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U.S. international transactions, second quarter 1994.

THE U.S. current-account deficit increased to $37.0 billion in the second quarter from $32.3 billion (revised) in the first (table A).(1) The deficits on goods and services and on investment income both increased, and net unilateral transfers were higher. Merchandise imports and income payments on foreign assets in the United States both surged, reflecting continued U.S. economic expansion.

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In the capital account, net recorded capital inflows were $40.5 billion in the second quarter, compared with $46.8 billion in the first. Net inflows on banking transactions picked up, and net outflows on direct investment transactions diminished. Transactions in securities shifted to net outflows.

U.S. dollar in exchange markets

From March to June, the U.S. dollar depreciated 3 percent on a trade-weighted average basis against the currencies of 10 industrial countries and 2 percent against the currencies of 22 OECD countries plus 4 newly industrialized countries in Asia (table B, chart 1). The dollar depreciated against nearly all major currencies.

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U.S. monetary authorities intervened three times during the quarter to support the dollar. Intervention purchases of dollars against German marks and Japanese yen occurred on April 29, May 4, and June 24, following periods in which the dollar had declined sharply. On the last two occasions, U.S. intervention was part of a concerted operation among central banks to support the dollar.

The dollar depreciated the most against European currencies, despite sizable movements in short-term interest-rate differentials in favor of dollar-denominated assets (chart 2). Although U.S. monetary authorities raised the discount rate and continued to tighten bank reserve positions, the dollar fell partly because of concern about the potential for higher U.S. inflation in the future. The depreciating dollar and declining U.S. longterm bond prices reinforced each other at times, adversely affecting foreigners' willingness to hold U.S. assets. In addition, signs that the slump in economic activity in continental Europe was ending led market participants to expect that further reductions in European short-term interest rates were less likely.

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The dollar also depreciated against the Japanese yen. Although supported to a certain extent by movement in short-term interest-rate differentials in favor of dollar-denominated assets, the dollar fell as a result of other, negative factors. A change in the Japanese Government in April led to concerns about delay in trade negotiations and the implementation of measures to stimulate Japanese domestic demand; delay in these areas would heighten the need for further exchange rate adjustment to reduce Japan's current-account surplus. Trade relations between the United States and Japan were calm for most of the quarter, but tensions rose soon after the reopening of the trade "framework" talks in late May. Indications of potential near-term improvement in economic conditions and a second change in the Japanese Government contributed to the dollar's decline late in the quarter.

The U.S. dollar appreciated slightly against the Canadian dollar after sharp first-quarter appreciation was halted by a steep increase in Canadian short-term interest rates. The U.S. dollar also appreciated against the Mexican peso, partly because of investor concerns over political uncertainty in Mexico.

Against the currencies of the newly industrialized countries in Asia, the U.S. dollar depreciated 3 percent against the Singapore dollar and was unchanged against both the Hong Kong dollar and the South Korean won. In contrast, the U.S. dollar appreciated 2 percent against the Taiwan dollar.

Current Account

The $4.7 billion increase in the deficit on current account in the second quarter was accounted for by a $2.7 billion increase in the deficit on goods and services, a $1.7 billion increase in the deficit on investment income, and a $0.3 billion increase in net unilateral transfers.

Goods and services

The deficit on goods and services increased to $27.0 billion in the second quarter from $24.3 billion in the first. A $4.8 billion increase in the deficit on merchandise trade was partly offset by a $2.1 billion increase in the surplus on services.

Merchandise trade.--The merchandise trade deficit increased to $41.8 billion in the second quarter from $37.0 billion in the first. Although exports increased moderately, the deficit increased as a result of a surge in imports.

Exports.--Exports increased $4.7 billion, or 4 percent, to $122.7 billion in the second quarter. Volume, measured in constant (1987) dollars, increased 3 percent (table C). The increase in value was accounted for by a pickup in nonagricultural exports; agricultural exports were unchanged.

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Nonagricultural exports increased $4.6 billion, or 4 percent, to $111.7 billion; volume increased 3 percent. The increase in value was widespread by commodity category, but capital goods accounted for more than one-half of it. Nearly all capital goods increased, with exports of electric generating machinery and telecommunications equipment rising the most; exports of semicon-ductors increased at a slower rate than in the first quarter. Nonagricultural industrial supplies and materials excluding nonmonetary gold increased, led by a pickup in chemicals; exports of nonmonetary gold decreased sharply. Consumer goods increased, paced by higher exports of durable goods; consumer nondurables also rose. Automotive products increased, reflecting a step-up in parts exports to Canada. By area, over 60 percent of the increase in total nonagricultural exports was to Canada, where second-quarter economic growth accelerated. However, over the past three quarters, the most consistent growth in exports has been to Mexico. Second-quarter exports to Japan and Western Europe decreased.

