U.S. international transactions, second quarter 1984.
In contrast to large increases in recent quarters, the merchandise trade deficit decreased slightly to $25.7 billion. The faster increase in exports than in imports is expected to be temporary.
In the private capital accounts, unusually large gross inflows reflected a number of factors. There was a strong demand, largely by banks, for foreign source funds to meet domestic credit demands related to rapid U.S. expansion and Treasury financing. In addition, a marked rise in U.S. interest rates relative to those abroad and an appreciating dollar created strong incentives for foreigners to place funds in dollar-denominated assets in the United States. These capital inflows were augmented by substantial inflows to finance mergers or takeovers of several major U.S. corporations.
Gross outflows also were large, as international credit demands shifted to U.S. banks to dund foreign banks' participation in large U.S. mergers, to fund their own foreign offices, to participate in loans to Mexico arranged by the International Monetary Fund (IMF), and to fund midyear positioning by foreign banks. On balance, bank-reported flows shifted to small net outflows during the quarter, in contrast to strong net inflows in the previous four quarters. The merger financing was evident throughout the banking, nonbanking, and direct investment accounts.
The statistical discrepancy (errors and omissions in reported transactions) was an inflow of $13.3 billion. U.S. nonbanking concerns' claims on, and liabilities to, unaffiliated foreigners are not yet available for the second quarter. When available, they will include corporate borrowing to finance merger activity and should reduce the unreported inflows reflected in the statistical discrepancy.
The statistical discrepancy in the first quarter was revised downward from an inflow of $13.5 billion to $5.9 billion, primarily due to newly reported data on U.S. nonbanking concerns' claims on, and liabilities to, unaffiliated foreigners. Claims decreased (inflow) $1.7 billion, and liabilities increased (inflow) a record $4.4 billion to finance several large mergers.
The U.S. dollar continued to appreciate in the second quarter. The appreciation was 4 percent on a trade-weighted, quarterly average basis against the currencies of 22 OECD countries and 1 percent against the currencies of 10 industrial countries. Record levels were reached against the Canadian dollar, Japanese yen, British pound, and several European currencies. Rapidly rising U.S. short-term interest rates, which reflected strong expansion, contributed to the appreciation. U.S. rates were higher than a weighted average of foreign rates by the largest amount since early 1982. In addition, indications of continued low U.S. inflation, together with strikes and weak expansions abroad, encourage large purchases of dollar-denominated assets. Temporary weakness in mid-May partly reflected rumors about the vulnerability of some large U.S. banks to international debt problems and unsettled market conditions.
The dollar appreciated 3 percent against the Canadian dollar, largely due to the rise in U.S. interest rates and uncertainties about upcoming Canadian elections. Increases in Canadian interest rates in line with U.S. rates failed to stop the steady decline of the Canadian dollar, and Canadian monetary authorities borrowed from U.S. and other foreign banks and in the Eurobound market to prevent further declines in Canada's international reserves. Additional demands for U.S. dollars late in the quarter were to make semiannual bond payments.
The dollar appreciated 3 percent against the British pound. A long coal strike that cut industrial production and worsened the British trade balance, as well as weakness in petroleum prices, contributed to the pound's steady decline. Also, large interest rate differentials in favor of dollar-denominated assets contributed to the pound's weakness.
The dollar appreciated about 1 percent on a quarterly average basis against each of the European Monetary System currencies. However, increases during the quarter were 5 to 6 percent, as the dollar rose steadily following a period of temporary weakness late in the first quarter. The dollar reached record levels against the French franc and Italian lira, and the highest levels in 10 years against the German mark, Dutch guilder, and Belgian franc. A metalworkers' strike in Germany weakened industrial production throughout Europe and tended to reduce European exports. The German central bank intervened several times to support the mark during the quarter.
Although the dollar was unchanged against the yen on a quarterly average basis, it appreciated gradually over the quarter. Japan experienced record capital outflows as rising U.S. interest rates led Japanese investors to buy U.S. Treasury bonds, and declining stock prices in Japan led some foreign investors to sell Japanese stocks.
