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U.S. international transactions, fourth quarter and year 1988.

U.S. International Transactions, Fourth Quarter and Year 1988

Fourth Quarter 1988

THE U.S. current-account deficit decreased to $31.9 billion in the fourth quarter from $32.6 billion (revised) in the third.(1) The decrease was more than accounted for by service transactions, which shifted to net receipts of $4.6 billion from net payments of $0.2 billion. In contrast, the merchandise trade deficit increased to $32.0 billion from $29.2 billion, and net unilateral transfers were $4.4 billion compared with $3.2 billion.

Merchandise trade.--Merchandise exports increased $2.0 billion, or 2 percent, to $83.6 billion. The increase was all in volume. Nonagricultural exports increased $2.6 billion, or 4 percent, to $74.0 billion. Volume increased 3 percent. The largest increases in value were in capital goods, $1.1 billion, and automotive products, $0.6 billion. Within automotive products, engines and parts to Canada accounted for one-half of the increase. Agricultural exports decreased $0.6 billion, or 6 percent, to $9.6 billion. Volume decreased 5 percent. Soybeans decreased $0.5 billion, or 33 percent, largely because of decreases to Japan and Mexico. Corn decreased $0.3 billion, or 18 percent; decreases to Japan and Western Europe more than offset an increase to the Soviet Union. Prices of most major commodities decreased from peaks related to the U.S. drought. The average price of rice decreased 15 percent; soybeans, 11 percent; and cotton, 7 percent. The average price of corn was unchanged, and the average price of wheat increased 12 percent.

Merchandise imports increased $4.8 billion, or 4 percent, to $115.7 billion. Volume increased 3 percent. Non-petroleum imports increased $5.4 billion, or 5 percent, to $106.4 billion. Volume increased 3 percent. The largest increases in value were in automotive products, $1.8 billion, and consumer goods, $1.6 billion. Within automotive products, passenger cars from areas other than Canada increased $1.0 billion, mostly from South Korea, Japan, and Mexico. Within consumer goods, manufactured consumer durables increased $1.0 billion, and textile apparel and household goods, $0.6 billion. Petroleum imports decreased $0.6 billion, or 6 percent, to $9.2 billion. The decrease in value was more than accounted for by lower prices. The average price per barrel decreased to $12.89 from $14.21. The average number of barrels imported daily increased to 7.83 million from 7.57 million. Domestic production and inventories decreased and consumption increased.

Service transactions.--Service transactions shifted to net receipts of $4.5 billion in the fourth quarter from net payments of $0.2 billion in the third. Among major components, receipts of income on U.S. direct investment abroad increased to $15.5 billion from $10.4 billion. The increase was accounted for by a shift to capital gains that reflected appreciation of major foreign currencies against the dollar; operating earnings remained strong. Payments of income on foreign direct investment in the United States decreased to $3.3 billion from $4.2 billion; there was a shift to capital losses and a decrease in operating earnings of petroleum, manufacturing, and finance affiliates. Receipts of income on other private investment increased to $15.6 billion from $14.2 billion, and payments of income on other private investment increased to $16.5 billion from $15.1 billion. Sharply higher interest rates and large increases in claims increased receipts, and higher interest rates and large increases in liabilities increased payments.

Foreign visitors spent $5.1 billion for travel in the United States, a 7-percent increase. Receipts from overseas visitors increased 5 percent to $3.2 billion; receipts from Canada, 8 percent to $1.1 billion; and receipts from Mexico, 16 percent to $0.8 billion. U.S. travelers spent $6.0 billion in foreign countries, a 5-percent increase. Payments for overseas travel increased 1 percent to $3.8 billion; payments to Canada increased 15 percent to $0.9 billion; and payments to Mexico increased 12 percent to $1.3 billion.

Other transportation receipts were virtually unchanged at $4.9 billion. Other transportation payments were $5.1 billion, up 4 percent, due mostly to the higher volume of ocean and air imports.

Transfers under U.S. military sales contracts decreased $0.5 billion to $2.2 billion. Direct defense expenditures abroad were virtually unchanged at $3.6 billion.

Unilateral transfers.--Net unilateral transfers were $4.4 billion in the fourth quarter compared with $3.2 billion in the third. Pursuant to legislation, a major cash grant for Israel was paid in full after funds were appropriated by Congress in the first quarter of the new fiscal year.

U.S. assets abroad.--U.S. assets abroad increased $40.2 billion in the fourth quarter compared with a $39.2 billion increase in third. U.S. official reserve assets decreased $2.3 billion following an increase of $7.4 billion. Intervention sales, mostly of Japanese yen and German marks, accounted for much of the decrease. Other U.S. Government assets decreased $3.3 billion compared with a $2.0 billion decrease; the decrease in the fourth quarter was more than accounted for by repayments on U.S. credits.

U.S. private assets abroad increased $45.7 billion compared with $33.8 billion. U.S. claims on foreigners reported by U.S. banks increased $33.5 billion compared with $27.8 billion. Interbank claims payable in dollars on offices the United Kingdom increased $10.9 billion following a $2.6 billion increase; in contrast, claims payable in dollars on offices in the Caribbean increased only $2.1 billion following a $11.9 billion increase. Over one-half of the increase in claims on the United Kingdom occurred in December, and was probably related to yearend transactions. The incentive to book LIBOR-based loans at Caribbean branches lessened significantly as Eurodollar rates rose more rapidly than the U.S. prime rate. Claims on Japan increased $3.2 billion compared with $4.9 billion, as demand shifted to claims payable in foreign currencies (see below). Claims on Latin America continued to be reduced, largely on Argentina and Mexico. In November, Brazil signed a major debt accord with commercial banks that restructured its international bank debt and permitted new credits to be extended. Brazil also became current on its interest payments during the fourth quarter, eliminating its interest arrears with its creditor banks.

Claims payable in foreign currencies increased $5.1 billion compared with $9.8 billion. Most of the increase was accounted for by Japan, and was related to both the strong credit demand there and the continued high level of Japanese activity in the Euroyen and Asian interbank markets.

