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U.S. international transactions, second quarter, 1987.

U.S. International Transactions, Second Quarter 1987

THE U.S. current-account deficit increased $4.3 billion to a record $41.1 billion in the second quarter.1 The merchandise trade deficit increased slightly, as imports increased more than exports. The net service surplus decreased sharply: Receipts fell due to lower capital gains in income on U.S. direct investment abroad, and payments of income on other private investment increased strongly. Net unilateral transfers decreased.

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

In the private capital accounts, bank-reported flows dominated. U.S. bank-reported claims on foreigners increased strongly in April, partly because of a more rapid increase in short-term Eurodollar interest rates than in U.S. rates. U.S. bank-reported liabilities also increased strongly, largely related to the increase in claims.

In securities transactions, net foreign purchases of U.S. corporate stocks remained at near record levels, and bonds newly issued abroad by U.S. corporations slowed somewhat. Net sales of U.S. Treasury securities by private foreigners continued, especially early in the quarter when the dollar depreciated. There were small net U.S. sales of foreign securities; net U.S. purchases of foreign stocks were lower, mostly because of net sales in Japan, and there was a shift to small net U.S. sales of foreign bonds.

Outflows for U.S. direct investment abroad decreased, as reinvested earnings fell because of lower capital gains. Inflows for foreign direct investment in the United States decreased moderately, but remained strong.

Foreign official assets in the United States continued to increase, primarily reflecting accumulations of U.S. dollars by foreign monetary authorities from exchange market intervention. U.S. official reserve assets decreased, mostly from intervention sales of foreign currencies.

The statistical discrepancy (errors and omissions in reported transactions) was an inflow of $17.6 billion.

U.S. dollar in exchange markets

In the second quarter, the U.S. dollar depreciated 3 percent on a trade-weighted quarterly average basis against the currencies of 10 industrial countries, but appreciated slightly--less than 1 percent--against the currencies of 22 OECD countries (table C, chart 5).

The dollar was under heavy downward pressure from the beginning of the quarter through mid-May, and depreciated rapidly despite intervention purchases of dollars by U.S. and foreign monetary authorities. The depreciation reflected concerns over U.S. protectionist measures, the continued large U.S. current-account deficit, and some hesitancy on the part of foreign investors to increase holdings of dollar-denominated assets. The depreciation was discussed by monetary officials of major industrial countries in Washington in early April and again in June at the Economic Summit in Venice. At both meetings, participants reaffirmed their commitment to foster exchange rate stability.

The dollar strengthened during the second half of the quarter (except during two brief episodes when the dollar dipped and U.S. and foreign authorities intervened to buy dollars), ending the quarter near its beginning level against most currencies. Capital inflows beginning in mid-May in response to wide interest rate differentials in favor of U.S. dollar assets contributed to the strengthening of the dollar, as did tighter monetary conditions in the United States and somewhat more relaxed conditions in Japan and Germany (chart 6). The strengthening also may have reflected perceptions by exchange market participants that the major industrial countries were likely to coordinate actions to reduce currency fluctuations. Inflows of capital following increased political tensions in the Middle East also may have contributed to the strengthening of the dollar.

For the quarter, the dollar depreciated 7 percent against the Japanese yen. Rapid depreciation, which began late in the first quarter, continued through mid-May despite exchange market intervention by Japanese and U.S. monetary authorities. A shift by Japanese investors from dollar-denominated assets to assets denominated in yen and other currencies contributed to rapid widening of U.S.-Japanese interest rate differentials, as U.S. rates rose and Japanese rates fell. After mid-May, actions by Japanese authorities to stimulate the domestic economy, to permit short-term interest rates to ease, and to advise Japanese foreign currency traders and financial institutions to refrain from speculation contributed to a strengthening of the dollar. Subsequently, investment reflows from Japan into high-yielding U.S. assets and the unwinding of hedges against the dollar provided further strength to the dollar.

For the quarter, the dollar depreciated 6 percent against the British pound, 4 percent against the Swiss franc, and 1 to 2 percent against the European Monetary System currencies. The dollar depreciated 1 percent against the Canadian dollar.

