declining for industrial supplies and materials and foods, feeds and beverages. The decline in industrial supplies partly reflected a decline in raw materials and commodities prices in world markets. The moderate decline in foods, feeds, and beverages followed the surge in prices caused by the severe U.S. drought in the previous year. When converted into foreign currencies, prices in most categories increased by somewhat greater amounts, reflecting moderate dollar appreciation in addition to domestic price increases. In 1988, moderate dollar depreciation had offset most of the domestic price increases (table H).

Dollar prices of most imports increased very little or declined; all had risen significantly in 1988. Prices of foods, feeds, and beverages and of industrial supplies excluding petroleum all reflected sharp declines in commodities prices in world markets. Prices of petroleum increased strongly.

Exports.--Nonagricultural exports increased $39.3 billion in 1989, or 14 percent, to $320.4 billion, compared with a 28-percent increase in 1988. Volume increased 13 percent, compared with a 24-percent increase. The increases in 1989 in both value and volume were largest for capital goods, industrial supplies and materials, and consumer goods (nonfood), but all trailed their impressive increases in 1988.

Capital goods increased $17.7 billion, or 16 percent, to $130.1 billion, following a 28-percent increase. Volume increased 12 percent. Percentage increases in value in some key categories--such as oil drilling, mining, and construction machinery, industrial engines, telecommunications equipment, semiconductors, and hospital and scientific equipment--slowed very little or even increased. In contrast, computers, peripherals, and parts were unchanged; a decrease in computers was offset by an increase in peripherals and parts to Western Europe and the newly industrialized countries in the Far East. Prices of computers, peripherals, and parts decreased sharply. Civilian aircraft accelerated strongly in value for the second consecutive year; sales of new and used aircraft were largely for replacement.

Nonagricultural industrial supplies and materials increased $8.5 billion, or 11 percent, to $90.1 billion, following a 30-percent increase. All of the increase was in volume. Although large dollar increases in value continued for chemicals, paper and paper base products, and building materials, all clearly reflected a slackening in real demand abroad. In sharp contrast, iron and steel products increased strongly. Nonferrous metals decreased; unusually large transactions in nonmonetary gold had boosted the previous year's total.

Consumer goods (nonfood) increased $8.0 billion, or 33 percent, to $32.1 billion, nearly the same pace as last year. Volume also increased at nearly the same pace as last year, 28 percent. The increase in value, mostly to Western Europe and Japan, was widespread by commodity.

Automotive products increased $2.1 billion, or 6 percent, to $34.6 billion, following an 18-percent increase. Volume increased 3 percent. The slower growth in the value of exports to Canada reflected both the 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. Passenger cars and trucks to other areas also slowed. Engines and parts, largely to Mexico, increased at about the same pace as last year.

Agricultural exports increased $3.3 billion, or 9 percent, to $41.4 billion--the highest level since 1981--compared with a 29-percent increase. Average prices, which had risen 26 percent in 1988 as a result of the severe U.S. drought, decreased 11 percent in 1989. Volume increased 5 percent, following an 8-percent increase. In value, the largest increases were in corn, $1.7 billion, mostly to the Soviet Union, and wheat, $1.0 billion, mostly to Western Europe and China. Soybeans decreased $0.8 billion, mostly to Western Europe and the Soviet Union. In volume, shipments of corn to the Soviet Union accounted for the entire 22-percent increase, and shipments of wheat to the Soviet Union accounted for the entire 10-percent decrease. Transactions with the Soviet Union reflected a greater shortfall in Soviet production of corn than wheat, a scarcity of supplies of corn from competing sources, and more advantageous U.S. pricing for corn than for wheat. A decrease in soybeans, mostly to Western Europe and Japan, reflected adequate worldwide supplies of soybeans and substitution of competing products.

Imports.--Nonpetroleum imports increased $17.7 billion, or 4 percent, to $424.9 billion in 1989, compared with an 11-percent increase. Volume increased 5 percent, the same pace as in the previous year. Price increases in 1989 were small or declined sharply from 1988. For most major commodity categories, increases in value slowed; in capital goods and consumer goods (nonfood) they remained strong, partly in response to relatively strong U.S. expenditures for producers' durable equipment and personal consumption expenditures.