Banks' domestic customers' claims increased $11.4 billion compared with $0.1 billion because of a sharp step-up in purchases by U.S. money market mutual funds of Eurodollar certificates of deposit and in deposits placed abroad to take advantage of rising interest rates. Customers' claims were boosted further as U.S. banks acted as trustees for foreign governments who raised funds in U.S. security markets to prepay existing Foreign Military Sales credits that carried high interest rates. (See U.S. Government assets other than official reserve assets).

Net U.S. purchases of foreign securities were $3.0 billion compared with $1.6 billion. Net U.S. purchases of stocks increased to $1.2 billion from $0.2 billion, due to a shift to large net purchases of Japanese stocks. A sharp rise in Japanese stock prices and appreciation of the Japanese yen were contributing factors. Net purchases of Western European stocks dropped sharply, mostly in December in the United Kingdom. U.S. purchases of the British Government's holdings of British Steel only partly offset slower net purchases of other British stocks. Net U.S. purchases of bonds were $1.8 billion compared with $1.3 billion. Foreign new issues in the United States decreased; a decrease in borrowing by foreign private corporations more than offset an increase in borrowing by foreign governments. Tunisia, under a special U.S. Government guarantee, floated a special issue to fund prepayment of existing Foreign Military Sales credits (see U.S. Government assets other than official reserve assets). In transactions in outstanding bonds, net purchases were $1.4 billion compared with $0.1 billion. U.S. investors increased their net purchases of British gilt-edged bonds to $2.3 billion from $0.3 billion, attracted by relatively high yields and appreciation of the pound. In contrast, U.S. investors sold $1.3 billion of Japanese bonds after purchasing $0.6 billion. Redemptions were $1.3 billion compared with $0.8 billion.

Net capital outflows for U.S. direct investment abroad were $9.2 billion compared with $5.2 billion; much of the increase was accounted for by reinvested earnings (largely a shift to capital (currency translation) gains from capital losses). Intercompany debt shifted to outflows, and equity capital shifted to inflows.

Foreign assets in the United States.--Foreign assets in the United States increased $71.1 billion in the fourth quarter compared with $48.1 billion in the third. Foreign official assets increased $10.9 billion following a $2.5 billion decrease. Dollar assets of industrial countries increased $5.6 billion, partly reflecting intervention purchases of dollars. Dollar assets of OPEC members increased $0.7 billion, and dollar assets of other countries, including newly industrialized countries in Asia, increased $4.7 billion (table B).

Other foreign assets in the United States increased $60.2 billion, compared with $50.6 billion. U.S. liabilities to private foreigners and international financial institutions reported by U.S. banks, excluding U.S. Treasury securities, increased $35.8 billion compared with $29.2 billion. There was heavy borrowing, payable in dollars, by U.S.-owned banks from Caribbean branches to finance domestic (U.S.) acquisitions and to fund offices in the United Kingdom. Borrowing by foreign-owned banks was moderate. Liabilities payable in dollars to branches in the Caribbean increased $20.7 billion, following a $9.5 billion increase; to Western European countries, $8.4 billion following a $3.1 billion decrease; and to Japan, $1.1 billion following a $7.7 billion increase.

Liabilities payable in foreign currencies, virtually all to Japan, increased $9.8 billion compared with $6.1 billion. Banks' custody liabilities decreased $0.5 billion following a $3.3 billion increase.

Net foreign purchases of U.S. Treasury securities were $4.1 billion compared with $3.4 billion. Purchases were especially strong in November when U.S. interest rates rose sharply relative to foreign rates; there was a shift to net sales in December.

Net foreign purchases of U.S. securities other than U.S. Treasury securities were $6.8 billion compared with $7.9 billion. New bond issues abroad by U.S. corporations were $6.4 billion compared with $4.8 billion. Some of the new issues were associated with leveraged buyout financing and corporate restructuring. Net foreign purchases of outstanding corporate and agency bonds were $2.6 billion compared with $2.2 billion.

Transactions in U.S. stocks shifted to net sales of $2.2 billion from net purchases of $1.0 billion. The United Kingdom, Switzerland, and Japan were net sellers. The sharp rise in interest rates in the United States, the volatility in foreign exchange markets, and the strength of several foreign stock markets probably damped foreign demand for U.S. stocks.

Net capital inflows for foreign direct investment in the United States were $13.4 billion compared with $8.4 billion. Both equity capital and intercompany debt inflows increased to finance several sizable acquisitions in mining, banking, petroleum, and wholesale trade. Reinvested earnings decreased.

The statistical discrepancy (errors and omissions in reported transactions) was a net inflow of $1.0 billion compared with a net inflow of $23.7 billion.

U.S. dollar in exchange markets.--From September to December, the dollar depreciated 6 percent and 5 percent on a trade-weighted average basis against the currencies of 10 industrial and of 22 OECD countries and 4 newly industrialized countries in Asia, respectively. The dollar depreciated 8 percent against the British pound and Japanese yen, 6 to 7 percent against the continental European currencies, and 2 percent against the Canadian dollar (table C, chart 2). Intervention sales of Japanese yen and, to a lesser extent of German marks, by U.S. and foreign monetary authorities were concentrated in November when the dollar's decline intensified. In December, the dollar recovered about one-half of the losses incurred since the end of September. 1. Quarterly estimates for U.S. current-and capital-account components are seasonally adjusted when statistically significant seasonal patterns are present.

The Year 1988 U.S. dollar in exchange markets

The dollar stabilized in 1988 following a protracted decline since early 1985. After rebounding from historic lows at the beginning of the year, the dollar moved gradually higher through mid-May and then strengthened more rapidly through September. In the fourth quarter, the dollar lost much of its gains from the previous 3 months, but at yearend, remained 7 to 8 percent higher against most European currencies than at the beginning of the year. The dollar was unchanged against the British pound, depreciated 4 percent against the Japanese yen, and depreciated 9 percent against the Canadian dollar.