Merchandise trade

The merchandise trade deficit increased slightly to a record $39.5 billion in the second quarter from $38.8 billion in the first; imports increased more than exports. Although the rate of increase in exports was more rapid than the rate for imports, the increase in imports was larger because imports are nearly two-thirds larger than exports.

Exports.--Exports increased $3.0 billion, or 5 percent, to $60.0 billion; volume increased 4 percent. The increase in value was broadly based, both by end-use commodity category and destination. In terms of volume, most major categories showed increases: Foods, feeds, and beverages increased 9 percent; industrial supplies and materials, 4 percent; capital goods other than civilian aircraft, 5 percent; and consumer goods, 7 percent. Exceptions were automotive products and civilian aircraft.

Agricultural exports increased $0.6 billion, or 9 percent, to $7.1 billion; volume increased 8 percent. Corn and wheat increased sharply in response to lower U.S. prices and lower production by other exporters. Much of the increase was to the Soviet Union, which made its first substantial purchase of U.S. grain in 2 years. Grain received under the Export Enhancement Program permitted U.S. exporters to offer the Soviet Union competitive export prices. Grain exports to the Soviet Union under this program are expected to continue for several more quarters. Cotton exports were also up strongly in response to tight world supplies. Agricultural prices increased 1 percent on average for the second consecutive quarter, in contrast to rapidly falling prices in 1986. Increased agricultural prices were part of a general rise in commodity prices this year, as shown in chart 7.

Nonagricultural exports increased $2.4 billion, or 5 percent, to $52.8 billion; volume increased 4 percent.

The largest increase was in industrial supplies and materials, up $0.9 billion, or 6 percent, to $15.3 billion. Chemicals increased $0.6 billion to a record $5.6 billion; the increases were widespread geographically. Nonferrous metals increased $0.2 billion, largely to Canada. Average prices for industrial supplies and materials, like agricultural prices, increased for the second consecutive quarter; prices had declined moderately throughout 1986.

Capital goods increased $0.6 billion, or 3 percent, to $20.8 billion. Machinery other than business machines and computers increased $0.8 billion, and business machines and computers increased $0.2 billion; a $0.4 billion decrease in civilian aircraft was partly offsetting.

Automotive products increased slightly to $6.4 billion. Exports of completed cars to Canada increased, and exports of parts and engines to Canada and Mexico decreased.

Consumer goods increased $0.3 billion, or 8 percent, to $4.4 billion. Japan accounted for about one-half of the increase.

Imports.--Imports increased $3.8 billion, or 4 percent, to $99.5 billion; volume increased 2 percent.

Petroleum imports increased $1.3 billion, or 15 percent, to $10.0 billion. The average price per barrel increased to $17.32 from $15.64, and the average number of barrels imported daily increased to 6.32 million from 6.09 million. Lower domestic production and higher consumption contributed to both a large decrease in petroleum inventories and the increase in imports. Crude petroleum prices increased throughout the quarter, largely reflecting production cutbacks by OPEC countries that began in the first quarter and concerns over the possible disruption of supplies from the Middle East.

Nonpetroleum imports increased $2.5 billion, or 3 percent, to a record $89.5 billion; volume increased 1 percent. Volume increased for most major end-use commodity categories: Foods, feeds, and beverages increased 4 percent; capital goods, 7 percent; automotive products, 1 percent; and consumer goods, 3 percent. The only large volume decline--6 percent--was in industrial supplies and materials.

The largest increase in value was in capital goods, which increased $1.5 billion, or 7 percent, to $21.2 billion. A larger increase in imports than in exports resulted in a first-time trade deficit in capital goods. Business machines and computers increased $0.3 billion. More than one-half of the increase was from the newly industrialized countries (NIC's) in Asia. Other capital goods increased $1.2 billion, or 8 percent, to $16.3 billion. The increase was broadly based, with machinery up $0.8 billion and transportation equipment up $0.4 billion.

Consumer goods increased $1.1 billion, or 6 percent, to $21.9 billion. Nearly two-thirds of the increase was from the NIC's, with smaller increases from Western Europe, Japan, and Mexico. In mid-April, 100-percent tariffs were placed on a range of Japanese consumer products (certain computers, hand tools, and televisions) in retaliation for Japan's alleged violation of an agreement to prevent dumping of semiconductors.