Capital goods increased $11.5 billion, or 11 percent, to $113.2 billion, following a 20-percent increase. Volume increased 16 percent. The slowing in value was evident across all major categories, including computers, peripherals, and parts and semiconductors from Japan and the newly industrialized countries in the Far East. Some categories, such as oil drilling equipment, industrial engines, and machine tools, slowed even more sharply than computers. By country or area of origin, capital goods from Western Europe slowed to an increase of 6 percent from 15 percent, from Japan to 13 percent from 18 percent, and from the newly industrialized countries in the Far East to 5 percent from 29 percent.

Consumer goods (nonfood) increased $6.6 billion, or 7 percent, to $102.9 billion, following a 9-percent increase. Volume increased 4 percent. Price increases slowed significantly. In value, consumer goods from Western Europe slowed significantly, and those from Japan and the newly industrialized countries in the Far East decreased. They increased from Latin America. The slowing was in durables, as non-durables increased at the same pace as a year earlier.

Nonpetroleum industrial supplies and materials increased $0.9 billion, or 1 percent, to $83.9 billion, following a 17-percent increase. Volume decreased 1 percent. Whereas strong demand and sizable price increases had boosted nominal imports in 1988, demand was especially weak and prices were unchanged in 1989 for iron and steel products, chemicals, and paper and paper base products. Other industrial supplies reflected sharp decreases in world market prices of raw materials, nonfood commodities, and metals, including nickel, zinc, copper, and aluminum.

Automotive products decreased $1.8 billion, or 2 percent, to $86.1 billion, compared with a 3-percent increase. Volume decreased 4 percent. The decrease in value was more than accounted for by passenger cars, which decreased $2.5 billion, and occurred despite a 3-percent increase in prices. The number of passenger cars imported from areas other than Canada and Mexico decreased 15 percent. The number of cars from South Korea decreased 41 percent; from West Germany, 19 percent; and from Japan, 5 percent. The number of foreign cars sold in the United States decreased 9 percent, following a 3-percent decrease, and the foreign share of total sales decreased to 28 percent from 29 percent. The decrease in the number of cars imported from Japan was the third consecutive yearly decrease and mostly reflected the substitution of production in the United States for imports. As part of that development, imports of engines and parts from Japan increased $1.4 billion, or 16 percent, compared with a 23-percent increase. Passenger cars from Canada and Mexico, which are counted as part of U.S. domestic production, moved in opposite directions: Those from Canada decreased 14 percent, and those from Mexico increased 82 percent.

Petroleum imports increased $10.9 billion, or 28 percent, to $50.3 billion--the highest level since 1986--compared with an 8-percent decrease. The increase was in both price and volume. The average number of barrels imported daily increased to 8.06 million--the highest level since 1979--from 7.48 million. The increase in volume was primarily due to a 6-percent decrease in domestic production. The volume of imports accounted for 47 percent of consumption, compared with 43 percent; consumption was unchanged. The volume of petroleum imports from OPEC members increased 16 percent, compared with 11 percent. OPEC's share of imports increased to 53 percent from 49 percent.

Balances by area.--The deficit with Canada decreased to $8.5 billion from $10.9 billion and with Western Europe to $3.6 billion from $15.8 billion (tables I,J). For both, most of the slowing in exports was in capital goods and industrial supplies, and the slowing in imports was spread across all major commodity categories. The deficit with the newly industrialized countries in the Far East decreased to $25.0 billion from $29.2 billion: Exports slowed markedly, especially capital goods and industrial supplies; imports of capital goods also slowed markedly, and imports of consumer goods decreased. The deficit with Japan decreased to $49.7 billion from $52.6 billion: Exports slowed to an 18-percent increase from a 35-percent increase, mostly attributable to a sharp slowing in capital goods and a moderate slowing in industrial supplies; imports of capital goods slowed and imports of consumer goods and automotive products both decreased. The deficit with OPEC members increased to $17.6 billion from $9.3 billion as a result of the previously mentioned increase in the price and volume of petroleum imports, mostly from Saudi Arabia and Venezuela.

