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U.S. international transactions, fourth quarter and year 1990.

U.S. International Transactions, Fourth Quarter and Year 1990

Fourth Quarter 1990

Current account

THE U.S. current-account deficit was $27.8 billion in the fourth quarter, compared with $26.5 billion in the third quarter. A decline in the merchandise trade deficit and increases in the surpluses on services and investment income were more than offset by an increase in unilateral transfers associated with developments in the Middle East.(1)

Merchandise trade.--Merchandise exports increased $4.3 billion, or 4 percent, to $100.5 billion in the fourth quarter. Volume, measured in constant (1982) dollars, also increased 4 percent.

Nonagricultural exports increased $4.7 billion, or 5 percent, to $91.1 billion; volume increased 4 percent. The largest increases were in industrial supplies and materials (mostly petroleum and products, chemicals, and metals), $3.1 billion, in capital goods, $0.9 billion, and in consumer goods, $0.5 billion. Industrial supplies and materials were boosted by exceptionally strong increases in petroleum products, mostly residual fuel oil and petroleum coke for which large price increases augmented large volume increases. There were also large increases in chemicals and nonmonetary gold. Automotive products were unchanged as a decrease to Canada was offset by an increase to areas other than Canada.

Agricultural exports decreased $0.4 billion, or 4 percent, to $9.4 billion. Volume decreased 1 percent. The largest decreases were in wheat, corn, and soybeans. Prices of all major commodities except cotton decreased sharply; the price movements reflected abundant worldwide supplies of grain and soybeans and reduced purchases of these commodities by the Soviet Union. Demand and prices for cotton continued to rise.

Merchandise imports increased $3.4 billion, or 3 percent, to $129.3 billion. Volume decreased 3 percent. Petroleum imports, reflecting higher prices as a result of the crisis in the Persian Gulf, accounted for the increase.

Nonpetroleum imports increased $0.3 billion, or less than 1 percent, to $110.6 billion. Volume also increased less than 1 percent. Increases in capital goods (mostly civilian aircraft, engines, and parts) and in consumer goods were partly offset by a decrease in automotive products from Canada.

Petroleum imports increased $3.1 billion, or 20 percent, to $18.7 billion; a sharp decrease in volume was more than offset by an increase in prices. The average number of barrels imported daily decreased to 7.14 million from 8.64 million reflecting the downturn in the U.S. economy. The average price per barrel increased to $28.47 from $19.67. The pattern of petroleum prices and their volatility following the Iraqi invasion of Kuwait on August 2 reflected the market's assessments of the risks of war in the Persian Gulf rather than fundamental conditions in the petroleum markets. Peak prices occurred in early October; prices by yearend were substantially lower but still well above pre-invasion levels. Despite the crisis, worldwide supplies were abundant throughout the quarter. Large increases in production by Saudi Arabia and Venezuela more than offset the loss of production by Iraq, Kuwait, and Nigeria. Both U.S. inventories and consumption decreased; the decrease in inventories was seasonal and followed a buildup in the previous quarter. Fourth-quarter 1990 inventories were 2 percent higher than a year earlier. Domestic production increased.

Services.--Transfers under U.S. military agency sales contracts were $2.9 billion in the fourth quarter, an increase of $0.2 billion from the third. Deliveries to Saudi Arabia in response to the Iraqi invasion of Kuwait added $0.8 billion to overall transfer levels. In the previous quarter, similar deliveries added $0.4 billion. U.S. direct defense expenditures abroad were $4.9 billion in the fourth quarter, up $0.5 billion. Petroleum expenditures more than accounted for the increase; they increased $0.6 billion to support the buildup of the coalition armed forces in the Persian Gulf. In the previous quarter, similar petroleum expenditures added $0.4 billion. Expenditures in the fourth quarter reflected not only a substantial step-up in volume of purchases, but also the higher post-Iraqi-invasion prices for all petroleum products. Other expenditures to support the coalition armed forces added $0.2 billion each in the third and fourth quarters.

Foreign visitors spent $10.3 billion for travel in the United States, a 4-percent increase. Receipts from overseas increased 2 percent to $7.5 billion; from Canada, 6 percent to $1.6 billion; and from Mexico, 17 percent to $1.2 billion. U.S. travelers spent $10.0 billion in foreign countries, a 1-percent decrease. Payments for overseas travel decreased 3 percent to $7.5 billion; payments to Canada increased 3 percent to $0.9 billion, and payments to Mexico increased 7 percent to $1.6 billion.

Passenger fare receipts increased 5 percent to $3.1 billion, and passenger fare payments decreased 4 percent to $2.4 billion.

Other transportation receipts increased 4 percent to $5.7 billion as a result of an increase in ocean and air freight receipts. Other transportation payments increased 2 percent to $6.1 billion; a sharp drop in the volume of both petroleum and non-petroleum imports was more than offset by an increase in air port service payments abroad, which was partly attributable to sharply higher jet fuel prices and increased shipments of military materials to the Persian Gulf.

Receipts from foreigners for "other private services" increased $0.1 billion, to $8.2 billion. Payments to foreigners for "other private services" were virtually unchanged at $3.7 billion.

Investment income.--Receipts of income on U.S. direct investment abroad increased $0.3 billion, to $14.2 billion, in the fourth quarter. A $0.9 billion rise in operating earnings was partly offset by a $0.5 billion decline in capital gains. The increase in operating earnings was mostly in manufacturing affiliates in Western Europe and Japan. Earnings of petroleum affiliates increased strongly as a result of higher crude petroleum prices.

Payments of income on foreign direct investment in the United States were $0.4 billion, down from $0.7 billion. A shift from operating earnings to operating losses was partly offset by a shift from capital losses to capital gains.

Receipts of income on other private investment were $16.5 billion, compared with $16.1 billion. An increase in bank claims more than offset lower interest rates. Payments of income on other private investment were $20.5 billion, compared with $19.6 billion; an increase in bank liabilities more than offset lower interest rates.

Receipts of income on U.S. Government assets abroad were $4.1 billion, compared with $2.0 billion. The forgiveness of $2.1 billion in interest owed by the Egyptian Government to the U.S. Government accounted for the increase. Related entries appear in the unilateral transfers and U.S. Government repayments on credits accounts.

Payments of income on U.S. Government liabilities were $9.5 billion, compared with $9.3 billion. Higher foreign official holdings of U.S. Treasury securities more than offset lower interest rates.

Unilateral transfers.--Net unilateral transfers were $9.1 billion in the fourth quarter, compared with $4.1 billion in the third. U.S. Government grants included three large, and partly offsetting, transactions that accounted for the increase.

First, cash contributions from the coalition partners in Operation Desert Shield to help defray the costs of operations in the Persian Gulf totaled $4.3 billion. These contributions are considered unilateral receipts by the United States, and they are recorded in table 1, line 30; their offset is recorded in the U.S. Government banking accounts in table 1, line 53. There were no cash contributions in the third quarter. Recording in-kind transfers received from the coalition partners, as well as other in-kind transactions associated with these military operations, is not possible, because of the lack of comprehensive source data.