Several factors accounted for a gradual 6- to 7-percent appreciation of the dollar through mid-May against the European currencies. These factors included a widening of interest differentials in favor of the dollar, especially after March, increased confidence in the U.S. economy, and evidence that the U.S. trade deficit was still improving. In addition, it was perceived that the G-7 countries were opposed to any renewed sharp decline in the dollar. This was evidenced by several periods of limited intervention purchases of dollars by both U.S. and foreign monetary authorities.

The dollar then appreciated another 6 to 7 percent against most European currencies, the Japanese yen, and the British pound, mostly in June and early July, and remained strong through the end of September, partly because of continued improvement in the montly trade balance figures. In addition, the U.S. economy was stronger than many had anticipated early in the year, with employment, output, and capacity utilization all at high levels. Concerns shifted toward the possible reemergence of inflation and higher interest rates.

Given these conditions and strong demand for credit, U.S. interest rates moved sharply higher, and the demand for dollars in foreign exchange markets strengthened to the extent that substantial intervention sales of dollars were necessary from late June through July to limit dollar appreciation. The dollar continued strong through most of September, even though foreign monetary authorities moved to restrain depreciation of their currencies against the dollar and to reduce domestic inflationary pressures that might arise from a stronger dollar. German, British, and Canadian interest rates all rose faster than U.S. interest rates.

From October to December, the dollar lost nearly all of its gains from the previous quarter against the European currencies, the Japanese yen, and the British pound. The widening of short-term interest differentials in favor of the dollar had little positive effect on exchange rates, and in December, foreign interest rates rose as rapidly as U.S. interest rates. Furthermore, the pace of improvement in the monthly U.S. trade balance figures slowed considerably. Heavy intervention purchases of dollars, largely against Japanese yen and German marks, by U.S. and foreign monetary authorities were necessary in November to slow the dollar's decline.

The Canadian dollar appreciated substantially against the U.S. dollar, mostly in the first half of the year, partly reflecting a strong economy, high interest rates, and large additions to Canada's international reserves.

The dollar depreciated in 1988 against the currencies of the newly industrialized countries in Asia. From December 1987 to December 1988, the dollar fell 14 percent against the Korean won, 3 percent against both the Taiwan dollar and the Singapore dollar, and was virtually unchanged against the Hong Kong dollar. The declines against the Korean and Taiwanese currencies totaled 21 and 22 percent, respectively, over the past 2 years.

Merchandise trade

The U.S. merchandise trade deficit was $126.5 billion in 1988 compared with $160.3 billion in 1987 (tables D,E,F). Exports increased strongly due to the cumulative effects of earlier dollar depreciation and a step-up in economic growth abroad. The increase in imports, although restrained by dollar depreciation, reflected continued strength in U.S. economic activity.

Exports increased $70.3 billion, or 28 percent, to $319.9 billion; volume increased 24 percent. Nonagricultural exports increased $61.6 billion to $281.6 billion, and agricultural exports increased $8.8 billion to $38.3 billion. The 28-percent increase in nonagricultural exports followed increases of 12 percent in 1987 and 6 percent in 1986.

Imports increased $36.6 billion, or 9 percent, to $446.4 billion; volume increased 7 percent. Nonpetroleum imports more than accounted for the increase; they increased $40.2 billion, or 11 percent, to $407.1 billion. They had increased 10 percent in 1987 and 16 percent in 1986. Petroleum imports decreased $3.6 billion to $39.3 billion.

The price competitiveness of U.S. goods in export markets and at home continued to improve in 1988, but not by as much as in 1987 and 1986 because of the dollar's stabilization.

Price changes of exports and imports for major end-use categories were not uniform (table G). Prices of exports in 1988 continued to rise moderately for capital goods, consumer goods (nonfood), and autos, which when combined accounted for 52 percent of export trade. Prices of industrial supplies and materials, determined largely in world markets, increased sharply. Prices of foods, feeds, and beverages reflected the severity of the U.S. drought. When converted into foreign currencies, prices in most categories increased somewhat, reflecting moderate dollar appreciation in addition to domestic price increases. In 1987, prices had fallen substantially as dollar depreciation more than offset the rise in domestic prices (table H).

Dollar prices of most imports rose significantly, especially capital goods, consumer goods (nonfood), and autos. However, the increases were somewhat smaller in 1988 than in 1987. These three categories accounted for 65 percent of import trade in 1988. Import

Table : A.--Summary of U.S. International Transactions

Table : B.--Selected Transactions with Official Agencies

Table : C.--Indexes of Foreign Currency Price of the U.S. Dollar

Table : D.--Selected Balances on U.S. International Transactions

Table : E.--U.S. Merchandise Trade, Current and Constant (1982) Dollars prices of industrial supplies increased more sharply than in 1987, as raw materials, nonfood commodities, and metals prices rose sharply in world markets. Prices of petroleum declined.

Relative growth rates in real domestic demand also exerted an important influence on trade in 1988. Strength in U.S. domestic demand continued to boost expenditures on imports as well as domestically produced goods. Stepped-up growth in domestic demand abroad, which had begun in mid-1987 in Western Europe and Japan, contributed to the U.S. export boom.

Exports.--Nonagricultural exports increased $61.6 billion in 1988, or 28 percent, to $281.6 billion, compared with a 12-percent increase in 1987. Volume increased 26 percent compared with a 13-percent increase. The impressive increases in value and volume in both 1987 and 1988 are the largest percentage increases since 1978-79.

Capital goods increased $23.8 billion, or 27 percent, to $112.0 billion, following an 11-percent increase. Volume increased 32 percent. Percentage increases in nearly all of the major categories of electrical and nonelectrical equipment--including telecommunications equipment, hospital and scientific instruments, machine tools, industrial engines, and oil drilling and mining equipment--were about double those of a year earlier. Computers, peripherals, and parts, as well as semiconductors, increased by about the same percentage amounts in 1987 and 1988. Peripherals and parts accounted for most of the growth in the computer category, mainly to Western Europe and the newly industrialized countries in Asia, with increasing amounts to Malaysia, Thailand, and the Philippines. The rate of decline for export prices of computer equipment slowed in 1988, in contrast to rapid declines in recent years. Civilian aircraft accelerated strongly after two years of stability; sales of new and used aircraft were largely for replacement.