Nonagricultural export prices, measured by an aggregate fixed-weighted (1987) price index, increased at a stronger rate than in the first quarter, reflecting a surge in the prices of nonagricultural industrial supplies and materials. Export prices for other major commodity categories increased by only small amounts.

Agricultural exports were unchanged at $10.9 billion; volume increased 2 percent. Industrial supplies of raw cotton increased sharply, mainly to China, but the increase in cotton was offset by decreases in corn, wheat, and soybeans. Over the first half of the year, corn and wheat have declined sharply, largely because of reduced shipments to the Newly Independent States.

Agricultural export prices, measured by an aggregate fixed-weighted (1987) price index, decreased, but remained high after rising sharply in the previous three quarters (chart 3). Prices of most major commodities declined, more than offsetting a sharp increase in the price of cotton.

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Imports.--Imports increased $9.5 billion, or 6 percent, to $164.4 billion in the second quarter. Volume, measured in constant (1987) dollars, increased 5 percent (table C). Nonpetroleum imports grew much faster than in the first quarter, and petroleum imports also stepped up.

Nonpetroleum imports increased $7.0 billion, or 5 percent, to $151.6 billion; volume increased 4 percent. Most major commodity categories increased by substantial amounts. Capital goods were paced by computers, peripherals, and parts, whichsurged despite a recent slowdown in U.S. domestic purchases of computers and related equipment; in addition, civilian aircraft, engines, and parts rebounded, and other capital goods increased substantially. Automotive products increased strongly, reflecting a step-up in imports of passenger cars, particularly from Canada; although U.S. domestic passenger car sales decreased in the second quarter, auto imports rose as U.S. domestic output declined more sharply than sales. Consumer goods were led by an increase in durable goods; consumer nondurables also picked up. Nonpetroleum industrial supplies and materials excluding nonmonetary gold increased, led by continued strong growth in imports of iron and steel; nonmonetary gold decreased sharply. By area, the increase in nonpetroleum imports was widespread, but was largest from Canada and China. Imports from Canada have grown strongly over the past three quarters, helping to fuel Canadian economic expansion. Second-quarter imports from Japan decreased slightly.

Nonpetroleum import prices, measured by an aggregate fixed-weighted (1987) price index, increased at a stronger rate than in the first quarter, reflecting a pickup in prices for nonpetroleum industrial supplies and materials and for foods, feeds, and beverages. Import prices for other major commodity categories increased by smaller amounts.

Petroleum imports increased $2.5 billion, or 24 percent, to $12.9 billion. The step-up resulted from sharply higher prices and increased volume. The average price per barrel rose to $14.66 from $12.66, the first quarterly increase since the second quarter of 1993, but it remained low compared with recent years (chart 3). The average number of barrels imported daily rose to 9.62 million from 8.99 million, nearly 30 percent above the recent low level reached in the fourth quarter of 1991. Imports as a percentage of consumption increased to 55 percent.

Balances by area.--The deficits with both industrial and developing countries continued to increase in the second quarter. The deficit with industrial countries increased to $24.6 billion from $22.6 billion, reflecting a sharp rise in the deficit with Western Europe. The deficit with Canada increased slightly, but the deficit with Japan decreased by a small amount for the second consecutive quarter.

The deficit with developing countries increased to $17.2 billion from $14.4 billion. The deficit with members of OPEC increased $2.0 billion, reflecting the sharp rise in petroleum imports. The deficit with other countries increased $0.8 billion; this increase was more than accounted for by increases in the deficits with China and the newly industrialized countries in Asia.

Services.--The surplus on services increased to $14.8 billion in the second quarter from $12.6 billion in the first. Service receipts increased to $48.5 billion from $46.9 billion; service payments decreased to $33.7 billion from $34.2 billion.

Travel receipts increased to $15.4 billion from $14.4 billion. The increase was accounted for by a step-up in receipts from overseas, a small part of which was attributable to increased travel to attend the World Cup Soccer Championships. Travel receipts from Canada and from Mexico changed little. Travel payments decreased to $10.9 billion from $11.2 billion, reflecting a decline in payments by U.S. travelers overseas.

Passenger fare receipts were unchanged at $4.2 billion, and passenger fare payments increased to $3.1 billion from $3.0 billion.