Second, in November, as a result of congressional legislation, the Government of Egypt was relieved of its responsibility to repay $7.1 billion in principal and interest to the U.S. Government. The entire $7.1 billion is recorded as a U.S. Government grant in table 1, line 30, with the reduction in principal ($5.9 billion) recorded as a repayment on U.S. Government credits in table 1, line 41, and the interest ($2.1 billion) recorded in U.S. Government receipts in table 1, line 14. (An additional $1.0 billion in military debt will be forgiven in the first quarter of 1991.)

Third, grants to Israel from regular budget appropriations totaled $2.9 billion. Cash grants of $1.2 billion were paid in full when funds became available in the first quarter of the new fiscal year. An appropriation of $1.7 billion provided funds under the waiver credit program.

Private remittances and other transfers decreased for the quarter. However, remittances to Israel through private philanthropic (nonprofit) institutions were up sharply in response to the crisis in the Persian Gulf. Remittances also flowed to Israel to support the emigration of Soviet Jews to Israel.

Capital account

Net recorded capital inflows--that is, net changes in U.S. assets abroad less net changes in foreign assets in the United States--decreased to $8.3 billion in the fourth quarter from $24.2 billion in the third quarter. The decrease was largely due to a slowing in the accumulation of private assets in the United States by foreigners.

U.S. assets abroad.--U.S. assets abroad increased $30.6 billion in the fourth quarter, compared with an increase of $31.9 billion in the third.

U.S. official reserve assets increased $1.1 billion, following a $1.7 billion decrease.

U.S. claims on foreigners reported by U.S. banks increased $24.4 billion, following a $13.5 billion increase. Interbank claims on own foreign offices abroad shifted sharply to a $23.0 billion increase from a $1.2 billion decrease. Most of the increase occurred in late November and in December, when U.S.-owned banks advanced large amounts of funds to their banking offices in the United Kingdom, the Caribbean, Hong Kong, and Singapore. These advances partly offset deposit outflows from those offices that were perhaps related in part to the uncertainties in the Persian Gulf. Claims on foreign-owned banks, which had increased moderately in October and November, decreased sharply in December. The decrease partly resulted from a reduction in claims on Japan, as Japanese banks took further actions to cut back their international activities and improve their capital positions.

U.S. banks' claims on foreign public borrowers decreased $4.9 billion, partly because of a $2.2 billion reduction in claims in exchange for bonds issued by the Venezuelan Government. This was the sixth consecutive quarter of decreases in claims on foreign public borrowers, mostly on heavily indebted countries.

U.S. banks' domestic customers' claims increased $7.3 billion, mostly in deposits of both dollars and foreign currencies.

Net U.S. purchases of foreign securities were $6.8 billion, up strongly from $1.2 billion; purchases of bonds returned to their near-record quarterly pace of the first half of the year, while purchases of stocks slowed further. Net U.S. purchases of foreign bonds were $6.7 billion, up from $0.7 billion; sharply lower U.S. bond rates, partly reflecting the downturn in the economy, encouraged borrowing in the United States. Canadian new issues surged to $2.3 billion, up from $0.3 billion, as the large differential between Canadian and U.S. interest rates strongly favored the U.S. market. Latin American issues were $2.3 billion; the total included $2.2 billion of bonds issued by the Government of Venezuela in exchange for a reduction in U.S. banks' claims on the Venezuelan Government. The new issues are collateralized by zero-coupon U.S. Treasury bonds purchased by the Government of Venezuela.

Transactions in outstanding bonds included net U.S. sales of $3.3 billion of British bonds; sales of gilt-edged securities were heavy as British long-term rates fell sharply and as the British recession deepened. Nearly offsetting these net sales were net U.S. purchases of $1.5 billion from France, $0.7 billion from Japan, and $1.0 billion from Germany; although interest rates declined sharply in France and Japan, their rates remained well above U.S. rates, and their currencies strengthened against the dollar.

Net U.S. purchases of foreign stocks slowed further to $0.1 billion. Uncertainty over prospects of war in the Persian Gulf, substantial declines in stock prices abroad in the previous quarter, and weakened earnings prospects kept U.S. investors from continuing the pace of acquisitions from the second quarter of 1989 through the second quarter of 1990. Trading volume declined 15 percent from the third quarter. Small net purchases in Germany, the Netherlands, Japan, and other Far East and Caribbean finance centers were nearly offset by net sales in the United Kingdom.

Net capital outflows for U.S. direct investment abroad were $3.0 billion in the fourth quarter, compared with $19.2 billion in the third. A substantial shift to intercompany debt inflows partly reflected the absence of two extraordinary transactions that had dominated transactions in the third quarter--an exceptionally large loan (outflow) to purchase a holding company with many affiliates in Western Europe and a large loan (outflow) to purchase a communications company. The decrease in equity capital outflows was mostly related to the same Western European transaction mentioned previously and, to a much lesser extent, the partial purchase (outflow) of another communications company. Reinvested earnings decreased by a small amount.

Foreign assets in the United States.--Foreign assets in the United States increased $38.9 billion in the fourth quarter, compared with a $56.1 billion increase in the third. Foreign official assets in the United States increased $19.9 billion, compared with a $13.6 billion increase. Dollar assets of industrial countries increased strongly in October and November when the German mark and other Western European currencies moved sharply higher against the dollar. Assets of developing countries other than OPEC members were boosted by transactions of a few countries (table B).

U.S. liabilities to private foreigners and international financial institutions reported by U.S. banks, excluding U.S. Treasury securities, increased $19.6 billion, compared with an increase of $27.6 billion. Banks' own liabilities to own foreign offices increased $7.7 billion; a surge occurred in December when U.S.-owned banks increased their liabilities to offices in the United Kingdom and the Caribbean by $10.7 billion. These inflows may have been indirectly linked to the surge in U.S. bank claims on own foreign offices in that month, but the increase in liabilities was significantly smaller than the $24.0 billion increase in claims. Banks' own liabilities to other foreign banks increased $12.0 billion. Political uncertainties in the Soviet Union, Eastern Europe, and the Persian Gulf may have caused inflows from Western Europe to the United States late in the quarter as investors sought liquidity in the face of uncertainty. These inflows occurred in spite of a decline in U.S. deposit rates relative to Eurodollar interest rates.

Net foreign sales of U.S. Treasury securities were $1.9 billion, compared with small net purchases of $0.3 billion. Japanese investors were the largest net sellers, reducing their holdings by $7.8 billion; net sales by the United Kingdom were $2.9 billion. Partly offsetting these net sales were net purchases of $7.8 billion from the Netherlands Antilles.