Automotive products increased $0.5 billion, or 2 percent, to $21.1 billion. The increase was almost entirely due to passenger cars from Japan, up 15 percent, and from South Korea, up 90 percent. The import share of U.S. car sales has remained steady during the past year, as a surge in sales of lower cost cars from Korea offset a drop in sales of Japanese cars. Sales of cars (domestic and foreign) remained slow in the second quarter, resulting in a build-up in foreign car inventories.

Industrial supplies and materials decreased $0.5 billion, or 3 percent, to $16.3 billion; nonmonetary gold was down $0.3 billion. Foods, feeds, and beverages increased $0.1 billion, or 2 percent, to $6.1 billion.

In April, the United States reduced the list of products exported by developing countries eligible for duty free entry into the United States under the General System of Preferences (GSP), possibly affecting future trade. About $3.2 billion in products, mostly from higher income developing countries, were excluded from the GSP.

By area, the deficit increased $1.3 billion with the NIC's and $1.0 billion with Western Europe; smaller increases occurred in the deficit with Japan, up $0.1 billion to $14.3 billion, and with Mexico, up $0.2 billion to $1.7 billion. The deficit with Canada decreased $1.3 billion to $2.6 billion, and the deficit with Latin America, other than Mexico, decreased $0.4 billion to $1.7 billion. The deficit with Eastern Europe shifted $0.3 billion to a surplus of $0.2 billion.

Service transactions

Net service receipts decreased to $1.3 billion in the second quarter from $5.1 billion in the first. Receipts decreased $2.0 billion to $40.0 billion; the decrease was more than accounted for by lower capital gains in receipts of income on U.S. direct investment abroad. Payments increased $1.8 billion to $38.7 billion, mostly due to increased payments of income on other private investment.

Receipts of income on U.S. direct investment abroad decreased $3.3 billion to $9.4 billion. The decrease was more than accounted for by lower capital gains. Following large currency translation gains in the first quarter, when the dollar depreciated substantially, gains were down sharply in the second, when the dollar strengthened beginning in mid-May. Operating earnings increased $0.3 billion to $9.0 billion, mostly reflecting the impact of higher petroleum prices on earnings of petroleum affiliates. Payments of income on foreign direct investment in the United States decreased $0.6 billion to $2.9 billion. Higher operating earnings of petroleum affiliates were offset by losses of automobile wholesale trading affiliates and by a decline in capital gains of insurance affiliates.

Receipts of income on other private investment abroad increased $0.7 billion to $11.6 billion, reflecting increased bank claims and higher interest rates on dollar-denominated assets. Payments of income on other private investment in the United States increased $1.5 billion to $11.8 billion, reflecting continued heavy purchases of U.S. securities, increased bank liabilities, and higher interest rates.

U.S. Government receipts of income were unchanged at $1.3 billion. U.S. Government payments of income increased $0.4 billion to $6.1 billion, due to large increases in holdings of U.S. Treasury securities by foreign official agencies over the past two quarters.

Travel receipts increased $0.2 billion to $3.7 billion. Receipts from overseas continued to increase as the lower value of the dollar reduced the foreign currency cost of travel to the United States. Receipts from Mexico increased strongly. Receipts from Canada were down slightly, reflecting lower average expenditures. Travel payments increased $0.2 billion to $5.4 billion, as the number of travelers to Europe and the Mediterranean continued to increase from last year's depressed level. Payments to other overseas areas also rose; average expenditures have increased sharply over the past year due to depreciation of the dollar. Payments to Canada and Mexico were down.

Passenger fare receipts and payments were nearly unchanged at $1.0 billion and $1.9 billion, respectively.

Other transportation receipts increased $0.3 billion to $4.2 billion. Ocean freight receipts were higher due to a rise in the volume of exports. Air and ocean port receipts were up strongly from increased traffic. Other transportation payments increased $0.2 billion to $4.7 billion, reflecting higher ocean freight and ocean port expenditures.