Other transportation receipts increased to $6.1 billion from $5.9 billion, as both port and freight expenditure receipts increased. Higher port expenditures were largely accounted for by an increase in ocean port expenditures, which benefited from a substantial increase in combined import and export tonnage carried by foreign flag vessels. Increased freight expenditures reflected the higher volume of U.S. exports. Other transportation payments increased to $6.3 billion from $6.1 billion. The increase was mostly accounted for by an increase in freight expenditure payments, reflecting the higher volume of U.S. imports. Port expenditure payments also increased.

Receipts for other private services were unchanged at $14.4 billion. Payments for other private services decreased to $8.7 billion from $8.8 billion; this decrease was more than accounted for by a drop in financial services payments, resulting from lower commission payments on securities transactions. The drop in financial services payments was partly offset by an increase in payments for business, professional, and technical services, which included the transfer of gate receipts from the World Cup Soccer Championships to the international soccer federation; one-half of this transfer is recorded in the second quarter, and one-half will be recorded in the third quarter. (Related fees for sponsorships and broadcast rights of the Championships are included in royalties and license fees.)

Transfers under U.S. military agency sales contracts increased to $2.8 billion from $2.5 billion. U.S. direct defense expenditures abroad were unchanged at $2.8 billion.

Investment income

The deficit on investment income increased to $2.5 billion in the second quarter from $0.8 billion in the first. Income receipts on U.S. assets abroad increased substantially, but were more than offset by an even larger increase in income payments on foreign assets in the United States.

Private portfolio income receipts and payments have both turned up in recent quarters, following sharp declines in the past several years (chart 4). Direct investment income receipts and payments have also increased--particularly payments, which have been bolstered by continued U.S. economic growth.

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Direct investment income.--Income receipts on U.S. direct investment abroad increased to $15.4 billion in the second quarter from $15.0 billion in the first. The increase was largely accounted for by earnings of manufacturing affiliates, which increased in most major industrial countries. Earnings of petroleum affiliates decreased for the fourth consecutive quarter.

Income payments on foreign direct investment in the United States increased to $4.6 billion from $3.6 billion, reflecting increases in both earnings and interest. The increase in earnings was more than accounted for by "other" affiliates, primarily Japanese wholesale trade affiliates. Earnings of manufacturing affiliates decreased, but remained strong. Portfolio investment income.--Income receipts on other private investment abroad increased to $15.8 billion in the second quarter from $13.8 billion in the first. The step-up was largely accounted for by a sharp increase in income receipts on bank claims, which was attributable to an increase in claims outstanding, to higher yields, and to the receipt of past-due interest on loans to Brazil. U.S. Government income receipts were unchanged at $1.0 billion.

Income payments on other private investment in the United States increased to $18.9 billion from $16.3 billion, reflecting substantial increases in payments on bank liabilities and on foreign holdings of U.S. securities. The increase in payments on bank liabilities was largely attributable to higher yields, but liabilities outstanding also increased. The increase in payments on foreign holdings of U.S. securities was the result of higher payments on bonds. U.S. Government income payments increased to $11.2 billion from $10.8 billion.

Unilateral transfers

Net unilateral transfers were $7.5 billion in the second quarter, compared with $7.2 billion in the first. The increase was largely accounted for by an increase in U.S. Government grants.

Capital Account

Net recorded capital inflows were $40.5 billion in the second quarter, compared with $46.8 billion in the first. Acquistions of foreign assets by U.S. residents and acquisitions of U.S. assets by foreign residents both slowed sharply, reflecting slowdowns in most private accounts.

World financial markets were unsettled in the second quarter. Short-term interest rates continued to increase in the United States, and long-term interest rates continued to rise world-wide, particularly in Europe, where signs of improving economic conditions began to appear. The runup in interest rates also affected stock prices, which declined in most countries.

U.S. assets abroad

U.S. assets abroad increased $1.8 billion in the second quarter, compared with an increase of $48.2 billion in the first. Sharp slowdowns in capital outflows were evident in most private accounts.

U.S. official reserve assets.--U.S. official reserve assets decreased $3.5 billion in the second quarter, compared with a $0.1 billion increase in the first. The decrease was attributable to a decline in foreign currency holdings that resulted from intervention operations by U.S. monetary authorities to support the dollar. U.S. sales of German marks and Japanese yen for dollars occurred on three occasions, totaling $2.2 billion in sales of marks and $1.3 billion in sales of yen. Other transactions in foreign currencies included the liquidation of Swiss franc, French franc, and British pound holdings.