Net foreign purchases of U.S. securities other than U.S. Treasury securities were $0.4 billion, compared with net sales of $1.7 billion. Foreigners increased their net sales of U.S. stocks to $5.2 billion from $2.5 billion; a surge in net sales occurred in October, when the U.S. stock market fell sharply to its lowest level in over a year. Net sales of U.S. stocks were the largest since the market crash in the fourth quarter of 1987, when net sales were $7.8 billion. Rising fears of a downturn in the U.S. economy, weakening corporate earnings, further weakness of the dollar in exchange markets, and uncertainties about the outcome of events in the Persian Gulf all contributed to the fifth consecutive quarter of large net sales. Trading volume dropped 16 percent from the third quarter. Net sales by Japan, concentrated largely in October, accounted for much of the acceleration in total net sales. Net sales by Western European countries remained at about the same pace as in the third quarter. Foreigners shifted to net purchases of U.S. Government agency bonds of $2.5 billion from net sales of $0.5 billion. Most of the shift occurred in November when the bond market rallied briefly. New bond issues abroad by U.S. corporations decreased $1.3 billion, to $3.4 billion. The decrease reflected poor performance of the Eurobond market in October, and U.S. corporations elected to raise funds in the U.S. bond market when interest rates dropped sharply.

Net capital inflows for foreign direct investment in the United States were $1.1 billion, compared with $11.9 billion. Net equity capital inflows fell sharply to $4.4 billion from $11.1 billion; inflows in the third quarter had been boosted by several substantial acquisitions that accounted for nearly one-half of total net inflows. Intercompany debt inflows declined, and negative reinvested earnings increased.

U.S. dollar in exchange markets.--In the fourth quarter, the U.S. dollar depreciated 5 percent on a trade-weighted quarterly average basis against the currencies of 10 industrial countries, and it depreciated 2 percent against the currencies of 22 OECD countries plus 4 newly industrialized countries in the Far East (table C, chart 3). The dollar depreciated 10 percent against the Japanese yen, 5-6 percent against the continental European currencies, and 4 percent against the British pound. In contrast, the U.S. dollar appreciated 1 percent against the Canadian dollar.

Dollar depreciation reflected pessimism about the slowing U.S. economy and widened interest rate differentials against dollar assets for much of the quarter (charts 4, 5). During the first half of the quarter, the U.S. economy slowed, partly as a result of weakening consumer confidence following the rise in petroleum prices associated with the Iraqi invasion of Kuwait. The slowing economy led to a further drop in U.S. interest rates at a time when growth in Germany and Japan remained strong and their interest rates either rose or remained stable. Higher petroleum prices were also thought by many analysts to have a greater inflationary potential for the United States than for Germany and Japan.

During the last half of the quarter, strength in the dollar offset some of the earlier depreciation. The Federal Reserve Board moved to counter the weakness in the U.S. economy by reducing the federal funds rate from 8.00 percent to 7.25 percent over the November-December period, and it lowered the official discount rate one-half percentage point to 6.5 percent in December. Nonetheless, many participants in the foreign exchange markets sharply reduced their activities after the United Nations Security Council, on November 29, 1990, set a January 15, 1991, deadline for Iraq to withdraw its military forces from Kuwait. In late November and mid-December, when financial institutions bid heavily for funds to improve their capital ratios and balance sheet positions and a sufficient supply of funds was not available in the interbank market, many financial institutions purchased dollars in the foreign exchange markets to meet their capital requirements. In addition, as the January 15 deadline approached, market participants viewed dollar assets as a better hedge against uncertainties in the Persian Gulf than assets denominated in many other currencies.

The Year 1990

U.S. dollar in exchange markets.--The dollar paused in its decline in the early months of 1990, but then depreciated sharply, ending the year 15 percent lower than in the fourth quarter of 1989 and 20 percent lower than its highs of mid-1989 on a trade-weighted quarterly average basis against 10 currencies. During 1990, declines were 17-19 percent against the European Monetary System currencies and 9 percent against the Japanese yen. The decline of the dollar in 1990 was principally the result of declines in U.S. interest rates and economic growth rates relative to those of other countries (charts 4, 5).

The dollar changed little from February through April as a result of divergent movements against the German mark and Japanese yen. During much of the period, prospects for growth in the United States were somewhat better than at the end of 1989. However, U.S. growth trailed that in Germany by a substantial margin, and events surrounding the economic and monetary union of West and East Germany suggested even more rapid expansion and higher interest rates; thus, the dollar depreciated slightly against the German mark. In contrast, the dollar strengthened strongly against the Japanese yen; uncertainties about the Japanese election, an unprecedented large drop in the Japanese stock market, and hesitancy of the Bank of Japan to raise interest rates until late March contributed to strong dollar appreciation. Intervention operations carried out by U.S. monetary authorities in March were aimed primarily at moderating the rise of the dollar against the yen.

By late spring, when prospects in the United States were about evenly balanced between inflation and recession, conditions in Germany and Japan strengthened. The announced terms of currency conversion between West and East Germany did not fuel an uncontrollable increase in domestic consumption and inflation, and German long-term interest rates rose, which contributed to a further slight depreciation of the dollar against the mark. In Japan, the stock market stabilized temporarily. However, concerns that Japanese portfolio investments in the United States might weaken contributed to dollar weakness against the Japanese currency in May.

By mid-July, there was growing evidence that the U.S. economy might slow and that U.S. short-term interest rates, which had fallen several hundred basis points since early 1989, might decline further. Thus, sentiment toward the dollar turned negative. The sharp increase in crude petroleum prices that followed the Iraqi invasion of Kuwait initially boosted the dollar, but, in combination with weakening consumer confidence in the U.S. economy, it subsequently undermined foreign confidence in the dollar. Consequently, the dollar depreciated, first against the continental European currencies, mostly in August, and then against the yen, mostly in September and October. A protracted impasse over approval of the 1991 Federal budget added to negative dollar sentiment abroad. Safe-haven currency flows resulting from the crisis in the Persian Gulf may have gone primarily into the German mark and Swiss franc--countries with high interest rates and tight anti-inflationary policies--rather than into the dollar. During this time, the British pound moved broadly in line with the German mark, despite signs of rising unemployment and declining output in the United Kingdom, buoyed in part by expectations that the United Kingdom would soon join the exchange rate mechanism of the European Monetary System.

In November and December, interest rate differentials moved further against dollar assets and the dollar weakened significantly. In Japan, interest rates had risen sufficiently so that investors were satisfied with returns available at home. In addition, Japanese banks and insurance companies, partly in response to sharp declines in the values of their stock and bond portfolios, repatriated funds to shore up their domestic capital positions. In Germany, interest rates rose even further as economic expansion fueled additional domestic consumption resulting from the unification of Germany on October 3, 1990. In the United States, the drop in interest rates was particularly sharp, and the Federal Reserve Board lowered the federal funds and discount rates to counter the downturn in the economy. Currency inflows may have boosted the dollar somewhat in mid-to-late December as the deadline for Iraq to withdraw its troops from Kuwait approached. In the last 6 months of the year, the dollar declined 10-12 percent against the European Monetary System currencies and 17 percent against the Japanese yen.

In 1990, the performance of the dollar against the currencies of the newly industrialized countries in the Far East was mixed. The U.S. dollar depreciated 10 percent against the Singapore dollar, and it appreciated 6 percent against the South Korean won and 4 percent against the Taiwan dollar; it was unchanged against the Hong Kong dollar.

