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U.S. international transactions, second quarter 1990.

U.S. International Transactions, Second Quarter 1990

The U.S. current-account deficit was $21.8 billion in the second quarter of 1990, little changed from the $21.7 billion (revised) in the first quarter. (1) A further decrease in the merchandise trade deficit was more than offset by a shift to a deficit on investment income and an increase in net unilateral transfers. The surplus on services increased slightly.

In the capital account, net private capital flows were an outflow of $10.5 billion in the second quarter, in contrast to an inflow of $11.9 billion in the first quarter and an inflow of $30.8 billion in the fourth quarter of 1989 (chart 2). This was the first net capital outflow since the fourth quarter of 1982. Several factors explain the swing to outflows from large inflows; among these are a slowing in economic growth in the United States relative to that abroad, a shift in key interest rate differentials against the United States, a significant depreciation of the dollar since mid-1989, and greater global competition for investment funds.

In the second quarter, U.S. private assets abroad increased $26.2 billion, following a decrease of $36.7 billion in the first. Most of the change was due to a shift in U.S. claims reported by U.S. banks to an outflow of $12.1 billion from an inflow of $52.4 billion. Foreign private assets in the United States increased $15.7 billion following a decrease of $24.8 billion. Nearly all of the change was in U.S. liabilities reported by U.S. banks, which shifted to an inflow of $2.9 billion from an outflow of $32.3 billion.

U.S. direct investment abroad was a net outflow of $3.1 billion in the second quarter, compared with a net outflow of $9.3 billion in the first. Foreign direct investment in the United States was a net inflow of $5.0 billion, compared with an inflow of $5.5 billion. In securities transactions, net U.S. purchases of foreign securities were a record $10.9 billion, compared with $7.5 billion. Net foreign purchases of U.S. securities other than U.S. Treasury securities were $4.9 billion, compared with $2.5 billion. A surge in new bond issues sold abroad by U.S. corporations more than offset the third consecutive quarterly decline in purchases of stocks by foreigners.

The statistical discrepancy (errors and omissions in recorded transactions) was an inflow of $26.3 billion in the second quarter, compared with an inflow of $21.9 billion in the first. The size and volatility of the discrepancy in recent quarters suggest difficulties mostly in tracking capital transactions rather than in measuring the current account. If some or most of the unrecorded capital transactions had been more fully recorded (either as larger inflows or reduced outflows), the drop in recorded net capital inflows in the first half of 1990 from the levels in 1988 and 1989 would not have been as large.

U.S. dollar in exchange markets

On a trade-weighted quarterly average basis, the dollar was unchanged against the currencies of 10 industrial countries and against the currencies of 22 OECD countries and 4 newly industrialized countries in the Far East (table C, chart 3). Currencies of most major industrial countries depreciated slightly in April and May, and some appreciated slightly in June. Although the dollar was little changed on average over the first and second quarters, it was significantly below its recent highs of mid-1989.

In the second quarter of 1990, the dollar appreciated 5 percent against the Japanese yen. Sharp dollar appreciation in April was only partly offset by depreciation in May following large sales by Japanese institutional investors of some of their dollar-denominated assets. A more rapid decline in U.S. short-term interest rates than in Japanese interest rates in May and perceptions that Japanese outflows for portfolio investments in the United States might weaken further contributed to the dollar weakness (chart 4).

The dollar depreciated 1 percent against the German mark in the second quarter. It reached its lowest level in more than 2 years briefly in mid-May and recovered in June. The perception existed early in the quarter that German growth might strengthen relative to growth in the United States as a result of West German unification with East Germany, leading to a weakening of the dollar. The dollar recovered somewhat when market participants shifted their focus to fears about future inflation in Germany, but those fears eased when the terms of unification were announced. The relationship between U.S. and German short-term interest rates was virtually unchanged over the period.

The dollar depreciated 1 percent against the Canadian dollar in the second quarter; a rise in Canadian short-term interest rates relative to U.S. rates contributed to continued strength of the Canadian currency. Temporary weakness of the Canadian dollar occurred in the middle of the period as a result of uncertainty about plans to modify the Canadian constitution.

The dollar depreciated 1 percent against the British pound in the second quarter. Depreciation was strong in May and June, when market participants focused on large interest differentials favoring the pound and anticipated that the United Kingdom might soon join the European Monetary System; participants ignored lackluster economic growth and continued high inflation.