Service transactions

Net service receipts were $21.6 billion in 1989, compared with $15.3 billion in 1988 (table K).

Direct investment income.--Receipts of income on U.S. direct investment abroad were $51.1 billion, compared with $48.3 billion (table L). Substantial capital losses in the first two quarters, largely related to dollar appreciation, slightly more than offset substantial capital gains in the last two quarters, largely related to dollar depreciation. Operating earnings, mostly those of manufacturing affiliates, increased $2.0 billion, well below the increases of the previous several years. The increase in 1989 was more than accounted for by Brazil and Mexico, reflecting strong growth in the transportation equipment industry in these countries. Operating earnings in Western Europe and other industrial countries were unchanged in total: Earnings of affiliates in continental Europe increased, reflecting strong economic expansion there, and earnings of British, Canadian, and Japanese affiliates decreased. The share of operating earnings distributed as dividends dropped to more normal levels in 1989 after exceptionally large distributions in 1988, some of which were in excess of earnings that year. A $1.1 billion decrease to $0.5 billion in net interest payments reflected lower payments to affiliates in the Netherlands Antilles and higher receipts from other affiliates.

Payments of income on foreign direct investment in the United States were $14.9 billion, compared with $16.7 billion. A decrease in operating earnings to $6.1 billion from $11.0 billion more than accounted for the drop. Affiliates in most industries incurred declines in earnings, and affiliates in real estate, machinery, and retail trade incurred losses. An increase in capital gains to $1.7 billion from $0.9 billion was partly offsetting. Net interest payments were $7.1 billion, up from $4.9 billion, as affiliates continued taking on substantial amounts of debt for acquisitions.

Portfolio income.--Receipts of income on other private investment were $68.1 billion, compared with $52.8 billion, as both interest rates and bank-reported claims increased (table M). Receipts of income on U.S. Government assets were $5.5 billion, compared with $6.7 billion. The 1988 total had included receipts from large capitalizations of interest pursuant to agreements rescheduling debts of foreign governments. Large prepayments on Foreign Military Sales credits in the previous 1 1/2 years also led to lower receipts. Earnings on foreign currency balances increased.

Payments of income on other private investment abroad were $75.1 billion, compared with $59.7 billion, reflecting higher interest rates and continued large increases in both bank-reported liabilities and foreign bond purchases. Payments of income on U.S. Government liabilities were $33.7 billion, compared with $29.1 billion, reflecting higher interest rates and an increase in net foreign private purchases of U.S. Treasury securities partly offset by a substantial slowing in foreign official purchases of U.S. Treasury securities.

Other services.--Travel and passenger fares shifted to net receipts of $1.2 billion from net payments of $1.9 billion. Foreign visitors spent $33.9 billion for travel in the United States, up 16 percent from the previous year. Travel receipts from overseas were $25.8 billion, up 14 percent following a 24-percent increase in 1988. The slowing was partly due to significant depreciations in the values of key foreign currencies over the past 18 months, and to smaller increases in the number of visitors from Western Europe (8 percent compared with 24 percent) and from the Far East (17 percent compared with 23 percent). Within the Far East, however, the increase in the number of visitors from Japan, at 18 percent, was virtually unchanged. Receipts from Canada increased 19 percent to $4.7 billion, largely as a result of an increase in the number of auto travelers. Receipts from Mexico increased 27 percent to $3.4 billion as the number of visitors to the border area increased strongly.

U.S. travel payments totaled $34.2 billion, a 7-percent increase from 1988. Travel payments overseas increased 4 percent to $25.2 billion, following an 8-percent increase. The slowing was attributable to a substantial drop in the number of travelers to Western Europe, which increased 1 percent following a 17-percent increase, and to Japan, which increased 3 percent following a 13-percent increase. Travel payments to Canada increased 5 percent to $3.4 billion; however, the number of travelers decreased 4 percent. Payments to Mexico totaled $5.7 billion, up 20 percent; the number of travelers to Mexico's interior increased 10 percent, and the number of travelers to the border area increased 12 percent, about one-half pace in the previous year.