Current account

The U.S. current-account deficit was $99.3 billion in 1990, down from $110.0 billion in 1989. A decrease in the merchandise trade deficit, an increase in the surplus on services, and a shift to a surplus on investment income more than offset an increase in unilateral transfers.

Merchandise trade.--The U.S. merchandise trade deficit was $108.7 billion in 1990, compared with $114.9 billion in 1989 (tables D, E, F).

Exports increased $28.8 billion, or 8 percent, to $389.3 billion; volume increased 9 percent. Nonagricultural exports increased 9 percent, and agricultural exports decreased 3 percent.

Imports increased $22.6 billion, or 5 percent, to $498.0 billion; volume increased 4 percent. Nonpetroleum imports increased 3 percent, and petroleum imports increased 22 percent.

The slowdown in growth in real demand, both abroad and in the United States, had a significant impact on developments in trade in 1990. Growth in real demand abroad (based on trade-weighted real gross national product) slowed to an estimated 2.9 percent from 3.7 percent in 1989; both increases were well below the exceptional increase of 5.9 percent in 1988. Economic activity abroad in 1990 was mixed: Strong growth occurred in Germany, Japan, and Mexico, moderate growth in many continental European countries, and recession in the latter part of the year in the United Kingdom and Canada. U.S. demand weakened further to 0.9 percent in 1990 from 2.5 percent in 1989 and 4.5 percent in 1988; this weakness restrained expenditures on imports as well as on domestically produced goods.

Price changes in exports and imports by major end-use categories were not uniform in 1990 (table G). Prices of exports were mixed, rising moderately for capital goods, automotive products, and consumer goods (nonfood) and declining for foods, feeds, and beverages. When converted into foreign currency prices, prices of all export categories declined, as significant dollar depreciation more than offset domestic price increases (table H).

Dollar prices of most imports increased moderately. A decline in industrial supplies excluding petroleum reflected continued declines in commodity prices in world markets, particularly in the last half of the year. Prices of petroleum were significantly higher in the last 5 months as a result of the crisis in the Persian Gulf.

Exports.--Nonagricultural exports increased $29.9 billion, or 9 percent, to $348.9 billion in 1990, compared with a 13-percent increase in 1989. Volume increased 10 percent, compared with a 13-percent increase. Capital goods and consumer goods, which had been sources of strength in exports for several years, remained sources of strength in 1990 and accounted for 80 percent of the year's increase in exports. However, both their dollar and percentage increases slowed as the rates of expansion abroad became more mixed. Some stimulus was provided by the weaker dollar, which had declined by a substantial amount since mid-1989, particularly against Western European currencies. Growth of industrial supplies and materials weakened further, and automotive products remained weak.

Capital goods increased $15.9 billion, or 12 percent, to $153.9 billion. Volume increased 13 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 sharply after little slowdown in 1989 from peak rates in 1988. In contrast, computers, peripherals, and parts picked up. Civilian aircraft remained exceptionally strong for the third consecutive year; sales of new and used aircraft are largely for replacement. Production backlogs for new generation aircraft remained large.

Consumer goods (nonfood) increased $7.6 billion, or 21 percent, to $43.0 billion, down from a 32-percent increase. Volume increased 17 percent, down from a 28-percent increase. The slowing in both value and volume was widespread by commodity, mostly to Japan, the newly industrialized countries in the Far East, and Western Europe.

Nonagricultural industrial supplies and materials increased $6.8 billion, or 7 percent, to $97.4 billion, down from a 10-percent increase. All of the increase was in volume. As in 1989, both dollar and percentage increases in chemicals, paper and paper base products, building materials, and iron and steel products all reflected the slowing in economic activity abroad. Nonferrous metals were boosted by shipments of nonmonetary gold.

Automotive products increased $1.9 billion, or 6 percent, to $36.6 billion, up from a 2-percent increase. Volume increased 4 percent, following a 1-percent decrease. Continued stagnation in the value of exports to Canada reflected the further slowdown in economic activity there as well as reduced shipments of auto parts to U.S. assembly plants in Canada in response to lower auto sales in the United States. Exports of cars, trucks, and parts to Mexico continued to rise strongly; this increase reflected the continued transfer of assembly operations to that area and the increased sales of completed autos both in Mexico and for Mexican export either back to the United States or abroad (table I).

Agricultural exports decreased $1.1 billion, or 3 percent, to $40.4 billion, compared with an 8-percent increase. Volume increased 1 percent. The largest decreases were in wheat, $2.1 billion, and corn, $0.6 billion. Wheat exports fell to the lowest level in 3 years; much of the decrease was in exports to the Soviet Union, which had record harvests of wheat and coarse grains. During the last half of the year, restricted availability of credit from the U.S. Government to protest the Soviet policy on the emigration of Jews probably also contributed to reduced U.S. shipments. Corn exports to the Soviet Union also declined, but increases to other areas lessened the impact. Soybean exports to Western Europe and the developing countries also decreased. Offsetting some of these decreases was an increase of $1.2 billion, to a record $5.7 billion, in vegetables, fruits, nuts, and preparations, mostly to Western Europe and Canada. Cotton increased $0.5 billion. Prices of all commodities except cotton fell. Prices and demand for cotton remained strong.

Imports.--Nonpetroleum imports increased $11.4 billion, or 3 percent, to $435.8 billion in 1990, compared with a 4-percent increase in 1989. Volume increased 4 percent, compared with a 5-percent increase. The largest increases in 1990 were in capital goods and consumer goods, but their dollar and percentage increases were less than half those in 1989. Automotive products were nearly unchanged, and nonpetroleum industrial supplies and materials decreased.

Capital goods increased $4.1 billion, or 4 percent, to $117.3 billion, following an 11-percent increase. Volume increased 9 percent. This was the second successive year of large slowdowns in value across all major categories, including semiconductors and computers, peripherals, and parts from Japan and the newly industrialized countries in the Far East. Other categories, such as oil drilling and construction equipment and machine tools, showed no growth or declined. By country or area of origin, capital goods from the newly industrialized countries in the Far East slowed to a 2-percent increase from a 5-percent increase, and those from Japan shifted to a 6-percent decrease from a 12-percent increase. Imports from Western Europe picked up to an 8-percent increase from a 5-percent increase, partly in response to the lower dollar.

Consumer goods (nonfood) increased $3.4 billion, or 3 percent, to $106.2 billion, following a 7-percent increase. Volume increased 1 percent. Durables showed only a small increase, partly because of drops in television and audio equipment. Among nondurables, relative strength in textiles from the newly industrialized countries in the Far East partly offset slowdowns in other categories.

Nonpetroleum industrial supplies and materials decreased $1.7 billion, or 2 percent, to $82.3 billion, after a 1-percent increase. Volume was unchanged. As in 1989, demand was especially weak for iron and steel products, building materials, and paper and paper base products; imports of these commodities actually dropped in 1990. Chemicals remained relatively strong, rising 9 percent. Other industrial supplies reflected further decreases in world market prices of raw materials, nonfood commodities, and metals, including nickel, zinc, copper, and aluminum.