Nonagricultural industrial supplies and materials increased $18.8 billion, or 30 percent, to $81.6 billion, following a 7-percent increase. Volume increased 18 percent. In contrast to 1987, volumes for all major commodities increased strongly, and were augmented by sharp price increases of some commodities. Chemicals increased $4.8 billion, and paper and paper base products $1.5 billion; both volumes and prices reflected strengthened demand abroad. Building materials were up $1.4 billion. Products in basic industries, such as iron and steel products and steelmaking materials, were also up in both volume and price in response to demand. Exports of non-monetary gold were boosted in the first and second quarters by sales to Taiwan and several other Asian countries. Exports of other nonferrous metals were higher, partly because of sharp price increases in metals prices in world markets.

Automotive products increased $6.9 billion, or 26 percent, to $33.1 billion, following a 6-percent increase. Volume increased 24 percent. Passenger cars to Canada, to Western Europe and to Japan increased. Shipments of engines, parts, and accessories were also substantially higher.

Consumer goods (nonfood) increased $5.8 billion, or 33 percent, to $23.8 billion, following a 23-percent increase. Volume increased 27 percent. The increase in value, primarily to Western Europe, was widespread by commodity.

Agricultural exports increased $8.8 billion, or 30 percent, to $38.3 billion, compared with an 8-percent increase. Exports in 1988 were the highest since 1984. The largest increases were in corn, $1.9 billion, mostly to the Soviet Union, Japan, and Taiwan; wheat, $1.9 billion, mostly to China and the Soviet Union; agricultural industrial supplies, $1.0 billion; and soybeans, $0.6 billion, mostly to Japan, Taiwan, and Mexico. Volume increased 8 percent compared with 14 percent. The rise in prices related to the U.S. drought more than offset the slower growth in volume. For the year, the average price of corn increased 38 percent; soybeans, 33 percent; wheat, 20 percent; and cotton, 20 percent. Tighter supplies in other countries also contributed to higher prices on world markets. Despite higher prices, U.S. exports remained competitive in world markets; average export prices were still far below their highs of 1980-84. Lower commodity price supports and subsidies under the Export Enhancement Program helped moderate the impact of the drought on average export prices.

Imports.--Nonpetroleum imports increased $40.2 billion in 1988, or 11 percent, to $407.1 billion, compared with a 10-percent increase 1987. Volume increased 6 percent, the same as in 1987. Price increases continued to push import values in 1988 higher but at slower rates than in 1987. Volume increases for capital goods remained strong; volume increases for consumer goods, automotive products, and nonpetroleum industrial supplies slowed further or decreased.

Capital goods increased $16.9 billion, or 20 percent, to $101.6 billion, compared with an 18-percent increase. Volume increased 23 percent. Capital goods from Western Europe and Japan accelerated to increases of 15 percent and 18 percent, respectively. Capital goods from the newly industrialized countries in the Far East increased 29 percent. Although price increases for capital goods other than computers, peripherals, and parts were 7 percent, volume increases remained as strong as in each of the two previous years. The strength was evident in nearly all major categories. Imports of computer peripherals and parts, and semiconductors, from Japan and the newly industrialized countries in the Asia accelerated. Some categories, such as oil drilling equipment, industrial engines, and machine tools, increased strongly following little increase in 1987.

Nonpetroleum industrial supplies and materials increased $11.7 billion, or 16 percent, to $83.0 billion, following a 2-percent increase. Volume increased 1 percent. Iron and steel products, chemicals, and paper and paper base products increased strongly; sizable price increases due to stepped-up demand boosted import values. Other supplies and materials were boosted by sharp increases in world market prices of raw materials, nonfood commodities, and metals, including nickel, zinc, copper, and aluminum. Prices of these commodities have risen strongly for 2 consecutive years. Imports of nonmonetary gold from Western Europe were large in the first and second quarters, and were associated with the previously mentioned exports to Taiwan and other Asian countries.

Consumer goods (nonfood) increased $7.6 billion, or 9 percent, to $96.3 billion, compared with a 12-percent increase. Volume increased 1 percent. Imports of both durables and nondurables were mainly boosted by price increases.

Automotive products increased $2.7 billion, or 3 percent, to $87.9 billion, compared with a 9-percent increase. The increase was more than accounted for by an increase in prices; volume decreased 2 percent. Passenger cars from Canada increased $3.1 billion. Passenger cars from areas other than Canada decreased $3.9 billion, mostly from Japan and West Germany. Passenger cars from South Korea and Mexico increased. The number of foreign cars sold in the United States decreased 3 percent, and their share of total cars sold in the United States decreased to 29 percent from 31 percent. The decrease in sales was mostly accounted for by decreases from Japan and West Germany of 4 percent and 18 percent, respectively. Over the past three years, prices of Japanese cars have risen 16 percent; German cars, 33 percent; and South Korean cars, 16 percent. Engines, parts, and assemblies from areas other than Canada increased strongly, both from Mexico and from the newly industrialized countries in Asia.

Petroleum imports decreased $3.6 billion, or 8 percent, to $39.3 billion, compared with a 25-percent increase. Most of the decrease was due to a 15-percent decline in prices. For 1988, the average price per barrel decreased to $14.34 from $17.33. The average number of barrels imported daily increased to 7.48 million form 6.78 million, the highest level since 1979. One-half of the increase was from members of OPEC, mostly Indonesia and Saudi Arabia. This 10-percent increase in volume in 1988 followed a 3-percent increase in 1987. Domestic production and inventories, excluding those for the Strategic Petroleum Reserve, were nearly unchanged; consumption increased 3 percent.

Balances by area.--Industrial countries accounted for $19.0 billion of the $33.8 billion reduction in the trade deficit. Most of the reduction was in Western Europe where the deficit fell $11.8 billion; the reduction with Japan was $4.4 billion, and the reduction with Canada was $1.6 billion. Developing countries accounted for $10.3 billion of the reduction; the newly industrialized countries in Asia accounted for $6.6 billion. The deficit with OPEC members was reduced $4.5 billion (table I).