Passenger fare receipts from foreign visitors traveling on U.S. flag carriers increased 12 percent to $9.9 billion. The number of visitors increased 8 percent, following a 29-percent increase. The sharpest declines in percentage increases in the number of visitors were for visitors from Western Europe and the Far East. U.S. payments to foreign transocean carriers totaled $8.3 billion, a 6-percent increase. The number of U.S. travelers on foreign flag carriers increased 4 percent; most of the increase was in travelers to Europe.

Other net transportation payments were $0.4 billion, compared with $0.7 billion. Total receipts increased 8 percent to $20.4 billion, down from an 11-percent increase in 1988. Both ocean and air freight receipts increased less rapidly, reflecting the slower rate of growth in the volume of exports. Total payments increased 6 percent to $20.7 billion. Ocean freight payments were unchanged at $9.5 billion. Air port expenditure payments increased 24 percent to $5.9 billion as a result of an increase in U.S. air traffic overseas and in jet fuel prices abroad. Air freight payments were down slightly to $2.2 billion.

U.S. military transactions with foreigners resulted in net payments of $5.7 billion, up from $4.6 billion. Transfers under U.S. military agency sales contracts were $8.6 billion, compared with $10.1 billion. The completion of major aircraft delivery programs and downturns in other major equipment deliveries accounted for most of the reduction. U.S. direct defense expenditures abroad were $14.3 billion, down $0.4 billion. After several years of increases, expenditures for contractual services and construction decreased in Germany and Japan where major base renovation programs were completed. Pay to foreign nationals also decreased. An increase in petroleum purchases overseas was partly offsetting.

Net receipts from foreigners for other private services were $16.9 billion. Among compared with $12.9 billion. Among transactions with unaffiliated foreigners, net receipts for education services continued to rise. Net receipts for financial services increased, mostly as a result of a rise in noninterest income of banks. Receipts and payments of commissions on stock, bond, and futures transactions were in balance, as the increase in U.S. activity in foreign financial markets offset the increase in foreign activity in U.S. markets. Net receipts for business, professional, and technical services reflected continued rapid expansion in sales of services to foreigners by U.S. companies. Net payments on insurance activities decreased; unusually large loss recoveries on reinsurance transactions occurred as a result of the extensive damage caused by Hurricane Hugo. Net payments on telecommunications services increased.

Unilateral transfers

Net unilateral transfers were $14.3 billion in 1989, down from $14.7 billion in 1988. U.S. Government grants decreased $0.2 billion to $10.2 billion. Grants for development assistance under the Foreign Assistance Act and related acts continued to decline, more than offsetting small increases in grants financing military purchases and grants for farm products programs. Private remittances and other transfers accounted for the remainder of the decrease.

U.S. assets abroad

U.S. assets abroad increased $125.7 billion in 1989, compared with an $82.1 billion increase in 1988.

U.S. official reserve assets.--U.S. official reserve assets increased $25.3 billion, compared with a $3.6 billion increase. The increase in 1989 was due to especially large intervention purchases of German marks and Japanese yen, mostly in May and June, and again in late September and early October. The increase in foreign currency holdings far exceeded the previous largest increase of $6.5 billion in 1980.

U.S. Government assets other than official reserve assets.--Disbursements of U.S. Government credits were $5.5 billion, compared with $7.6 billion. The movement from credit financing of foreign assistance to grant financing or financial guaranty financing continued. Disbursements for debt reorganization decreased to $1.4 billion from $3.1 billion in 1988; an unusually large reorganization covering certain debts of the Egyptian Government to the U.S. Government had boosted the 1988 total. Disbursements for other than debt reorganization continued to decline, reflecting the contraction of lending authority for virtually all major U.S. Government lending authorities in recent years.

Repayments of principal on U.S. Government credits were $6.5 billion, down from $10.3 billion, as prepayments of Foreign Military Sales credits slowed to $2.3 billion from $6.3 billion.