Automotive products were about unchanged at $86.1 billion, compared with a 2-percent increase. Volume decreased 1 percent. The number of new passenger cars imported slowed to a 2-percent decrease from a 9-percent decrease. Passenger cars from Japan and South Korea continued to decline; the decline was only partly offset by modest increases in cars from Mexico and Canada. The number of cars from Japan decreased 9 percent, and those from South Korea decreased 25 percent. The number of new cars sold in the United States decreased 4 percent following a 7-percent decrease, and the foreign share of total sales decreased to 27 percent from 28 percent.

The decline in the number of autos from Japan was the fourth consecutive yearly decrease. The decline resulted from the substitution of transplant production in the United States for imports and from the downturn in U.S. economic activity.

Over the past decade, imports of parts have risen dramatically even as the number of vehicles has fallen and their average price has risen. However, that rise has virtually ceased in the past 2 years because of falling sales in the United States. For Japan, the earlier growth in parts was related to transplant production. For Canada, parts have been used mainly in the larger American-built cars. For Mexico, the increase has been part of the enlargement of assembly operations in northern border area (table I).

Petroleum imports increased $11.2 billion, or 22 percent, to $62.1 billion--the highest level since 1981--compared with an increase of 28 percent. The increase was mostly in price. The average price per barrel increased 20 percent to $20.55 from $17.06. On a fourth-quarter-to-fourth-quarter basis, the average price increased 61 percent to $28.47 from $17.67 as a result of the crisis in the Persian Gulf. The average number of barrels imported daily, year to year, increased to 8.28 million--the highest level since 1979--from 8.17 million, but the annual percentage increase slowed to 1 percent from 8 percent.

After a long rise since the first quarter of 1985, quarterly increases in the volume of petroleum imports reached a peak in the first quarter of 1990. Thereafter, volume reflected the progressive slowing and eventual downturn in the U.S. economy (chart 6). Declines in volume and price were reinforcing in the second quarter, but the surge in average prices following the Iraqi invasion of Kuwait more than offset a greatly reduced volume of imports in the last half of the year. In constant (1982) dollars, petroleum imports were only $1.3 billion higher in 1990 than in 1989.

The annual increase in the volume of petroleum imports went into inventories, which were 2 percent higher at yearend 1990 than at yearend 1989. Lower consumption reflected deteriorating economic conditions, and domestic production continued to decline. The volume of imports accounted for 49 percent of consumption, compared with 47 percent. The volume of imports from OPEC members slowed to a 5-percent increase from a 16-percent increase. OPEC's share of imports increased to 54 percent from 52 percent. Import volume from Saudi Arabia and Venezuela increased 11 percent and 15 percent, respectively; most of the step-up was in the last half of the year.

Balances by area.--This was the fourth consecutive year in which deficits with key industrial countries or areas have dropped substantially (tables J, K). The balance with Western Europe shifted to a surplus of $2.2 billion in 1990 from deficits of $3.8 billion in 1989 and $27.5 billion in 1987. Significant gains in net U.S. exports of capital goods and steady reductions in net U.S. imports of consumer goods have accounted for the major improvement. The deficit with Japan was $41.8 billion in 1990, down from $49.8 billion in 1989 and $57.0 billion in 1987. Relatively little change has occurred in U.S. net capital goods imports from Japan, although these imports did rise strongly from 1987 through 1989 before falling in 1990. Much of the improvement was traceable to higher U.S. net exports of industrial supplies and materials and lower U.S. net imports of consumer goods. The deficit with the newly industrialized countries in the Far East was $21.1 billion in 1990, down from $25.2 billion in 1989 and $34.8 billion in 1987. Lower net U.S. imports of consumer goods accounted for over one-third of the improvement. Additional improvements resulted from higher net U.S. exports of industrial supplies and, in the past 2 years, reduced U.S. net imports of capital goods.

The deficit with OPEC members in 1990 increased to $24.8 billion from $17.6 billion in 1989 because of the previously mentioned surge in petroleum prices. In 1987, the deficit was $13.7 billion.

Services.--Net service receipts were $22.9 billion in 1990, compared with $20.5 billion in 1989 (table L).

Military transactions with foreigners resulted in net payments of $6.4 billion in 1990, up slightly from 1989. Transfers under U.S. military agency sales contracts were $10.2 billion, an increase of $1.8 billion. The step-up in transfers was paced by $1.6 billion in deliveries to Saudi Arabia. A step-up in deliveries of $1.2 billion followed the Iraqi invasion of Kuwait on August 2. Earlier in the year, stepped-up technical assistance of $0.5 billion had been provided to Saudi Arabia to improve its command, communications, and control systems.

Direct defense expenditures abroad were $16.6 billion in 1990, up $1.9 billion from 1989. Expenditures related to Operation Desert Shield accounted for $1.1 billion of the increase; $0.7 billion of the increase was for purchases of petroleum. The increase in expenditures was held in check by in-kind transactions, which are known to have occurred. However, in-kind transactions for these military operations are not entered in the accounts because of the lack of complete source data. Expenditures for petroleum in the last half of the year reflected not only the step-up in the scale of the military operations but also the sharply higher prices of petroleum in world markets. An increase in contractual services of $0.6 billion, mostly in Germany as a result of a decline in the foreign exchange value of the German mark, and an increase in payments for NATO infrastructure of $0.2 billion for the transfer of the U.S. Air Force's F-16 base from Spain to southern Italy accounted for the rest of the annual increase.

Net travel and passenger fare receipts were $3.2 billion, up from $1.0 billion. Foreign visitors spent $39.3 billion for travel in the United States, up 14 percent. Travel receipts from overseas were $29.3 billion, up 12 percent, following a 17-percent increase. The number of overseas visitors from Europe and Japan significantly trailed their strong increases in the previous year. Receipts from Canada increased 17 percent to $5.7 billion, largely as a result of continued strength in the number of auto travelers and their expenditures in the United States. Receipts from Mexico increased 26 percent to $4.3 billion.

U.S. travel payments totaled $38.4 billion, a 10-percent increase. Travel payments overseas increased 11 percent to $28.9 billion; the number of travelers increased 8 percent, following a 3-percent increase. Payments to Canada increased 3 percent to $3.5 billion; the number of travelers was unchanged. Payments to Mexico totaled $6.0 billion, up 6 percent, following an increase of 20 percent. The number of travelers to Mexico's interior increased 2 percent, following a 15-percent increase; travelers to the border area fell 4 percent.

Passenger fare receipts from foreign visitors traveling on U.S.-flag carriers increased 17 percent to $11.9 billion. The number of visitors increased 10 percent, unchanged from the rate of a year earlier. Growth was strongest from Oceania and Latin America, which had increases of 22 percent and 14 percent, respectively, and was weakest from Europe and Japan, each up 7 percent. U.S. payments to foreign transocean carriers totaled $9.5 billion, a 12-percent increase, up from an 8-percent increase. The number of U.S. travelers on foreign-flag carriers increased 5 percent, reflecting a 10-percent increase in travel on European carriers.