Claims reported by banks.--U.S. claims on foreigners reported by U.S. banks decreased $15.1 billion in the second quarter, compared with an increase of $1.2 billion in the first. The decrease was more than accounted for by a sharp decline in claims payable in foreign currencies. Claims payable in dollars increased by a small amount.

Banks' own claims payable in dollars increased $0.4 billion, in contrast to a decrease of $8.1 billion. A sizable increase in interbank claims was offset by decreases in claims on other private foreigners and on foreign public borrowers; the increase in interbank claims was largely attributable to an increase in lending by foreign-owned banks. A sharp increase in U.S. short-term interest rates relative to many foreign rates limited outflows. Interbank claims on Japan increased, following a decline in March at the end of the Japanese fiscal year. Claims on other private foreigners decreased sharply, partly reflecting a decline in lending by U.S. securities brokers and dealers to international mutual funds. Claims on foreign public borrowers also decreased, partly resulting from a reduction in claims on Brazil in exchange for bonds issued by the Brazilian Government.

Banks' domestic customers' claims payable in dollars increased $0.9 billion, in contrast to a decrease of $4.8 billion. The increase was more than accounted for by a sharp increase in negotiable and readily transferable instruments. Dollar deposits abroad and foreign commercial paper outstanding in the United States both fell. Sharp swings in negotiable and readily transferable instruments and in dollar deposits abroad have occurred in both of the last two quarters, reflecting rapid changes in interest-rate environments in the United States and abroad.

Banks' own claims payable in foreign currencies decreased $16.9 billion, in contrast to an increase of $13.5 billion. The decrease was largely attributable to a reduction in claims on Japan, following a first-quarter surge in lending to Japna.

Foreign securities.--Net U.S. purchases of foreign securities were $12.5 billion in the second quarter, down from $24.6 billion in the first. Net purchases of foreign stocks were $9.7 billion, down from $17.4 billion, and net purchases of foreign bonds were $2.8 billion, down from $7.2 billion. Stock and bond prices declined in most major foreign markets, reducing the apparent attractiveness of international portfolio investment.

The decrease in net U.S. purchases of foreign stocks was largely attributable to a sharp decline in purchases from Japan, but purchases from most other countries and areas also decreased. Net U.S. purchases from Japan were sharply lower, following a first-quarter surge; however, U.S. purchases remained strong, as rising Japanese stock prices and signs of potential improvement in the Japanese economy contributed to substantial U.S. investment late in the quarter. Net U.S. purchases from Western Europe decreased; a decline in net purchases of outstanding stocks, mostly resulting from a shift to net sales to the United Kingdom, was partly offset by an increase in new stock issues in the United States by Western Europe. Net U.S. purchases from Latin America decreased, largely because of a decrease in purchases from Mexico.

The slowdown in net U.S. purchases of foreign bonds was more than accounted for by a drop in new foreign bond issues in the United States. New issues were discouraged by sharply declining U.S. bond prices in the early part of the quarter. Many foreign issuers of non-investment grade bonds delayed or reduced the size of new issues, as U.S. investors became increasingly sensitive to the liquidity of bonds in secondary markets. The drop in new foreign bond issues was limited by net U.S. purchases of $2.6 billion of Brazilian new issues in exchange for Brazilian debt owed to U.S. banks.

Net U.S. sales of outstanding foreign bonds decreased. Net sales to the United Kingdom were less than in the first quarter, but they remained large, as British bond prices continued to fall sharply. Net U.S. purchases from Caribbean finance centers surged. In contrast, net U.S. purchases from Japan decreased sharply.

Direct investment.--Net capital outflows for U.S. direct investment abroad were $7.8 billion in the second quarter, down sharply from $24.8 billion in the first. The fall-off was attributable to a shift to net intercomapny debt inflows from outflows. Net equity capital outflows decreased moderately, and reinvested earnings increased by a small amount. The shift to net intercompany debt inflows was partly the result of transactions with finance affiliates in the United Kingdom.

Foreign assets in the United States

Foreign assets in the United States increased $42.3 billion in the second quarter, compared with an increase of $95.1 billion in the first. Sharp slowdowns in inflows were evident in most private accounts.

Foreign official assets.--Foreign official assets in the United States increased $7.9 billion in the second quarter, following an increase of $11.5 billion in the first (table D). Assets of industrial countries more than accounted for the second-quarter increase; these assets increased mostly as a result of concerted exchange-market intervention among central banks to support the dollar. Assets of non-OPEC developing countries decreased, mainly because of a decline in the assets of one Latin American country. Assets of OPEC members continued to decrease.