Claims reported by banks.--U.S. claims on foreigners reported by U.S. banks increased $47.2 billion, compared with a $54.5 billion increase (tables N,O). Banks' own claims on foreigners, payable in dollars, increased at a faster pace in 1989 than in 1988, $42.0 billion, compared with $30.4 billion. Interbank demand for dollar credits picked up, especially by banks in Japan and the Caribbean. Claims increased especially strongly in February and March and in August through November. Banks' own claims on foreigners, payable in foreign currencies, decreased $4.0 billion, following an increase of $14.8 billion.

Claims of U.S.-owned banks payable in dollars increased $16.3 billion; they had increased $24.9 billion. Much larger amounts of funds were advanced to the Caribbean and much smaller amounts of funds to the United Kingdom than in 1988. Claims on the Caribbean increased strongly, mostly in the third and fourth quarters when funds were advanced to offset the withdrawal of funds by U.S. residents from Caribbean branches and to finance lending of those branches back to banks in the United States. Claims on the United Kingdom increased, mostly in the fourth quarter; much of that increase was related to activity at yearend.

Claims of foreign-owned banks payable in dollars increased $25.7 billion; they had increased $5.5 billion. Transactions were dominated by activities of Japanese banks in the United States. In the first quarter, these banks funded a surge in demand for dollar credits in Japan and in the Caribbean; demand eased considerably in the second quarter and claims decreased. The decrease in claims in the second quarter may also have reflected the repositioning of assets and liabilities that accompanied the lifting of restrictions on Japanese residents in the transfer of accounts from onshore to offshore Japanese offices. In the fourth quarter, a decline in U.S. interest rates relative to Japanese rates encouraged sizable borrowing from both Japanese offices and other banks in the United States.

Claims on Latin America decreased for the third consecutive year. Inflation and debt-servicing problems continued for many countries. Many U.S. banks either wrote off loans or sold them at discounts in the secondary markets. Interest arrearages continued for Argentina, Brazil, and Peru. Mexico continued negotiations with the United States to restructure its debt.

Banks' own claims payable in foreign currencies decreased $4.0 billion, following an increase of $14.8 billion. Banks in Japan sharply curtailed their foreign borrowing in yen for the year, although large swings in borrowings and repayments occurred from quarter to quarter.

Banks' domestic customers' claims increased $9.2 billion, the same amount of increase as last year. A decrease in claims used to make prepayments on Foreign Military Sales credits was offset by a step-up in customers' deposits abroad and in customers' claims payable in foreign currencies.

Foreign securities.--Net U.S. purchases of foreign securities were a record $22.6 billion, compared with $7.8 billion. Net purchases of foreign stocks increased to a record $17.6 billion from $0.9 billion, and net purchases of foreign bonds dropped to $4.9 billion from $6.9 billion.

Net U.S. purchases of foreign stocks were $17.6 billion--more than four times the previous peak in net purchases in 1983--compared with $0.9 billion. U.S. demand in the first half of the year was bolstered by strong stock market advances abroad and by a sharp drop in the dollar cost of foreign purchases when the dollar appreciated. Demand accelerated in the second half of the year, particularly in continental Europe where stock prices continued their advance. For the year, average price increases in major stock markets in continental Europe ranged from 12 to 30 percent.

Net U.S. purchases of British stocks were $10.1 billion, compared with net sales of $0.2 billion, and included a single large foreign-direct-investment-related transaction in the third quarter that accounted for over one-half of the purchases. Excluding this transaction, purchases of British stocks were strongest in the first half of the year and fell sharply in the second half, partly because the stock market advance slowed and sterling recovered somewhat against the dollar. Other Western European countries also attracted large net purchases, especially the Netherlands, Switzerland, and France where purchases increased severalfold from 1988. Purchases in all three of these countries accelerated in the second half of the year. In Germany, net purchases surged to $0.9 billion from $0.2 billion. This surge was also mostly in the second half of the year, and was partly in anticipation of the economic expansion that might occur as a result of the removal of political and economic barriers between Western and Eastern Europe. Net purchases of Japanese stocks were $1.0 billion, compared with $0.3 billion. Sustained economic growth and strong corporate earnings pushed stock prices in Japan to record levels. However, purchases were curtailed during the political uncertainties that affected the ruling Japanese party at midyear. Net purchases of Canadian stocks rebounded to $1.2 billion, following $0.5 billion in net sales.