Service transactions

Net service receipts were $4.8 billion in 1988 compared with $19.8 billion in 1987 (table J).

Receipts of income on U.S. direct investment abroad were $48.2 billion compared with $52.3 billion. In contrast to 1987 when income receipts were boosted $15.6 billion by capital gains largely related to dollar depreciation, income receipts in 1988 were reduced $1.6 billion by capital losses largely related to dollar appreciation. Income receipts before capital gains or losses were $49.8 billion in 1988 compared with $36.7 billion in 1987 (table K). The swings to capital losses from capital gains in 1988 were largest for the Western European countries. Operating earnings, especially those of manufacturing and "other" affiliates in Western Europe, again increased strongly on a general pickup in economic activity. Net interest payments decreased to $1.6 billion from $2.4 billion.

Receipts of income on other private investment were $54.1 billion compared with $46.1 billion, reflecting increases in interest rates and a step-up in bank-reported claims (table L). Receipts of income on U.S. Government assets were $5.9 billion compared with $5.3 billion. The increase was more than accounted for by large capitalizations of interest pursuant to agreements rescheduling debts of foreign governments, particularly Egypt.

Payments of income on foreign direct investment in the United States were $17.3 billion compared with $10.5 billion. Income before capital gains or losses was $16.6 billion compared with $10.7 billion; income growth was strongest for petroleum and "other" affiliates and was boosted by an accounting change effective in the first quarter. For petroleum affiliates, lower earnings from crude exploration and production were more than offset by higher earnings from refined products. Within the "other" category, several European-owned banking affiliates recovered from losses associated with developing countries. Net interest payments were $5.2 billion, compared with $3.8 billion, as affiliates continued to take on a substantial amount of debt for acquisitions.

Payments of income on other private investment were $58.9 billion compared with $48.8 billion, reflecting increases in interest rates and a continued large increase in both bank-reported liabilities and foreign bond purchases. Payments of income on U.S. Government liabilities were $29.4 billion compared with $24.0 billion, reflecting the shift to strong net foreign private purchases of Treasury securities and a continued high level of foreign official purchases.

Net travel and passenger fare payments decreased to $6.5 billion from $9.1 billion. Foreign visitors spent $18.4 billion for travel in the United States, up 25 percent from the previous year. Travel receipts from overseas were $11.8 billion. The number of visitors from Japan increased 25 percent; from Western Europe, 24 percent; from Oceania, 17 percent; and from the Caribbean, 10 percent. Receipts from Canada increased 22 percent to $4.0 billion, largely because of an increase in the number of auto travelers. Receipts from Mexico increased 29 percent to $2.6 billion, as the number of visitors to the U.S. interior increased 15 percent.

U.S. travel payments totaled $23.1 billion, a 13-percent increase. Travel payments overseas increased 11 percent to $15.1 billion. The number of travelers to Europe increased 3 percent following a 20-percent increase, and travelers to the Far East increased 10 percent following a 7-percent increase. Increases in 1987 had been especially large because of the rebound from 1986 which had been depressed by fear of terrorist activities in the peak midsummer travel season. Travel payments to Canada increased 10 percent to $3.2 billion; the number of travelers decreased. Payments to Mexico totaled $4.7 billion, up 20 percent; the number of travelers to Mexico's interior increased 3 percent, and the number of border crossers increased 25 percent.

Passenger fare receipts from foreign visitors traveling on U.S. flag carriers increased 35 percent to $7.3 billion. The number of visitors was up 31 percent: Increases were largest from Japan, 43 percent; Oceania, 41 percent; and Europe, 36 percent. U.S. payments to foreign transocean carriers totaled $9.1 billion, a 4-percent increase. The number of U.S. travelers on foreign flag carriers increased 2 percent; a 1-percent decrease in travelers on European carriers was more than offset by an increase in travelers to Latin America and Oceania on foreign carriers.

Other net transportation payments were $0.5 billion compared with $1.2 billion. Total receipts increased 14 percent to $19.3 billion. Ocean freight receipts increased 24 percent to $4.2 billion because of strength in exports. Air freight receipts increased 41 percent to $1.4 billion. Total payments increased 9 percent to $19.8 billion. Ocean freight payments increased 3 percent to $9.1 billion. Air port expenditure payments increased 16 percent to $4.8 billion. Air freight payments were unchanged at $2.2 billion.

U.S. military transactions with foreigners resulted in net payments of $4.2 billion, up from $2.4 billion. Transfers under U.S. military sales contracts were $10.0 billion compared with $11.5 billion. Major decreases occurred in aircraft and other major equipment deliveries, although deliveries to a few countries increased. U.S. direct defense expenditures abroad were $14.2 billion, up $0.3 billion. Continued growth in expenditures for contractual services and major equipment was partly offset by reductions in construction, pay to foreign nationals, and personnel expenditures. In Western Europe, contractual services and major equipment expenditures increased and construction expenditures decreased. Personnel expenditures declined slightly in Western Europe and Japan, despite protection by cost-of-living allowances. Pay to Japanese nationals decreased, as the Japanese Government assumed a greater share of these costs.

Net receipts from unaffiliated foreigners for miscellaneous services were unchanged at $2.5 billion. Among the components, transactions in securities commissions resulted in net payments of $0.4 billion, down from $0.5 billion in 1987. Receipts and payments both decreased, reflecting reduced activity in stock markets. Increased activity in bond markets was partly offsetting. U.S. brokers' gross receipts of commissions from foreigners on securities transactions decreased 15 percent to $1.6 billion, mostly because of a 25-percent drop in stock transactions. Commissions on outstanding corporate bonds also decreased; in contrast, commissions on U.S. Treasury bonds increased 16 percent, reflecting a step-up in purchases.