Against the currencies of the newly industrialized countries in the Far East, the dollar depreciated 3 percent each against the Taiwan dollar and the South Korean won in the second quarter. In contrast, the dollar appreciated 3 percent against the Singapore dollar and less than 1 percent against the Hong Kong dollar.

Merchandise trade

The merchandise trade deficit decreased to $22.6 billion in the second quarter from $26.3 billion in the first. The decrease was mainly due to a reduction in petroleum imports reflecting sharply lower petroleum prices. (Petroleum prices have increased significantly in the third quarter of 1990 in response to the crisis in the Persian Gulf.) In the first half of 1990, the merchandise trade deficit was $9.7 billion lower than in the second half of 1989. The decrease was more than accounted for by a decline in the deficit with the industrial countries, mainly Japan and Western Europe; the deficit with members of OPEC increased, and that with other developing countries was nearly unchanged.

The merchandise trade deficit peaked in 1987 and has been decreasing steadily since then mainly as a result of much stronger growth in exports than in imports. The deficit with most geographic areas peaked during the third or fourth quarters of 1987.

Exports. - Exports increased $0.5 billion, or less than 1 percent, to a record $96.7 billion in the second quarter of 1990; volume, measured in constant (1982) dollars, decreased 1 percent. Export expansion began to accelerate in 1987, partly in response to the delayed effects of the devaluation of the dollar that began in the first quarter of 1985.

Nonagricultural exports increased $1.1 billion, or 1 percent, to a record $86.4 billion; volume increased less than 1 percent. Exports of automotive products, primarily engines and other parts to U.S. assembly plants in Canada and Mexico, increased to $9.6 billion from $8.7 billion in the first. Although sales of domestically produced passenger cars, including those produced in Canada and Mexico, decreased 3 percent, they remained well above their level at the end of 1989. Consumer goods increased to $10.5 billion from $10.2 billion. They have shown the fastest growth of all the enduce categories, increasing 130 percent since the first quarter of 1987. Nearly all of the growth has been to Western Europe, Canada, and Japan. Capital goods increased to $38.5 billion from $38.2 billion; a large increase in completed civilian aircraft was partly offset by a decrease in computers, peripherals, and parts. Nonagricultural industrial supplies and materials decreased to $23.3 billion from $23.6 billion as a result of a decrease in energy products.

Exports in constant (1982) dollars have risen much more rapidly than U.S. goods production since the first quarter of 1987 (chart 5). All of the growth has come from nonagricultural exports, which have been a primary contributor to the U.S. economic expansion.

Agricultural exports decreased $0.6 billion, or 6 percent, to $10.3 billion in the second quarter; volume decreased 8 percent. The largest decreases were in exports of wheat, down $0.2 billion, mostly to the Soviet Union; soybeans, down $0.2 billion, mostly to Western Europe and Japan; and cotton, down $0.1 billion. The fixed-weighted price index for agricultural products increased 2 percent, reflecting an 8-percent increase in the average price of corn and a 5-percent increase in soybeans. Despite these movements, grain and soybean prices have moderated in recent quarters because of excess world supplies and weak demand from the Soviet Union. Insufficient foreign exchange may also have limited recent Soviet purchases. The average price of cotton has remained strong since the fourth quarter of 1987 as a result of tight supplies and strong demand.

Imports. - Imports decreased $3.2 billion, or 3 percent, to $119.3 billion in the second quarter; volume, measured in constant (1982) dollars, decreased less than 1 percent. The decrease was more than accounted for by petroleum imports; nonpetroleum imports increased.

Nonpetroleum imports increased $0.3 billion, or less than 1 percent, to $107.2 billion; volume increased 1 percent. Nonpetroleum industrial supplies and materials, up $0.5 billion, and automotive products, mostly from Canada, up $0.2 billion, more than accounted for the increase.

Import growth in constant (1982) dollars has leveled in recent quarters, mostly in response to slower economic growth in the United States. Nevertheless, merchandise imports have grown faster than gross domestic purchases less services (goods) (chart 6).

Petroleum imports decreased $3.5 billion, or 22 percent, to $12.1 billion in the second quarter. Nearly all of the decrease was due to sharply lower prices. The average price per barrel decreased to $15.81 from $19.47. (Petroleum prices have increased significantly in the third quarter of 1990 in response to the crisis in the Persian Gulf.) The average number of barrels imported daily decreased to 8.41 million from 8.90 million.