Gross purchases and sales of foreign stocks, which had fallen 20 percent in 1988, increased 48 percent in 1989.

Net U.S. purchases of bonds were $4.9 billion, compared with $6.9 billion. Foreign new issues in the United States were $6.6 billion, down slightly from $6.8 billion, despite a sharp drop in U.S. interest rates. Governments were the most active issuers, placing $4.0 billion, up moderately from 1988. Borrowing by private corporations dropped by one-half, and borrowing by international financial institutions increased.

In transactions in outstanding bonds, redemptions were $5.1 billion, compared with $5.3 billion, and net purchases were $3.4 billion, compared with $5.3 billion. Net U.S. purchases of British gilt-edged securities were $8.1 billion, following $5.9 billion, as interest rates increased significantly. Decreases in net purchases of Canadian bonds to $2.8 billion from $3.7 billion, and a step-up in net sales of Japanese bonds to $3.3 billion from $1.8 billion and in net sales of German bonds to $2.8 billion from $1.5 billion were more than offsetting. The step-up in net sales of German and Japanese bonds occurred despite a major change in interest rate differentials that favored greater, rather than fewer, purchases of these bonds (chart 5).

Gross purchases and sales of outstanding bonds were 7 percent above 1988; a large share of the activity was concentrated in the June-to-October period when foreign interest rates rose significantly.

Direct investment.--Net outflows for U.S. direct investment abroad were $32.3 billion, compared with $17.5 billion. The increase was in intercompany debt and in reinvested earnings (tables L,P).

Intercompany debt outflows increased $8.1 billion to $15.9 billion. The increase was more than accounted for by an $8.5 billion increase to the United Kingdom; much of the increase was in multibillion dollar advances to affiliates in finance, partly to fund acquisitions.

Reinvested earnings increased $6.3 billion to $21.4 billion. They had been held to low levels in 1988 when affiliates distributed unusually large dividends, some of which were in excess of 1988 earnings. The distribution of dividends returned to more normal levels in 1989. U.S. parents of affiliates in Western Europe may have elected to increase the share of reinvested earnings in 1989 partly to strengthen operations to meet increased competition from the lowering of intra-European Community trade and investment barriers. The increase in the share of reinvested earnings for petroleum affiliates may have partly reflected a renewed emphasis on exploration and development overseas encouraged by rising crude petroleum prices and the lack of exploration opportunities in the United States.

Equity capital inflows decreased $0.4 billion to $5.1 billion. Increased inflows from petroleum and manufacturing affiliates were more than offset by a shift to outflows from other affiliates, particularly those in finance and insurance. The sale of a large petroleum affiliate in Canada, which accounted for over one-half of the inflows for the year, was augmented by sales of many large manufacturing affiliates in Western Europe.

Foreign assets in the United States

Foreign assets in the United States increased $196.7 billion in 1989, compared with a $219.3 billion increase in 1988.

Foreign official assets.--Foreign official assets in the United States increased $7.4 billion, compared with an increase of $38.9 billion. Dollar assets of industrial countries decreased $1.4 billion; intervention sales of dollars by foreign monetary authorities in the second and fourth quarters more than offset placement of dollar assets in the United States in the first and third quarters. Assets of OPEC members increased $10.7 billion following a decrease of $3.1 billion; this was the first substantial increase in OPEC assets since 1982. Dollar assets of other countries decreased $1.9 billion, following an increase of $11.8 billion, as newly industrialized countries in the Far East reduced their assets in the United States.