Gross payments of commissions to foreign brokers decreased 17 percent to $2.1 billion; commissions and transfer taxes on stocks decreased 20 percent because activity in most foreign markets was flat for 3 quarters before picking up in the fourth. Payments on transactions in outstanding foreign bonds increased 9 percent, mostly because of the pickup in activity in the second half of the year. Payments to Canada and Western Europe increased, and those to Japan decreased. Fees paid on new Eurobond issues by U.S. corporations were slightly lower because of a moderate decrease in the number of issues floated.

Commissions paid by foreigners on futures trading in the United States were $0.3 billion, unchanged from the previous year.

Unilateral transfers

Net unilateral transfers were $13.6 billion, virtually unchanged from 1987. U.S. Government grants were unchanged. A decrease in development assistance and related grants under the Foreign Assistance Act was almost offset by increases in grants financing military purchases.

U.S. assets abroad

U.S. assets abroad increased $92.0 billion in 1988 compared with a $76.0 billion increase in 1987.

U.S. official reserve assets.--U.S. official reserve assets increased $3.6 billion following a $9.1 billion decrease. The increase was more than accounted for by an increase in foreign currency assets, mostly German marks. The U.S. reserve position with the International Monetary Fund decreased $1.0 billion, and holdings of special drawing rights decreased $0.5 billion.

U.S. Government assets other than official reserve assets.--Disbursements of U.S. Government credits were $6.6 billion, up slightly. A movement away from credit financing of foreign assistance toward grant or financial guaranty financing was masked in 1988 by the unusually large reorganization in the first half of the year of certain debts of the Egyptian Government to the U.S. Government. This reorganization, primarily through capitalization of interest due and unpaid, added approximately $1.3 billion to total credits disbursed during the year. Other debt reorganizations accounted for approximately $1.0 billion, consistent with levels in recent years. Disbursements for other than debt reorganizations continued to decline sharply, reflecting the contraction of lending authority for virtually all major U.S. Government lending agencies in recent years.

Repayments of principal on U.S. Government credits were $10.0 billion, up from $7.6 billion in 1987. The increase resulted from prepayments of approximately $6.2 billion of outstanding debt in the second half of the year pursuant to the previously mentioned new U.S. Government programs to fa-

Table : F.--U.S. Merchandise Trade, Current and Constant (1982) Dollars (Change from Preceding Period)

Table : G.--U.S. Merchandise Trade, Fixed-Weighted Price Indexes (Change from Same Period One Year Earlier)

Table : H.--Foreign Currency Cost of U.S. Merchandise Exports (Change from Same Period One Year Earlier)

Table : I.--U.S. Merchandise Trade Balances by Area

Table : J.--U.S. International Service Transactions

Table : K.--Direct Investment Income and Capital

Table : L.--Other Private Income

Table : M.--Private Capital Flows, Net

Table : N.--U.S. Bank-Reported Claims and Liabilities by Type cilitate prepayment of Foreign Military Sales credits that carried annual interest rates of 10 percent or more. Under these programs, debtor governments issued securities for sale in U.S. securities markets with a U.S. Government guarantee of 90 percent of the principal and interest due on the securities. Proceeds from the sales were used to prepay principal and interest accrued through the date of settlement on Foreign Military Sales credits maturing in fiscal 1990 and thereafter.

U.S. private assets abroad increased $92.0 billion compared with a $86.3 billion increase.

Claims reported by banks.--U.S. claims on foreigners reported by U.S. banks increased $57.5 billion compared with $40.5 billion (tables M,N). Claims of U.S.-owned banks on own foreign offices payable in dollars increased $23.1 billion, mostly in the second half of the year on the United Kingdom; claims had increased $2.5 billion in 1987. Loan demand was buoyed by a pickup in economic activity abroad; by a rise in interbanking activity in the Eurodollar market, partly due to the resurgence of syndicated bank credits as a substitute for securitized lending; and by acquisition-related funding in Western Europe. U.S.-owned banks provided fewer funds to their offices in the Caribbean.

Foreign-owned banks provided a slightly larger amount of funds to own foreign offices than in 1987; claims payable in dollars increased $11.8 billion compared with $9.1 billion. Claims on offices in Japan accounted for most of the increase, but these claims dropped in the second half of the year when Japan shifted to claims payable in foreign currencies.

Claims payable in foreign currencies increased $14.2 billion compared with $22.7 billion. Claims on Japan increased sharply in the third and fourth quarters, as Japanese activity in the Euroyen and Asian interbank markets and final demand for bank credit in Japan were especially strong. The combined increase in dollar and foreign currency claims on Japan was $39.4 billion compared with $27.8 billion.

Claims on foreign public borrowers payable in dollars decreased $3.1 billion compared with a $1.2 billion increase; there was little net new discretionary lending to problem debtor countries. Banks sold their international debt at deeply discounted values or swapped debt for domestic currencies or equity; only the share booked with the banks in the United States was recorded in the U.S. accounts. Bonds of the Mexican Government were exchanged for debt held by U.S. commercial banks. Interim lending to Brazil in the second quarter preceded the signing of a major debt reorganization program and additional advancement of funds in the fourth quarter.

Banks' domestic customers' claims payable in dollars increased $9.7 billion compared with $3.8 billion. The step-up was more than accounted for in the fourth quarter when U.S. money market mutual funds made large purchases of Eurodollar certificates of deposit and other U.S. residents placed deposits abroad to take advantage of sharply rising interest rates. Customers' claims also included holdings of securities issued in U.S. capital markets by foreign governments to fund prepayment of existing Foreign Military Sales credits, as previously mentioned.

U.S. banks continued to be net borrowers in international credit markets in 1988, although the increase in claims was larger and the increase in liabilities was smaller than in 1987. Net funds raised from abroad increased $21.4 billion compared with a $47.3 billion increase (chart 3).

Foreign securities.--Net U.S. purchases of foreign securities were $7.5 billion compared with $4.5 billion. Transactions in bonds remained strong, and transactions in stocks shifted to small net purchases.