Other net transportation payments were $1.5 billion, compared with $0.4 billion. Total receipts increased 8 percent, to $22.0 billion, about the same pace as a year earlier. Air freight receipts grew by a substantial amount, up significantly from the previous year. Port expenditure receipts increased as higher jet fuel prices more than offset lower export freight volume. Total payments increased 13 percent, to $23.5 billion, compared with a 6-percent increase. Despite the large drop in the volume of petroleum imports in the fourth quarter, the higher volume for the year increased freight payments. Higher jet fuel prices led to higher U.S. airline port expenses overseas.

Net receipts from foreigners for other private services were $17.1 billion, compared with $18.0 billion. Among transactions with unaffiliated foreigners, net receipts for education services continued to rise. Net receipts for financial services decreased because of higher payments and lower receipts of commissions on securities transactions. Net receipts for business, professional, and technical services reflected continued rapid expansion in sales of services to foreigners. Insurance activities shifted to net payments as loss recoveries dropped to more normal levels; in 1989, recoveries had been unusually large as a result of the extensive damage caused by Hurricane Hugo in the previous year. Net payments on telecommunications services continued to increase.

Investment income.--Net receipts of investment income were $7.5 billion in 1990, following net payments of $0.9 billion in 1989 (table L).

Direct investment income.--Receipts of income on U.S. direct investment increased little in 1990, rising slightly to $54.1 billion from $53.6 billion (table M). Operating earnings, reflecting mixed economic activity abroad, were essentially unchanged at $51.8 billion. Earnings of manufacturing affiliates dropped substantially in the United Kingdom and Canada, where economies were in recession, and in Japan. In contrast, manufacturing earnings in continental Europe increased much more rapidly than a year earlier. Earnings of finance affiliates in continental Europe and in the United Kingdom were boosted by a significant step-up in earnings of investment banking and securities trading affiliates; however, this rise was dampened by a substantial drop in earnings of banking affiliates in the United Kingdom. Earnings of petroleum affiliates in OPEC countries were up strongly.

Payments of income on foreign direct investment in the United States were $4.8 billion, down from $14.0 billion. Weakness in the U.S. economy led to lower earnings; earnings of manufacturing affiliates decreased somewhat, but most of the earnings decline was attributable to "other" industries, where earnings shifted $5.3 billion to losses of $3.3 billion. Much of this change was the result of severe problems encountered by affiliates in the finance industry.

Portfolio investment income.--Receipts of income on other private investment were $64.8 billion in 1990, compared with $68.4 billion in 1989 (table N). Lower interest rates reinforced a significant retrenchment by U.S. banks from international lending activities. Receipts of income on U.S. Government assets were $9.9 billion, compared with $5.5 billion. One-half of the increase resulted from the forgiveness of $2.1 billion in interest owed by the Egyptian Government to the U.S. Government. The other half resulted from higher earnings on foreign currency holdings that had been built up in the previous year.

Payments of income on other private investment abroad were $79.1 billion, compared with $78.5 billion. A step-up of payments of interest on bonds and dividends on stocks more than offset a drop in interest paid on bank liabilities. Payments of income on U.S. Government liabilities were $37.5 billion, compared with $36.0 billion, reflecting lower interest rates and larger official holdings of Treasury securities.

Unilateral transfers.--Net unilateral transfers were $21.1 billion in 1990, up from $14.7 billion in 1989. Most of the increase was accounted for by U.S. Government grants, which increased to $17.0 billion from $11.0 billion (table O). The special reasons for the increase, which were presented in the discussion of the developments in the fourth quarter, included the receipt of cash contributions from the coalition partners in Operation Desert Shield; the forgiveness of certain Egyptian military debt; and funds provided to Israel from annual budget appropriations, including funds under the waiver credit program. Grants for development assistance under the Foreign Assistance Act and related acts increased slightly after several years of stability. Private remittances and other transfers were nearly unchanged at $1.2 billion, but included a step-up in contributions to Israel partly in response to Operation Desert Shield and partly in support of the emigration of Soviet Jews to Israel.

Capital account

Net recorded capital inflows--that is, net changes in U.S. assets abroad less net changes in foreign assets in the United States--decreased to $26.3 billion in 1990 from $87.6 billion in 1989. The decrease resulted largely from substantial swings to net outflows on securities transactions and on net direct investment transactions. These swings reflected a number of developments, including lower investment returns in the United States, a decline in the value of the dollar, increased demands for capital abroad, and a decline in stock markets in the United States and abroad.

U.S. assets abroad.--U.S. assets abroad increased $61.3 billion in 1990, compared with an increase of $127.1 billion in 1989.

U.S. official reserve assets.--U.S. official reserve assets increased $2.2 billion in 1990, compared with an increase of $25.3 billion in 1989. Increases in holdings of foreign currencies were limited in 1990, whereas large intervention purchases of foreign currencies in exchange markets had occurred in 1989. Special drawing rights (SDR's) were also sold to foreign monetary authorities who needed SDR's for the payment of International Monetary Fund charges and repurchases; these amounts were small.

U.S. Government assets other than official reserve assets.--Disbursements of U.S. Government credits were $6.9 billion in 1990, compared with $5.5 billion in 1989 (table O). Disbursements for debt reorganizations accounted for the increase. Reorganization credits of $1.0 billion were advanced to the Egyptian Government in the fourth quarter, the repayment of which will be waived in the first quarter of 1991. Reorganization of assets originally owned by the private banking sector but acquired by the U.S. Government under guaranty programs added $0.5 billion in new credits, returning this program to normal historical levels. Such private sector rescheduling was primarily with Argentina, Brazil, Mexico, and Zaire. Disbursements for other than debt reorganization continued to decline, reflecting the contraction of virtually all major U.S. Government lending authorities in recent years.

Repayments of principal on U.S. Government credits were $10.0 billion, up from $6.5 billion, and included $5.9 billion in Egyptian military debt owed to the U.S. Government that was repaid by a U.S. Government grant. The effect of this extraordinary transaction was partly offset by a $2.7 billion decrease in actual cash collections; of the $2.7 billion, $2.3 billion resulted from decreased flows under special provisions permitting prepayment of some Foreign Military Sales credits.

Claims reported by banks.--U.S. claims on foreigners reported by U.S. banks decreased $0.8 billion in 1990, compared with a $50.7 billion increase in 1989 (tables P, Q). Interbank claims decreased sharply as both U.S.-owned and foreign-owned banks in the United States reduced their international activity. Claims on foreign public borrowers in developing countries in Latin America were also reduced; part of the reduction was the exchange of U.S. bank claims for bonds issued by foreign governments. These reductions were nearly offset by an increase in U.S. banks' domestic customers' claims.