The dollar appreciated 13 percent against the Mexican peso, amid reports of Mexican capital flight and speculation that the rate of daily devaluations would be increased or that a new major devaluation would be announced. These pressures caused the peso to drop sharply in early May, with some recovery later in the quarter. Merchandise trade
In contrast to large increases in the U.S. merchandise trade deficit in the previous four quarters, the deficit decreased in the second quarter to $25.7 billion from $25.9 billion in the first. Exports were slightly higher; an increase in nonagricultural exports was partly offset by a decrease in agricultural exports. Imports also increased slightly; an increase in petroleum imports was partly offset by a decrease in nonpetroleum imports. The pause in the trade deficit growth is unlikely to be sustained because the fundamental factors contributing to it--the high exchange value of the dollar, the rapid economic expansion in the United States, and the weak expansions abroad--remain unchanged.
Imports increased $0.5 billion, or 1 percent, to $80.3 billion, the smallest increase since the onset of the domestic expansion. Petroleum imports increased $1.1 billion or 8 percent, to $14.9 billion; imports from OPEC members were up $1.3 billion, or 24 percent, and more than accounted for the increase. Increased petroleum imports went into both increased consumption and a buildup in domestic stocks. Most of the buildup occured early in the quarter when attacks on a number of oil tankers in the Persian Gulf raised concern that future petroleum supplies might be threatened. Despite the troubles in the Middle East, spot petroleum prices weakened later in the quarter, as increased production more than made up for limited disruptions in supply. The average price per barrel rose to $28.26 from $28.05 in the first quarter, and the average number of barrels imported per day increased to 5.76 million from 5.40 million.
Nonpetroleum imports decreased $0.5 billion, or 1 percent, to $65.4 billion; volume decreased 2 percent. Some moderation in the economic expansion in the second quarter, particularly a slowdown in inventory accumulation, probably contributed to the temporary pause in import growth. Most major commodity categories, except automotive products, decreased $0.4 billion, to $14.2 billion; textile products fell $0.3 billion from the record level in the first quarter, and gem diamonds fell $0.2 billion. Capital goods decreased $0.3 billion, to $14$1 billion, following a first-quarter surge in business machines and computers. Industrial supplies and materials were unchanged at $16.4 billion. Iron and steel decreased $0.2 billion; imports from Latin American, which had increased strongly over the past year, accounted for most of the decrease. Brazilian restrictions on steel exports to the United States--established in the first quarter in response to U.S. steel industry anti-dumping complaints--reduced shipments by over one-third. Foods, feeds, and beverages decreased $0.2 billion, to $5.1 billion. Declines were widespread, except for coffee, which increased $0.2 billion.
Automotive products increased $0.5 billion, to $13.8 billion, the fifth consecutive record quarterly level. Most of the increase was due to imports from Japan; Japanese auto imports increased substantially at the beginning of the new year under the voluntary export restriction program, and imports of trucks and parts were also strong. Increased truck imports from Canada were partly offset by lower imports of parts.
Exports increased $0.7 billion, or 1 percent, to $54.6 billion. Agricultural exports decreased $1.0 billion, or 10 percent, to $9.3 billion; volume decreased 11 percent. Sunflower and other oil seeds and oils decreased following the sharp rise in the first quarter; soybeans and corn were also down. Exports to Western Europe fell sharply--37 percent, or $1.2 billion.
Nonagricultural exports increased $1.7 billion, or 4 percent, to $45.3 billion, nearly all in volume. The increase was limited to a few products however; there were no signs of a generalized pickup. Industrial supplies and materials were up $0.5 billion to $13.8 billion, mostly due to fuel exports to Canada, Japan, newly industrialized countries in Asia, and United Kingdom. Capital equipment increased $0.3 billion, to $17.8 billion; the increase was more than accounted for by computers, up 11 percent, to $3.5 billion, for the quarter and up 37 percent since the first quarter of 1983. Automotive exports decreased $0.4 billion, to $5.3 billion, due to a decrease in shipments of complete autos, trucks, and parts to Canada. (Much of the balance of the increase is in exports for which commodity detail is not available.) Service transactions
Net service receipts fell sharply, down $4.9 billion to $3.4 billion, the lowest quarterly level since 1975. Receipts decreased $2.6 billion to $34.1 billion; payments increased $2.3 billion to $30.7 billion. The dollar's appreciation and higher U.S. interest rates contributed to the fall in net service receipts. The dollar's appreciation resulted in large capital losses on U.S. direct investment abroad and contributed to a sharp increase in net payments for travel. Higher U.S. interest rates contributed to a more rapid rise in interest payments on portfolio investment than in interest receipts.