The trend of declining domestic production in the United States since 1986 has contributed to increased dependence on imported petroleum (chart 7). Production has been affected by dwindling reserves and low market prices. Partly as a result, the annual volume of petroleum imports has increased more than 50 percent since 1984. Much of that increase has come from members of OPEC in Asia and Africa (chart 8). These countries accounted for 43 percent of total U.S. petroleum imports in the first half of 1990, compared with 28 percent in 1984.

Balances by area. - The merchandise trade deficit with members of OPEC decreased to $4.3 billion in the second quarter of 1990 from $6.6 billion in the first. Nearly all of the decrease was due to lower petroleum prices. The deficit with the industrial countries decreased to $10.1 billion from $10.6 billion. Since the peak deficit of $25.0 billion in the fourth quarter of 1987, the deficit with the industrial countries has decreased steadily. Most of the change was with Western Europe, which shifted to a surplus of $1.5 billion from a deficit of $7.9 billion. Sharply higher exports were aided by strong growth in Western Europe and greater competitiveness of U.S. products. At $10.4 billion, the deficit with Japan was nearly unchanged in the second quarter, but it has decreased from $14.7 billion in the fourth quarter of 1987; the deficit has decreased from a peak of $15.2 billion in the fourth quarter of 1988. The deficit with the developing countries other than members of OPEC decreased to $8.5 billion in the second quarter from $9.4 billion in the first; the deficit has decreased from a peak of $13.9 billion in the third quarter of 1987.

Table : (TABULAR OMITTED)

(1) Quarterly estimates of U.S. current- and capital-account components are seasonally adjusted when significant seasonal patterns are present.

Service transactions

The surplus on services increased to $6.1 billion in the second quarter from $6.0 billion in the first. Receipts increased $0.4 billion to $31.7 billion, reflecting increases in travel receipts and in royalties and license fee receipts. Payments increased $0.2 billion to $25.6 billion, reflecting an increase in travel payments. In the first half of 1990, the surplus on services was $0.2 billion above that in the second half of 1989.

Travel receipts increased to $9.6 billion in the second quarter of 1990 from $9.4 billion, as a result of an increase in visitors from overseas and Canada. Travel payments increased to $9.2 billion from $8.9 billion, as the number of U.S. travelers overseas increased. Passenger fare receipts decreased slightly to $2.9 billion, and passenger fare payments increased slightly to $2.3 billion.

Other transportation receipts were unchanged at $5.4 billion. A decrease in ocean freight receipts, due in part to a drop in tonnage, was offset by an increase in air freight receipts. Air freight receipts have increased 75 percent since the second quarter of 1988, primarily as a result of a marked expansion in U.S. airlines' operations overseas. Other transportation payments were unchanged at $5.7 billion. An increase in port expenditures offset a decrease in air freight payments; ocean freight payments were unchanged.

Receipts from other private services were unchanged at $7.7 billion. Payments for other private services decreased to $3.7 billion from $3.8 billion.

Transfers under U.S. military agency sales contracts were nearly unchanged at $2.4 billion; increases in aircraft and parts deliveries were partly offset by a decrease in technical support services. U.S. direct defense expenditures abroad increased to $3.7 billion from $3.6 billion.

Investment income

Net investment income shifted to a deficit of $0.6 billion in the second quarter from a surplus of $2.0 billion in the first quarter. In the first half of 1990, net investment income was a surplus of $1.4 billion, compared with a surplus of $0.6 billion in the second half of 1989.

Direct investment income. - Receipts of income on U.S. direct investment abroad increased to $13.4 billion in the second quarter of 1990 from $13.2 billion in the first. Capital gains increased $0.5 billion, primarily from the sale of petroleum assets by a holding company in the United Kingdom and a shift to small gains from large losses in Central and South America (mostly Brazil). Operating earnings decreased $0.3 billion. Earnings of manufacturing and banking affiliates in Western Europe remained moderately strong. The increase in Western Europe was more than offset by a drop in earnings in South America. The drop was mostly accounted for by a decrease in earnings of manufacturing and banking affiliates in Brazil, which reflected the harsh, anti-inflationary economic policies implemented by the Brazilan Government. Earnings of petroleum affiliates in Asia also decreased, partly as the result of lower crude petroleum prices.

Payments of income on foreign direct investment in the United States

increased to $2.3 billion from $1.2 billion, reflecting increases in operating earnings for financial, trade, and manufacturing affiliates. Operating earnings shifted $1.0 billion to a profit of $0.4 billion. More than one-half of the change was in earnings of Japanese banking affiliates, which shifted from losses to profits.