Net U.S. purchases of bonds were $6.8 billion, virtually unchanged (chart 4). New issues in the United States were $6.8 billion compared with $6.2 billion. Canadian issuers increased their placements to $2.5 billion from $2.0 billion, and Western European and Japanese issuers doubled their placements to $1.4 billion and $1.1 billion, respectively. International financial institutions reduced their borrowing. The Mexican Government placed special bonds with U.S. residents in exchanged for discounted public sector debt held by commercial banks in the United States; U.S. Government zero-coupon bonds were issued as collateral against the principal. Tunisia placed bonds to fund prepayment of Foreign Military Sales credits.

In transactions in outstanding bonds, redemptions were $5.1 billion compared with $3.0 billion, and net purchases were $5.1 billion compared with $3.6 billion. Net purchases of British securities, mainly gilt-edged securities, were $5.9 billion. Most purchases occurred in the first and fourth quarters when the interest differential favoring gilt-edged securities was the largest. Purchases for the year, however, were well below the $9.0 billion in 1987 and $13.0 billion in 1986. Several major U.S. dealers continued to offer currency hedging options on these securities to offset currency fluctuations. Gross purchases and sales of bonds in the first two quarters of the year trailed the level in the last quarter of 1987, but stepped-up interest in fixed income securities in the second half of 1988 brought activity for the year to 9 percent above the annual total for 1987.

Transactions in foreign stocks shifted to net purchases of $0.7 billion from net sales of $2.4 billion. A shift to net purchases of $0.3 billion in Japanese stocks from net sales of $7.1 billion more than accounted for the shift. Net purchases of Japanese stocks occured in the first and fourth quarters when the Japanese market rose sharply; net sales occurred in the second and third quarters when the market was relatively stable. For the United Kingdom, there would have been net sales if the British Government had not sold its holdings in British Petroleum and British Steel to U.S. residents in the third and fourth quarters. Interest in foreign stocks, as measured by gross purchases and sales, was subdued in 1988, with activity 20 percent lower than in 1987.

Direct investment.--Net outflows for U.S. direct investment abroad were $20.4 billion compared with $44.5 billion. Most of the decrease was in reinvested earnings, which fell $16.2 billion. Also contributing to the decrease in outflows were a $6.2 billion shift to equity capital inflows and a $1.6 billion decrease in intercompany debt outflows.

A $17.3 billion shift to small capital (currency translation) losses from large gains in 1987 more than accounted for the decrease in reinvested earnings. Because operating earnings rose somewhat more than the shift to capital losses. European manufacturing affiliates largely accounted for the decrease.

The shift to equity capital inflows reflected smaller increases, and larger reductions, in equity in 1988 than in 1987. The shift was concentrated in the petroleum industry and was widespread by area. Equity reductions largely reflected selloffs of affiliates in Europe and South America. The decrease in intercompany debt outflows to $4.8 billion from $6.3 billion may have reflected affiliates' generally strong economic condition, which dampened the need for financial support from U.S. parents (tables K, O).

Foreign assets in the United States

Foreign assets in the United States increased $210.7 billion in 1988 compared with a $211.5 billion increase in 1987.

Foreign official assets.--Foreign official assets in the United States increased $39.0 billion compared with $45.0 billion. Dollar assets of industrial countries increased $29.9 billion compared with $49.2 billion. Early in the year, some official placements in the United States reflected the repositioning of deposits from the Eurodollar market. In July and August, reductions largely reflected intervention sales of dollars, and in October and November, placements largely reflected intervention purchases of dollars by foreign monetary authorities. Dollar assets of OPEC members decreased $2.9 billion following a decrease of 10.0 billion. Dollar assets of other countries increased $12.0 billion compared with $5.7 billion; much of the increase was accounted for by the newly industrialized countries in Asia whose international reserves increased strongly.

Other foreign assets in the United States increased $171.7 billion compared with a $166.5 billion increase.

Liabilities reported by banks.--U.S. liabilities reported by U.S. banks and international financial institutions, excluding U.S. Treasury securities, increased $78.9 billion compared with $87.8 billion. Liabilities to own foreign offices payable in dollars increased $47.6 billion compared with $38.5 billion. U.S.-owned banks increased their liabilities to own foreign offices $32.3 billion compared with $23.9 billion. That step-up was accompanied by a major shift in the source of funding from branches in the United Kingdom to branches in the Caribbean. Banks in the United States drew heavily on Caribbean branches to fund loan demand in the United States, especially in the first half of the year. Borrowing was particularly strong in the second and fourth quarters, encouraged by widened differentials between U.S. and Eurodollar overnight interest rates as Eurodollar rates increased less rapidly than U.S. rates. Demand was also heaviest in those quarters for funds to finance domestic (U.S.) and foreign acquisitions. Concurrently, on the supply side, larger increases in U.S. short-term (90-day) interest rates than in most key foreign rates, and appreciation of the dollar favored placement of funds in dollar-denominated deposits.

Foreign-owned banks' liabilities to own foreign offices payable in dollars increased $15.3 billion compared with $14.7 billion. The increase was more than accounted for by borrowing in the second and fourth quarters to meet loan demand of parent banks in Japan.

Liabilities payable in foreign currencies increased $15.7 billion compared with $25.3 billion. Borrowing, mostly in Japanese yen to meet demand for credit in Japan and for Japanese activity in the Euroyen and Asian interbank markets, was particularly large in the third and fourth quarters. The increase in combined dollar and foreign currency liabilities to Japan was $31.7 billion compared with $12.6 billion.

Banks' custody liabilities increased $8.6 billion compared with $2.6 billion; most of the increase was in the first and third quarters. U.S. Treasury securities.--Transactions in U.S. Treasury securities shifted to net purchases of $19.9 billion from net sales of $7.6 billion. Net purchases, mainly of marketable bonds, were due to several factors: A shift to liquidity and safety early in the year to counter uncertainties associated with the stock market decline of October 1987; some increase in the interest differential in favor of U.S. assets as U.S. bond yields edged higher; and a rapid rise in the yields of 1- and 2-year securities. In contrast to transactions in other U.S. securities, gross activity in Treasury securities in 1988 exceeded that in 1987. By February 1988, activity had recovered to October 1987 levels and remained at or above those levels until December when activity dropped off sharply.