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Liabilities reported by banks.--U.S. liabilities reported by U.S. banks, excluding U.S. Treasury securities, increased $24.8 billion in the second quarter, compared with an increase of $35.2 billion in the first. The slowdown was more than accounted for by a shift to outflows in liabilities payable in foreign currencies. Liabilities payable in dollars increased strongly for the second consecurtive quarter.

Banks' own liabilities payable in dollars increased $35.3 billion after an increase of $25.8 billion. Interbank liabilities surged, as U.S.- and foreign-owned banks borrowed large amounts from abroad, partly to finance a continued surge in bank lending in the United States. To some extent, funding from abroad was also used to finance increased lending to banks abroad. The supply of funds from abroad was encouraged by the continued runup in U.S. short-term interest rates at a time when most foreign rates were stable or declining.

Banks' own liabilities payable in foreign currencies decreased $13.9 billion, in contrast to an increase of $7.9 billion. The decrease was largely attributable to a reduction in liabilities to Japan, following a first-quarter surge in borrowing from Japan.

U.S. Treasury securities.--Transactions in U.S. Treasury securities shifted to record net foreign sales of $7.7 billion in the second quarter from net foreign purchases of $9.3 billion in the first. Record net sales of long-term securities were particularly strong early in the quarter, when U.S. bond prices declined sharply. Partly offsetting these sales were record net purchases of short-term securities, as foreign investors sought to shorten the maturity of U.S. portfolios and enhance liquidity.

Net foreign sales of U.S. Treasury securities were very strong from the Caribbean and were substantial from the United Kingdom and from Asian countries other than Japan. Partly offsetting these sales was a shift by Japanese investors to large net purchases, which were encouraged by the increased differential between U.S. and Japanese long-term interest rates in favor of U.S. assets.

Other U.S. securities.--Net foreign purchases of U.S. securities other than U.S. Treasury securities fell to $13.4 billion in the second quarter from $21.3 billion in the first. Transactions in U.S. stocks shifted to net foreign sales of $1.6 billion from net foreign purchases of $6.6 billion. Net foreign purchases of U.S. corporate and agency bonds increased to $15.1 billion from $14.6 billion.

The shift to net foreign sales of U.S. stocks occurred as U.S. stock prices failed to recover from sharp first-quarter declines. Stock prices were held down in part by fears that the continued rise in U.S. interest rates would restrain future economic growth and corporate earnings. Net foreign sales were further encouraged by the depreciation of the dollar, which led to exchange rate losses on foreign holdings of dollar-denominated assets. By area, net sales were more than accounted for by a substantial reduction in net purchases from Europe, particularly from the United Kingdom and Germany, and by a shift to net sales from the Caribbean.

The small increase in net foreign purchases of U.S. corporate and agency bonds was attributable to increased purchases of corporate debt securities. Despite falling U.S. bond prices, net foreign purchases of corporate bonds increased, largely because of a shift to net purchases by Japanese investors. As in the case of U.S. Treasury securities, Japanese investors were encouraged by the increased differential between U.S. and Japanese long-term interest rates in favor of U.S. assets. New issues of bonds sold abroad by U.S. corporations fell slightly, but remained strong. New issues denominated in U.S. dollars declined, while new issues denominated in Japanese yen, largely issues by U.S. subsidiaries of Japanese companies, surged.

Net foreign purchases of U.S. federally-sponsored agency bonds decreased sharply, reflecting weak investor demand and a sharp decline in new issues of collateralized mortgage obligations by federally sponsored agencies.

Direct investment.--Net capital inflows for foreign direct investment in the United States were $3.9 billion in the second quarter, down from $12.0 billion in the first. The decrease was accounted for by a shift to net intercompany debt outflows from inflows and a decrease in net equity capital inflows; reinvested earnings increased. The shift to net intercompany debt outflows was the result of the repayment by U.S. affiliates of loans from foreign parent companies, mainly in Europe. The decrease in net equity capital inflows was widespread by industry and by area.

Tables 1 through 10 follow.

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(1.)Quarterly estimates of U.S. current- and capital-account components are seasonally adjusted when statistically significant seasonal patterns are present. The accompanying tables present both adjusted and unadjusted estimates.
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Author:Weinberg, Douglas B.
Publication:Survey of Current Business
Date:Sep 1, 1994
Words:4285
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