Portfolio income. - Receipts of income on other private investment abroad decreased to $15.9 billion in the second quarter from $16.2 billion in the first. U.S. Government income receipts decreased to $1.7 billion from $2.0 billion; they had been boosted by debt rescheduling in the previous quarter.

Payments of income on other private investment in the United States increased to $19.8 billion from $19.2 billion as a result of higher payments on foreign-held U.S. bonds; payments on U.S. bank-reported liabilities were unchanged. U.S. Government income payments increased to $9.4 billion from $9.2 billion.

Unilateral transfers

Net unilateral transfers increased to $4.7 billion in the second quarter from $3.4 billion in the first. Most of the increase was in U.S. Government grants, as Egypt drew substantially all the funds remaining from a prior fiscal year appropriation. Private remittances and other transfers decreased as receipts by individuals from Germany increased and as payments by U.S. corporations dropped from exceptionally high levels.

U.S. assets abroad

U.S. assets abroad increased $26.4 billion in the second quarter, in contrast to a decrease of $32.8 billion in the first, reflecting a large shift in bank claims. In the first half of 1990, U.S. assets abroad decreased $6.4 billion, in contrast to an increase of $92.8 billion in the second half of 1989. Most of the swing from the second half to the first half resulted from a shift in bank claims and from a slower accumulation of U.S. official reserve assets.

U.S. official reserve assets. - U.S. official reserve assets decreased $0.4 billion in the second quarter, compared with an increase of $3.2 billion in the first.

Claims reported by banks. - U.S. claims on foreigners reported by U.S. banks increased $12.1 billion in the second quarter, in contrast to a decrease of $52.4 billion in the first. Banks' own claims payable in dollars increased $1.0 billion, following a decrease of $43.0 billion, as foreign demand for dollar credits from U.S. banks remained extremely limited and as several major U.S.-owned banks reduced further their international claims; in contrast, foreign-owned banks in the United States increased their claims. Over the past year, U.S.-owned banks have reduced their dollar claims $11.9 billion, while foreign-owned banks have increased their claims $14.5 billion.

U.S. banks' own claims on own foreign offices payable in dollars increased $4.5 billion. Increases in claims on own foreign offices were limited to Asian banking centers early in the quarter and, after large repayments, to Caribbean offices late in the quarter. Claims on unaffiliated banks, primarily in Western Europe, increased moderately. Claims on foreign public borrowers, largely in Latin America, decreased for the fourth consecutive quarter.

Banks' own claims payable in foreign currencies increased $5.6 billion, in contrast to a decrease of $4.1 billion, as foreign-owned banks increased their claims on Japan and the United Kingdom by $3.2 billion and $1.7 billion, respectively.

Banks' domestic customers' claims, payable largely in dollars, increased $5.5 billion, in contrast to a decrease of $5.2 billion. There were large swings to net purchases of Eurodollar certificates of deposit from banks in the United Kingdom and of other negotiable instruments of continental European countries, Canada, and Japan.

Foreign securities. - Net U.S. purchases of foreign securities were a record $10.9 billion in the second quarter, compared with $7.5 billion in the first. Net U.S. purchases of foreign stocks increased to $5.5 billion from small net sales. Nearly all of the step-up was in purchases of stocks from Western Europe, especially the United Kingdom, and Japan.

Net U.S. purchases of foreign bonds were $5.4 billion, compared with $7.6 billion. New issues of foreign bonds in the United States were $4.6 billion, compared with $8.6 billion. The first-quarter figure had included a special $5.2 billion new issue associated with Mexico's debt restructuring. New issues were from the Netherlands and Canada, partly reflecting declines in U.S. long-term interest rates relative to the interest rates in those countries. Net purchases of outstanding bonds were $2.4 billion, compared with $0.3 billion. The increase was concentrated in purchases from the United Kingdom, Canada, and Japan. Redemptions were $1.5 billion, compared with $1.3 billion.

Direct investment. - Net outflows for U.S. direct investment abroad were $3.1 billion in the second quarter, compared with $9.3 billion in the first. Most of the decrease was in equity capital, which shifted to inflows of $2.8 billion from outflows of $1.9 billion. The shift occurred in every major geographic area but was largest in the United Kingdom, where outflows had been particularly large in the first quarter. Intercompany debt outflows were $1.9 billion, compared with $1.6 billion. A shift to outflows to Other Western Hemisphere and the United Kingdom reflected a combination of new loans to and of repayments of earlier borrowing from finance and insurance affiliates of U.S. petroleum companies. Reinvested earnings decreased to $4.0 billion from $5.8 billion.