Banks' own claims on foreigners, payable in dollars, decreased $17.8 billion, following a $45.1 billion increase; the shift was part of a general decline in international demand for U.S. bank credit that reflected economic slowdowns in several industrial countries and sharp contractions for brief periods in the interbank market. In addition, banks both in the United States and abroad took steps to enhance their balance sheets, thereby further reducing claims. The largest contraction in interbank business was with Japanese banks, which repaid earlier loans and refrained from borrowing large amounts from their offices in the United States. Throughout the year, part of the decrease in claims was related to the desire of Japanese banks to adjust their balance sheets to the substantial decline in the value of their assets and to meet risk-based capital requirements. U.S.-owned banks' claims on their offices in international banking centers were sharply curtailed in the first half of the year but picked up in the last half, partly to offset deposit outflows from foreign offices toward yearend. These deposit outflows apparently resulted from the uncertain financial environment created by the Persian Gulf crisis.

Banks' claims on foreign public borrowers decreased $13.2 billion, following a $1.5 billion decrease. The decrease in 1990 reflected banks' efforts to reduce further exposure in risky assets of heavily indebted countries in order to enhance overall asset quality and to accommodate risk-based capital requirements that went into effect at yearend. Part of the decrease, $7.3 billion, stemmed from the U.S. Government's initiative to assist the Governments of Mexico and Venezuela with the issuance of bonds in the U.S. capital market in order to restructure indebtedness owed to U.S. banks.

Banks' own claims payable in foreign currencies increased $0.9 billion, following a $3.7 billion decrease.

Banks' domestic customers' claims increased $16.1 billion, following a $9.2 billion increase. Purchases of foreign money market instruments by U.S. mutual funds were especially strong in the second and third quarters. Depositing in both dollars and foreign currencies was strong in the fourth quarter, possibly reflecting uncertainties associated with the crisis in the Persian Gulf.

Foreign securities.--Net U.S. purchases of foreign securities increased $4.9 billion, to $26.8 billion, in 1990, eclipsing the previous record in 1989. The diversification into foreign stocks during 1989, when $16.7 billion were acquired, slowed sharply to acquisitions of $6.1 billion in 1990. This slowdown was more than offset by a sharp increase in net purchases of bonds to a record $20.6 billion from only $5.3 billion in 1989.

New issues of foreign bonds in the United States were $21.7 billion, up from $6.6 billion. Borrowing was encouraged by further substantial declines in U.S. bond rates. Governments were the most active borrowers, placing $14.8 billion, more than three times the amount placed in 1989. Borrowing by governments included $7.3 billion in debt of developing countries issued in the U.S. market to U.S. banks in exchange for a reduction in U.S. banks' claims on the foreign government, $5.1 billion by Mexico in the first quarter and $2.2 billion by Venezuela in the fourth quarter. The borrowing was collateralized by Mexican and Venezuelan purchases of U.S. Treasury zero-coupon bonds. Canadian new issues were especially strong, at $6.4 billion, compared with $2.7 billion. Western European placements were $3.1 billion, up from only $1.0 billion, and borrowing by international financial institutions doubled, to $3.1 billion. Borrowing by private corporations more than tripled.

U.S. investors purchased $4.3 billion in outstanding foreign bonds, primarily from Canada, Western Europe, and Japan. High Canadian interest rates and the strength of the Canadian dollar contributed to $3.7 billion in net U.S. purchases. Net purchases from Germany were $2.3 billion, a reversal from net sales of $5.1 billion. High German interest rates, boosted by prospects of even larger demands on capital markets from a united Germany, made German issues especially attractive, particularly when translated into the appreciating German mark. Net purchases from Japan were $1.3 billion, a reversal from $3.3 billion in net sales. Japanese long-term interest rates had risen nearly 400 basis points over the past 2 years before turning down sharply in the third quarter. Offsetting the shift to net purchases was a near halt in purchases of British gilt-edged securities in 1990 after an $8.0 billion increase in 1989. British long-term rates finally began a sharp decline in April after a steady 2-year rise. Gross purchases and sales of outstanding bonds increased 34 percent in 1990; activity picked up significantly in the last 3 months of the year when investors sought both more attractive yields than were available on alternative investments and relative safety of principal in a period when capital and exchange markets were highly volatile.

Net U.S. purchases of stocks were $6.1 billion, down sharply from a record $16.7 billion. During the year, most major stock markets abroad fell significantly. The sharpest decline was in the Tokyo market; the decline began in February and totaled more than 40 percent for the year. The declines reflected slower expansion and rising interest rates in many countries early in the year. Deteriorating profits and uncertainty about the outcome of events in the Persian Gulf pushed prices lower in the last half of the year. Net purchases of British stocks dropped $10.0 billion, to $0.3 billion. Although over one-half of the increase in 1989 was related to a special direct-investment-related transaction, the dropoff in other purchases was also substantial. Concerns over British inflation, recession, and very high short-term interest rates contributed to the dropoff. Net purchases of German stocks were $0.7 billion, down $0.2 billion; early in the year, they had been buoyed temporarily by the euphoria over growth prospects that would result from the unification of West and East Germany. Net purchases from other Western European countries and Canada also declined. Gross purchases and sales of foreign stocks increased 13 percent in 1990 but dropped significantly in the last 4 months of the year.

Direct investment.--Net capital outflows for U.S. direct investment abroad were a record $36.4 billion in 1990, compared with $31.7 billion in 1989. A substantial shift to equity capital outflows more than offset decreases in intercompany debt outflows and in reinvested earnings (tables M, R).

Equity cpaital shifted to outflows of $6.2 billion from inflows of $4.9 billion. Inflows in 1989 had been boosted by several major sales of petroleum affiliates in Canada and the United Kingdom and food affiliates in the United Kingdom. No major sales occurred in 1990, when the shift to net outflows partly reflected a major purchase of a holding company with many affiliates in Western Europe.

Intercompany debt outflows decreased to $8.5 billion from $14.2 billion. The multibillion dollar advances to affiliates in finance in the United Kingdom, partly to finance acquisitions, that had occurred in 1989 were not repeated in 1990. In addition, automotive equipment manufacturers in the United Kingdom repaid sizable loans that had been obtained from their U.S. parents in 1990. U.S. parents' repayments of previous borrowing to affiliates in the Netherlands Antilles also slowed. Stepped-up outflows resulted from the purchase of a communications company.

Reinvested earnings decreased slightly to $21.7 billion from $22.4 billion, reflecting the mixed pattern of worldwide earnings.

Foreign assets in the United States.-- Foreign assets in the United States increased $87.5 billion in 1990, compared with a $214.7 billion increase in 1989.

Foreign official assets.--Foreign official assets in the United States increased $30.8 billion, compared with an $8.8 billion increase. Dollar assets of industrial countries increased $24.2 billion, particularly in the last half when Western European currencies appreciated strongly against the dollar. Dollar assets of OPEC members increased $1.9 billion, following an increase of $10.7 billion. Dollar assets of other countries increased $4.6 billion, following a decrease of $1.8 billion.

Liabilities reported by banks.--U.S. liabilities to foreigners and international institutions reported by U.S. banks, excluding U.S. Treasury securities, increased $19.8 billion, compared with a $61.2 billion increase. A large reduction in both domestic and foreign demand for U.S. bank credit sharply curtailed the need to borrow funds from abroad. Interest rate differentials adverse to U.S. dollar assets also contributed to the smaller increase, as did the significant decline in the dollar in exchange markets.