Liabilities reported by banks.--U.S. liabilities to foreigners and international financial institutions reported by U.S. banks, excluding U.S. Treasury securities, increased $58.0 billion, compared with a $68.8 billion increase. Banks' own liabilities, payable in dollars, increased at a faster pace in 1989 than in 1988, $56.9 billion, compared with $44.5 billion. A step-up in interbank borrowing from banks and other private foreigners in the Caribbean, Japan, and continental Europe financed a surge in U.S. banks' international lending activities, especially in the last half of the year. Liabilities payable in foreign currencies decreased $8.9 billion, following an increase of $15.6 billion.

U.S.-owned banks drew heavily from offices in the Caribbean in the last half of the year to finance lending to other financial centers; funding from overseas sources rather than from domestic sources was encouraged partly by a faster decline in Eurodollar rates than in U.S. interest rates. Foreign-owned (mostly Japanese) banks augmented this borrowing, especially in the fourth quarter, by drawing on banks abroad to finance an increase in funds advanced to home offices in Japan and an increase in U.S. loan portfolios. In the fourth quarter, deposit inflows increased from unaffiliated banks and nonbanks in France, Italy, and Germany. The increase from Western Europe may represent increased use of European source funds by Japanese banks in the United States.

Banks' own liabilities payable in foreign currencies decreased $8.9 billion, following a $15.6 billion increase, reflecting a sharp cutback in yen funding of Japanese-owned banks in the United States. An increase in funding in foreign currencies from the Caribbean and United Kingdom offset some of this drop.

Banks' custody liabilities, payable in dollars, increased $10.0 billion, following an $8.8 billion increase. Borrowing in the first half of the year reflected strong demand for bank credit for acquisitions in the United States. Additional drawing on Eurodollar credits by nonbank residents in the United States was induced by a significant widening of the prime/LIBOR differential favoring overseas borrowing.

U.S. Treasury securities.--Net foreign purchases of U.S. Treasury securities were a record $29.4 billion, up $9.3 billion from last year's peak. Net foreign purchases of U.S. Treasury bonds were a record $27.2 billion, despite a substantial narrowing of long-term interest rate differentials that favored greater investment abroad, especially in British, Japanese, and German government bonds. Net purchases were strongest in the first quarter, when U.S. interest rates increased and the dollar appreciated, and in the third quarter, when prospects for capital gains strengthened as U.S. economic growth appeared to slow (chart 6).

Net purchases by the United Kingdom accounted for $21.7 billion, or 85 percent of total net purchases, nearly triple last year's increase. Net purchases were strong in the months of the quarterly U.S. Treasury auctions. In contrast, net purchases by Japan were $0.1 billion; net purchases in the first quarter shifted to net sales in the following quarters. A rapid rise in Japanese bond rates relative to those of U.S. Government bonds and a keen interest in U.S. corporate stocks and agency bonds may have contributed to only small net purchases of U.S. Treasury bonds in 1989, compared with $4.7 billion in net purchases in 1988.

Gross purchases and sales of U.S. Treasury bonds by all countries in 1989 increased 45 percent. Activity by British residents was up 33 percent, and that by Japanese residents, 56 percent. Much of the increase in Japanese activity occurred in the May-to-August period when both purchases and sales accelerated significantly; the acceleration was prompted by the interaction of political tensions in China, the sharp drop in the Hong Kong stock market, uncertainties in financial markets in the Far East, and the previously mentioned prospects for capital gains on U.S. Treasury bonds.

Other U.S. securities.--Net foreign purchases of U.S. securities other than U.S. Treasury securities were $40.3 billion, compared with $26.4 billion. An increase in net foreign purchases of stocks and federally sponsored agency bonds accounted for the rise; new issues of corporate bonds abroad were almost unchanged.

Transactions in U.S. stocks shifted to net purchases of $7.3 billion from net sales of $0.5 billion (chart 7). Net purchases were strongest in the May-to-October period, when the dollar and U.S. stock prices both rose rapidly and short- and long-term U.S. interest rates declined. Most purchases were by Japan and other countries in Asia, the United Kingdom, and the Caribbean. Net Japanese and other Asian purchases were $4.7 billion, compared with $1.9 billion; purchases were exceptionally strong in June at the time of political difficulties in Japan, uncertainties in financial markets in the Far East, and unrest in China. A shift to large British net purchases of $4.3 billion from net sales of $1.1 billion was mostly offset by a step-up in sales by Switzerland and France, and by a shift to sales by Germany. Investors in these three countries may have shifted funds to their domestic stock markets, all of which advanced strongly in 1989. Net purchases by the Caribbean jumped more than fourfold to $3.3 billion as internationally oriented mutual funds, insurance companies, and investment funds located there bought heavily until the fourth quarter. Gross purchases and sales of stocks were 13 percent above 1988.