Foreign assets in the United States

Foreign assets in the United States increased $22.0 billion in the second quarter, in contrast to a decrease of $33.0 billion in the first. Large swings in bank liabilities and in foreign official assets in the United States accounted for much of the shift. In the first half of 1990, foreign assets in the United States decreased $11.0 billion, in contrast to an increase of $143.5 billion in the second half of 1989. Nearly all of the change from the second half to the first half was in foreign private assets in the United States, reflecting substantially slower inflows for foreign direct investment, larger negative bank inflows, and a slower accumulation of foreign holdings of U.S. securities.

Foreign official assets. - Foreign official assets in the United States increased $6.3 billion in the second quarter of 1990, in contrast to a decrease of $8.2 billion in the first (table B). Assets of industrial countries increased $7.1 billion, in contrast to a decrease of $7.5 billion. Assets of OPEC members increased $0.2 billion, compared with a $3.0 billion increase. Assets of other countries decreased $1.1 billion, compared with a $3.7 billion decrease.

Liabilities reported by banks. - U.S. liabilities reported by U.S. banks, excluding U.S. Treasury securities, increased $2.9 billion in the second quarter, in contrast to a decrease of $32.3 billion in the first. Much lower demand for U.S. bank credit at home and abroad and adverse interest differentials have greatly slowed deposit inflows over the past half year. Banks' own liabilities payable in dollars decreased $0.6 billion in the second quarter, compared with a $35.3 billion decrease. Banks borrowed in April and May from overseas offices, where deposit growth accelerated. This borrowing was repaid in June when U.S. credit demand subsided further and deposits at foreign offices slowed. U.S.-owned banks accounted for the bulk of this foreign borrowing, relying early in the quarter on own foreign offices in Western Europe and later on those in the Caribbean. Repayments to these offices were heavy in June.

Banks' liabilities payable in foreign currencies increased $5.0 billion, in contrast to a decrease of $4.7 billion. Foreign-owned banks borrowed heavily from the United Kingdom and Japan to fund their foreign currency lending operations in the same countries.

U.S. Treasury securities. - Net foreign purchases of U.S. Treasury securities were $2.9 billion in the second quarter, compared with sales of $0.8 billion in the first. Most of the increase was in purchases of bills and certificates by Italy, Mexico, and the United Kingdom. Investors in Japan continued to reduce their net holdings. Although net purchases decreased in the first half of 1990, gross Japanese purchases of long-term instruments remained close to the record gross purchases of 1989.

Other U.S. securities. - Net foreign purchases of U.S. securities other than U.S. Treasury securities were $4.9 billion in the second quarter, compared with $2.5 billion in the first.

Net foreign sales of U.S. stocks were $3.5 billion in the second quarter - the third consecutive quarter of net sales. Net sales were especially large for Switzerland, the United Kingdom, Canada, and Japan.

New issues of bonds sold abroad by U.S. corporations surged, mostly toward quarterend, to $6.4 billion from $3.1 billion. Borrowing demands had remained moderate for the past 3 quarters but were spurred in the second quarter in part by the marked decline in interest rates abroad that began in late May. Net purchases of agency and other outstanding bonds were $2.0 billion, compared with $2.7 billion. Most of the decrease was in the United Kingdom.

Direct investment. - Net inflows for foreign direct investment in the United States were $5.0 billion in the second quarter, compared with $5.5 billion in the first. Equity capital inflows were $6.8 billion, compared with $9.9 billion. Equity inflows in the first half of 1990 were the lowest since the first half of 1987. Moderate and small-size transactions from many foreign companies continued unabated, but the large multibillion dollar transactions that have characterized the past 2 years appear to have slowed.

Intercompany debt outflows were $1.1 billion, compared with $2.3 billion. Repayment of a large loan made for a 1989 acquisition of a food manufacturer had raised debt outflows in the first quarter.

Reinvested earnings increased $1.4 billion to a negative $0.8 billion from a negative $1.7 billion. The improvement in earnings resulted mostly from decreases in capital losses of insurance affiliates of Canadian and British parents.
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Author:Murad, Howard
Publication:Survey of Current Business
Date:Sep 1, 1990
Words:4285
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