Net purchases by Western Europeans increased to $11.6 billion from $2.8 billion, over one-half of which was in the first quarter when volatility in financial markets generated a desire for liquidity and safety. Thereafter, purchases slowed. Net purchases by Japan were $5.5 billion following net sales in the two previous years; over three-fifths of the purchases were in the fourth quarter. Canadians sold U.S. Treasury securities on balance, perhaps because of the large differential between higher Canadian interest rates and lower U.S. rates and a strengthening of the Canadian dollar in exchange markets.

Other U.S. securities.--Net foreign purchases of U.S. securities other than U.S. Treasury securities were $27.0 billion compared with $42.2 billion. Foreigners purchased $18.8 billion in Eurobonds issued abroad by U.S. corporations compared with $22.6 billion, and shifted to net sales of stocks of $0.7 billion from $15.5 billion in net purchases (chart 5).

Although new issues abroad of U.S. corporations were weak in the first quarter because of volatility in financial markets that followed the stock market decline, borrowing by U.S. corporations strengthened thereafter, especially in the fourth quarter. The rise in Eurobond interest rates was less than in U.S. rates, and the demand for funds continued to be fueled by the need to finance acquisitions. Use of the market for that purpose, however, was probably less than in 1987. For the year, the total amount of borrowing in all bond markets by U.S. corporations decreased to $222 billion from $325 billion; the overseas share increased

Table O. : Selected Direct Investment Transactions with Netherlands Antilles Finance Affiliates [Millionss of dollars]

Table P. : New International Bond Issues by U.S. Borrowers [Millions of Dollars] to 9 percent from 7 percent. Additional short- and intermediate-term corporate borrowing took the form of drawdowns on Euronote issuance facilities and Eurocommercial paper, reported in banks' custody liabilities.

Industrial corporations reduced their borrowing slightly to $10.2 billion from $10.7 billion (table P). Borrowing by nonbank financial corporations was above a year earlier, and borrowing by banking corporations was small.

Straight fixed-rate bonds accounted for over 80 percent of all borrowing in 1988, up from 64 percent in 1987. Convertible issue dropped sharply to a 6-percent share from 20 percent due to the volatility of stock prices. Floating-rate note issues recovered somewhat to an 12-percent share from 5 percent, despite the continued absence of borrowing by banking corporations.

The share of borrowing denominated in dollars dropped to 55 percent from 82 percent. Much of the deadline was accounted for by an increase in the shares denominated in currencies with high domestic interest rates, including the British pound, and the currencies of New Zealand, Australia, and Canada.

Net foreign purchases of outstanding bonds were $8.9 billion compared with $4.1 billion. Most purchases were by Japan, especially in the last three quarters, and coincided with their sales of stocks over the same time period. Gross activity was 16 percent lower than in 1987.

Transactions in U.S. stocks shifted to net sales of $0.7 billion from net purchases of $15.5 billion (chart 6). Net purchases were limited in the first three quarters; large sales occurred in the fourth quarter. Net purchases by Japan were $1.6 billion compared with $11.1 billion, and transactions by Western Europe shifted to net sales of $3.9 billion from net purchases of $1.2 billion. Although gross purchases and sales recovered somewhat from February through July, activity dropped off sharply thereafter. For the year, gross activity was 24 percent below that in 1987. Interest rates on short-term, high-quality debt were high relative to the expected return on stocks, and currency volatility in the last half of the year may have also discouraged interest.

Direct investment.-- Net inflows for foreign direct investment in the United States were a record $42.2 billion, up slightly from 1987. Substantial increases in equity capital inflows and reinvested earnings were nearly offset by a drop in intercompany debt inflows.

Equity capital inflows were $28.8 billion compared with $25.5 billion. Funding from Japan and the United Kingdom for large acquisitions accounted for 60 percent of the equity inflows, most which were to manufacturing and wholesale trade affiliates. Reinvested earnings almost tripled, increasing to $7.2 billion from $2.5 billion. The increase was mainly attributable to higher operating earnings and was almost entirely accounted for by nonpetroleum affiliates. Affiliates of European parents accounted for over 60 percent of the increase.

Intercompany debt inflows were $6.2 billion compared with $14.0 billion. Inflows had been boosted in 1987 by an especially large loan to finance the acquisition of a petroleum affiliate; there were no transactions of similar magnitude in 1987. Although affiliates continued to borrow substantial amounts from their foreign parents for acquisitions in 1988, some of these debts were paid off within the year.

The statistical discrepancy (errors and omissions in reported transactions) decreased to an inflow of $16.5 billion from an inflow of $18.5 billion. Increased quarterly volatility in the discrepancy over the past 2 years may in part reflect reporting, timing with the volatility of exchange rates and new financial instruments, affecting both the current and capital accounts.

Table : Q.--Selected U.S. Transactions with OPEC Members(1)

Table : 1-2.--U.S. International Transactions

Table : 3.--U.S. Merchandise Trade

Table : 3.--U.S. Merchandise Trade--Continued

Table : 3.--U.S. Merchandise Trade--Continued

Table : 3.--U.S. Merchandise Trade--Continued

Table : 4.--Selected U.S. Government Transactions

Table : 5.--Direct Investment: Income, Capital, Royalties and License Fees, and Other Private Services

Table : 6.--Securities Transactions

Table : 7.--Claims on and Liabilities to Unaffiliated Foreigners Reported by U.S. Nonbanking Concerns

Table : 8.--Claims on Foreigners Reported by U.S. Banks

Table : 9.--Foreign Official Assets and Other Foreign Assets in the United States Reported by U.S. Banks

Table : 10.--U.S. International

Table : Transactions, by Area

Table : 10.--U.S. International

Table : Transactions, by Area--Continued

Table : 10.--U.S. International

Table : Transactions, by Area--Continued
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Title Annotation:includes 34 tables
Author:Bach, Christopher L.
Publication:Survey of Current Business
Date:Mar 1, 1989
Words:8888
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