Liabilities decreased substantially in the first half of the year, as economic activity in several industrial countries slowed and as domestic and foreign interbank demand for credit at U.S. banks dropped sharply. With interest rate differentials strongly against dollar assets, there was little incentive for foreigners to place additional funds in the United States or for U.S. banks to borrow from abroad to lend to customers. The biggest decrease was in liabilities to Japan, which fell especially sharply in the first quarter.

In the second half of the year, when dollar depreciation resumed and interest rate differentials widened against the dollar, increases in liabilities were limited to surges in July, August, and December. Between August and December, there were virtually no net deposit inflows. Both U.S.-owned and foreign-owned banks borrowed from abroad to advance funds to their offices in the United Kingdom and Caribbean in late November and December when these offices lost deposits, partly as a result of uncertainties generated by the situation in the Persian Gulf. These uncertainties may have contributed to additional inflows late in the year as depositors sought liquidity and relative safety as the January 15 deadline for the Iraqi withdrawal from Kuwait approached. Liabilities to Japan fell sharply in the fourth quarter, perhaps related, in part, to the restructuring of balance sheets of Japanese banks and other financial institutions.

Banks' own liabilities payable in foreign currencies increased $0.8 billion, compared with an $8.4 billion decrease.

Banks' custody liabilities, payable in dollars, increased $14.6 billion, compared with an $11.6 billion increase. U.S. banks borrowed funds from the Eurodollar market on behalf of customers, mostly in the first and third quarters, when LIBOR rates fell more rapidly than the U.S. prime bank loan rate.

U.S. Treasury securities.--Net foreign purchases of U.S. Tresuary securities fell to $1.1 billion in 1990 from $30.0 billion in 1989 (chart 7). Government bond rates in many markets abroad rose substantially throughout 1989 and 1990, thereby decreasing the attractiveness of U.S. Treasury holdings. Net sales by Western European countries (mainly the United Kingdom) of $2.7 billion were heaviest in the second half of the year, when most European bond rates in relation to U.S. bond rates increased and the dollar weakened further against European currencies. Net sales by Japanese residents were $14.2 billion; more than one-half were concentrated in the September-December period. These net sales were partly offset by net purchases of $11.3 billion, mostly in the fourth quarter by the Netherlands Antilles. Gross purchases and sales of U.S. Treasury bonds fell 10 percent as a result of the reduction in Japanese activity in the last three quarters of the year. The level of Western European activity was unchanged.

Other U.S. securities.--Net foreign purchases of securities other than U.S. Treasury securities decreased sharply to $4.1 billion, the lowest level since 1979, from $39.6 billion. A large shift to substantial net sales of U.S. stocks accounted for one-half of the decrease, and a drop in net purchases of outstanding bonds accounted for most of the rest. New bond issues sold abroad by U.S. corporations remained moderately strong.

Transactions in U.S. stocks shifted to net sales of $14.8 billion from net purchases of $6.6 billion (chart 8). Net sales by most countries in Western Europe, Japan, and the Caribbean were especially large. Net sales were strong throughout the year and picked up in the fourth quarter as fears of war in the Persian Gulf and the possibility of a U.S. economic downturn pervaded the market. Both corporate earnings and the value of the dollar in exchange markets declined throughout much of the year. Gross purchases and sales of U.S. stocks decreased 12 percent; much of the decline in activity was concentrated in the last 4 months of the year.

Net foreign purchases of outstanding corporate and U.S. federally sponsored agency bonds decreased to $2.9 billion from $14.2 billion. Most of the decrease was in agency bonds, particularly those by Japanese investors whose purchases slowed to $0.5 billion from $5.6 billion. Gross purchases and sales of U.S. corporate bonds were 3 percent lower than in 1989; the decline in activity was concentrated in the last 4 months of the year. Gross purchases and sales of agency bonds were 26 percent higher than in 1989.

New issues sold abroad by U.S. corporations were $16.2 billion, down from $19.3 billion (table S).(2) Borrowing remained moderately strongly throughout most of the year. Much of the increase in new issues in 1990 was in asset-backed trusts issued by both U.S. and foreign banking corporations. New issues by nonbank financial corporations dropped, as did new issues by industrial corporations.

Straight fixed-rate bonds accounted for 85 percent of all new issues, the same share as in 1989. Floating-rate notes increased to a 10-percent share from a 4-percent share.

The share of borrowing denominated in U.S. dollars was 63 percent, compared with 69 percent; although the dollar weakened in the last half of the year and uncertainties buffeted all capital markets, dollar issues were relatively well maintained. Foreign currency issues increased to 37 percent from 31 percent, as Swiss franc and Japanese yen issues both increased. Issues in European Currency Units, Canadian dollars, and Australian dollars declined.

Direct investment.--Net capital inflows for foreign direct investment in the United States were $25.7 billion in 1990, compared with $72.2 billion in 1989. Net intercompany debt inflows plunged to $1.1 billion from $25.6 billion; net equity capital inflows decreased to $34.5 billion from $46.7 billion; and reinvested earnings were a negative $9.9 billion, compared with a negative $0.1 billion.

Seventy-five percent of the decline in net capital inflows was from Western Europe, where inflows decreased to $13.3 billion from $47.4 billion. Net inflows from the United Kingdom decreased to $6.2 billion from $20.2 billion; two extraordinary transactions in 1989 accounted for over $10 billion in inflows, and much of the debt associated with one of them was repaid in 1990. Net inflows from the Netherlands decreased to $1.3 billion from $9.8 billion, mostly in finance. Twenty percent of the decline in net capital inflows was from Japan, where inflows decreased to $8.8 billion from $17.3 billion. Two extraordinary acquisitions were made in 1990, but most financing for both was obtained from sources within the United States.

Several factors contributed to the reduction in net capital inflows: A weakening and downturn in the U.S. economy, which made new acquisitions or additions to existing positions less attractive in spite of a sharp appreciation of foreign currencies in exchange markets over the past 18 months; lower interest rates in the United States than abroad, which encouraged foreign parents to borrow from U.S. affiliates rather than add more funds to U.S. operations; repayment by U.S. affiliates of large amounts of debt acquired in recent years, much of it as the result of substantial acquisitions; interest in investment opportunities in Europe, in part related to the single market to be created there in 1992; and, to a much lesser extent, interest in investment in Eastern Europe. [Tabular Data A to T Omitted] [Tabular Data 1 to 4 Omitted] [Chart 1 to 8 Omitted]

(1)Quarterly estimates for U.S. current-and capital-account components are seasonally adjusted when statistically significant seasonal patterns are present. (2)The classification of new issues shown in table S has been revised significantly to include both U.S. and foreign corporations in each category. Previously, most foreign corporations (mainly finance affiliates) were included in the "all other," or residual category. In addition, borrowing through asset-backed trusts in now allocated to the sector that issued the trust (in most cases, either a banking or nonbanking corporation).
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Author:Bach, Charistopher L.
Publication:Survey of Current Business
Date:Mar 1, 1991
Words:10856
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