New issues abroad by U.S. corporations were nearly unchanged at $18.7 billion. Borrowing was strongest in the first half of the year but moderated in the second half as the U.S. economy and corporate credit demands slowed and as the need to finance acquisitions diminished further. Strong appreciation of the dollar and wide interest rate differentials in favor of dollar bonds, particularly over German and Japanese bonds, contributed to foreign demand in the first half of the year. In the last half, interest rate differentials narrowed substantially, contributing to a reduction in demand for new issues. For the year, the total amount of borrowing in all bond markets by U.S. corporations slowed, while reliance on overseas markets increased to 11 percent from 10 percent of total borrowing. Reliance on foreign markets was primarily through fixed- and floating-rate issues. U.S. companies offered very few equity-related bonds with warrants in international bond markets, although there was a surge in demand for such bonds offered by the Japanese.

Industrial corporations increased their borrowing to $12.2 billion from $10.2 billion (table Q). Borrowing by nonbank financial corporations fell by one-half.

Straight fixed-rate bonds accounted for 85 percent of all new issues, up from 82 percent. Floating-rate note issues decreased further, partly as a result of continuing problems in the floating-rate market.

The share of borrowing denominated in dollars increased to 69 percent from 55 percent, largely because of the strength of the dollar for much of the year. Despite increasing use of the Japanese yen in international finance, the share of U.S. new issues denominated in yen dropped, along with the share denominated in Swiss francs, German marks, and British pounds. The most popular denomination of foreign currency issue was the European currency unit, which accounted for 31 percent of foreign currency issues.

Net foreign purchases of outstanding bonds were $14.3 billion, compared with $8.1 billion. These purchases, mostly by Japanese and British residents of federally sponsored agency bonds, were seen as especially safe investments at times of political uncertainty in the Far East and at times of concern about riskier high-yield U.S. corporate bonds. Gross purchases and sales were 42 percent higher than in 1988.

Direct investment.--Net inflows for foreign direct investment in the United States were a record $61.3 billion, up from $58.4 billion. Intercompany debt inflows more than doubled in 1989, equity capital inflows dropped from their record level in 1988, and reinvested earnings were halved because of a drop in operating earnings (table L).

Intercompany debt inflows were $24.3 billion, compared with $11.5 billion. About one-half the increase was accounted for by a single acquisition in the first quarter. However, other large acquisitions occurred throughout the year.

Equity capital inflows dropped to $33.6 billion from $40.4 billion. In 1988, several multibillion dollar purchases were financed by equity capital. In 1989, only one large acquisition was financed entirely by equity capital. Contributions of equity capital were often made to existing U.S. affiliates, who then made the acquisitions.

Reinvested earnings were $3.4 billion, compared with $6.6 billion. The decrease reflected a sharp drop in operating earnings of most nonpetroleum affiliates.

The statistical discrepancy (errors and omissions in reported transactions) shifted to an inflow of $34.9 billion from an outflow of $10.6 billion. For the past several years, the statistical discrepancy has shown sharp swings from year to year and from quarter to quarter. It is likely that most of this volatility is due to errors and omissions in the capital accounts arising from reporting, timing, and valuation problems associated with the volatility of exchange rates, the volatility of financial transactions, and new financial instruments. [Chart 3 to 7 Omitted] [Table A to R Omitted]

(1)Quarterly estimates for U.S. current- and capital-account components are seasonally adjusted when statistically significant seasonal patterns are present.
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Author:Bach, Christopher L.
Publication:Survey of Current Business
Date:Mar 1, 1990
Words:9382
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