Receipts of income on U.S. direct investment abroad decreased $3.9 billion to $4.5 billion. The dollar's appreciation resulted in large capital losses ($2.2 billion) related to currency translation, especially in Canada and European countries, and may have also reduced operating earnings. Also, a large capital loss was related to the writeoff of a U.S. company's holdings in the Caribbean area. Strikes, weak expansions in some European countries, and soft petroleum markets also reduced operating earnings, which fell $1.0 billion before capital losses. Interest payments increased $0.1 billion to $1.0 billion, as borrowing through Netherlands Antilles finance affiliates remained large. Payments of income in foreign direct investment in the United States were virtually unchanged at $2.5 billion. A moderate increase in operating earnings associated with the U.S. expansion was offset by a shift to small capital losses from first-quarter gains. Interest payments increased $0.1 billion to $0.7 billion, due to a large loan to a U.S. affiliate for use in a buy-out of minority stockholders.
REceipts of income on other private investment increased $1.0 billion to $14.8 billion, due to rising interest rates and a sharp increase in U.S. bank claims in the second quarter. In May, Federal bank supervisory authorities jointly recommended changes in bank accounting practices for nonaccruing loans, which resulted in a small reduction in earnings reported by U.S. banks. Under the regulations, banks must classify loans as nonaccruing whenever interest payments are 90 days or more overdue. The new regulations are mandatory for third-quarter financial reports, but many banks effected the change immediately and reclassified a number of loans to Argentina and Venezuela. Interest arrears on the reclassified loans are now reflected in the income estimates. Payments of income on other private investment continued to increase strongly, up $1.3 billion, to $9.7 billion, reflecting rising interest rates, together with an increase in U.S. bank liabilities. During the past year, large net borrowing by banks caused payments to increase $o.8 billion, or 40 percent, against an increase in receipts of $2.5 billion, or 20 percent.
U.S. Government income receipts increased $0.3 billion, to $1.j billion, in the second quarter; Government income payments increased $0.1 billion, to $4.8 billion.
Net payments for travel increased sharply; payments rose $0.6 billion to $4.1 billion, and receipts declined $0.1 billion to $2.8 billion. Dollar appreciation encouraged U.S. residents to travel abroad and slowed the increase in foreign visitors to the United States. The increase in U.S. travel abroad on foreign-flag carriers caused passenger fare payments to increase 25 percent to $1.8 billion; receipts increased slightly. Other transportation receipts and payments were unchanged, at $3.3 billion and $3.5 billion, respectively.
Transfer under U.S. military sales contracts increased $0.1 billion to $2.6 billion. Many major weapons delivery programs were recently completed, and deliveries under new programs, although scheduled, have not yet begun. Direct defense expenditures abroad were unchanged at $2.9 billion.
Net unilateral transfers were unchanged at $2.1 billion. U.S. assets abroad
U.S. official reserve assets increased $0.6 billion. Foreign currency holdings decreased slightly, reflecting a single U.S. intervention sale of German marks to support the dollar in disorderly markets. the U.S. reserve position with the IMF and holdings of special drawing rights each increased $0.3 billion.
U.S. claims on foreigners reported by U.S. banks increased $24.i billion, compared with a $2.0 billion decrease in the first quarter. Much of the increase was related to the financing of mergers in the United States. In some instances, large credits to consortiums of foreign banks were arranged to finance merger activity, because loan-to-capital ratios of many U.S. banks limited the amount of funds that each could advance to a single borrower. Much of the merger-related corporate borrowing began to be repaid by the end of the second quarter, as borrowers substituted funds borrowed in the U.S. commercial paper market and the Eurobond market for relatively high cost bank funds. U.S. banks also advanced funds to their own foreign offices in May and June; to foreign banks for midyear positioning; and-- in a limited amount--to Mexico in May, in conjunction with an IMFz-arranged debt restructuring program. Claims on several developing countries in Southeast Asia increased strongly, probably related to brisk economic activity in those countries.
Net U.S. purchases of foreign securities were $0.8 billion in the second quarter, compared with net sales of $0.6 billion in the first. The shift was more than accounted for by $1.7 billion in long-term floating rate issues by the Swedish Government to refinance its bank borrowings. The attractiveness of the issues was enhanced by including annual options permitting investors to resell the issue. Canadian new issues were $0.3 billion; others included a $0.1 billion World Bank floating rate issue and small issues from Japan and Israel. In transactions in outstanding bonds, redemptions increased to $0.7 billion, mostly attributable to Canada and a European regional organization. In other transactions in outstanding bonds, net sales increased to $0.7 billion as bond prices fell sharply, reflecting the sharp rise in interest rates. In stocks, $0.2 billion in new issues, primarily from the United Kingdom and Canada, was offset by $0.2 billion in net sales of outstanding stocks, mostly from Japan. Foreign stock markets, except in France, were down sharply during the quarter, and rising U.S. interest rates attracted funds away from equities.
U.S. direct investment abroad shifted $5.4 billion, to inflows of $1.9 billion. REinvested earnings decreased $3.4 billion to $3.0 billion, largely reflecting capital (currency translation) losses from the dollar's appreciation. Intercompany debt inflows increased $2.9 billion to $5.2 billion. there were large borrowings through Netherlands Antilles finance affiliates, with over one-half of the $3.5 billion total associated with a single large merger-related transaction. Equity capital outflows increased $0.4 billion to $1.0 billion. U.S. parents of Netherlands Antilles finance affiliates increased their equity in these affiliates in conjunction with the just mentioned borrowings. A U.S. company's sale of most of its interest in Australian mining properties to an Australian company resulted in a reduction in equity in Australia (inflow). (Related transactions appear in the capital account for foreign direct investment in the United States.) Foreign assets in the United States
Foreign official assets in the United States decresed $0.6 billion, following a $2.8 billion decrease in the first quarter. Assets of industrial countries increased $0.8 billion; an increase in holdings of smaller European countries was partly offset by a decrease in those of other industrial countries, which sold dollars when their currencies came under strong pressure in exchange markets. Assets of OPEC members decreased $2.2 billion, slightly less than in the first quarter. Middle Eastern OPEC members reduced assets by more than double the first-quarter rate; there were large inflows from other OPEC members. Assets of other countries incresed $0.9 billion; the increase was more than accounted for by inflows from several Southeast Asian developing countries.
U.S. liabilities to private foreigners and international financial institutions reported by banks (including U.S. Treasury securities) increased $28.2 billion. Foreign purchases of U.S. Treasury securities were a record $6.5 billion, up from $1.4 billion. Rising U.S. interest rates, dollar appreciation, and declining bond and equity prices abroad all encouraged inflows. In addition, investors' preferences shifted towards U.S. Treasury issues, as shown in chart 7 by the limited rise in 90-day U.S. TReasury bill rates compared with the sharp increase in rates banks had to offer in unsettled financial markets to attract funds through 90-day certificates of deposits (CD's).
Bank liabilities other than U.S. Treasury securities increased $21.7 billion. As in the first quarter, rising U.S. interest rates relative to rates abroad and dollar appreciation made placement of funds in the United States highly attractive. The demand for these funds was related to the U.S. expansion and Treasury financing needs. Some of these funds were U.S. residents' deposits previously placed at Caribbean offices. These deposits offshore have increased strongly in recent quarters; a substantial portion of them represents proceeds of of commercial paper borrowing by U.S. bank holding companies deposited abroad and then returned to the U.S. parent bank. Another factor contributing to the rise in liabilities was the previously mentioned large-scale merger financing.
Data for U.S. liabilities to unaffiliated foreigners reported by nonbanking concerns are not available for the second quarter, but they are expected to show large net inflows reflecting corporate borrowing to finance mergers, as in the first quarter.
Inflows for foreign direct investment in the United States increased sharply, up $5.3 billion to $7.7 billion, the second largest quarterly total on record. Intercompany account inflows increased $3.4 billion to $4.2 billion, largely reflecting a substantial loan to a U.S. subsidiary to purchase a U.S. company. Excluding this transaction, intercompany accounts shifted to small net outflows, mostly because of lending by a U.S. financial affiliate to its parent of proceeds obtained by borrowing in the U.S. commercial paper market. Equity capital inflows increased $1.7 billion to $2.4 billion, largely because of foreign company established a new U.S. holding company to acquire the U.S. and foreign properties of a U.S. company. REinvested earnings were unchanged at $1.0 billion.
Net foreign purchases of U.S. securities other than U.S. Treasury securities decreased to $0.6 billion from $1.5 billion, well under the quarterly rate that prevailed in the previous year and a half. Contributing factors were declining equity prices and investor preferences for Treasury securities and other short-term investments.
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|Author:||Krueger, Russell C.|
|Publication:||Survey of Current Business|
|Date:||Sep 1, 1984|
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