Receipts from unaffiliated foreigners for other private services increased $0.1 billion to $2.6 billion. Payments to unaffiliated foreigners for other private services increased $0.2 billion to $2.0 billion, mostly due to higher commission payments on securities transactions in Japan, Germany, and the United Knigdom.

Transfers under U.S. military agency sales contracts increased $0.2 billion to $3.5 billion. As a result of a peak in scheduled deliveries of aircraft and other major items during the first and second quarters, transfers were two-thirds above last year's level. Direct defense expenditures abroad were unchanged at $3.4 billion.

Unilateral transfers

Net unilateral transfers decreased $0.2 billion to $2.9 billion, reflecting decreases in both U.S. Government grants and private remittances.

U.S. assets abroad

U.S. official reserve assets decreased $3.4 billion in the second quarter, compared with a $2.0 billion decrease in the first. Foreign currency holdings decreased $3.3 billion, mostly due to intervention sales. The U.S. reserve position in the International Monetary Fund decreased $0.3 billion, and special drawing rights increased $0.2 billion.

Claims on foreigners reported by U.S. banks increased $20.2 billion, compared with a decrease of $25.7 billion, as U.S. lending to the overseas interbank market surged in April. A more rapid increase in short-term Eurodollar interest rates than in U.S. rates contributed to that increase. Also, some of the increase in overseas demand for bank credit stemmed from foreign institutional investors, who sought increased dollar liabilities as hedges against the rapid depreciation of the dollar. U.S-owned banks, which had a strong influx of deposits related to income tax payments, sharply increased claims on affiliated banks, mostly in Western Europe and the Caribbean. However, U.S.-owned banks provided little net funding to the market because an increase in liabilities, mostly to their own foreign offices in the Caribbean, nearly matched the increase in claims. Foreign-owned banks in the United States also sharply increased their claims on affiliated and unaffiliated foreign offices in April.

Outside the interbank market, there was little bank activity. Changes in claims on private foreigners and on foreign public borrowers were small, as were changes in claims denominated in foreign currencies.

Net U.S. sales of foreign securities were $0.1 billion, compared with net purchases of $1.3 billion. Net stock purchases decreased to $0.5 billion from $1.2 billion. Large net sales in Japan were partly offset by purchases in Western Europe and Canada. Foreign corporations' new stock issues in the United States, at $1.4 billion, were especially strong.

New foreign bonds issued in the United States decreased slightly to $1.0 billion, as U.S. long-term interest rates rose 100 basis points in April and May. Issues were limited to a small number of regular borrowers from Canada, Israel, and an international organization.

Net sales of outstanding bonds, including redemptions, increased to $1.5 billion from $1.0 billion. There was a $2.6 billion shift to net sales of $1.9 billion of Japanese bonds. Sales were strongest late in the quarter when the dollar strengthened and interest rates in Japan rose. Substantial net sales also occurred in Western Europe, the Caribbean, and developing countries in Asia. In contrast, purchases of British gilt-edged bonds nearly tripled to $3.4 billion because of high yields and the strength of the pound in exchange markets.

Net outflows for U.S. direct investment abroad decreased to $4.6 billion from $9.8 billion. Reinvested earnings decreased $3.0 billion to $5.1 billion; the decrease, which largely reflected lower capital gains, was mostly in Western Europe and Canada. Equity capital shifted $1.8 billion to net inflows of $0.7 billion, and intercompany debt outflows slowed.

Foreign assets in the United States

Foreign official assets in the United States increased $9.4 billion in the second quarter, compared with a $14.0 billion increase in the first. Continued increases in industrial countries' holdings mostly reflected exchange market intervention purchases of dollars. Dollar assets of OPEC members continued to decrease. Dollar assets of other countries decreased (table B).

Liabilities to private foreigners and international financial institutions reported by U.S. banks, excluding U.S. Treasury securities, increased $15.2 billion, in contrast to a decrease of $13.6 billion. Large increases in liabilities of U.S.-owned banks to affiliated banks in Western Europe and the Caribbean were largely related to the previously mentioned surge in U.S. banks' claims on foreigners in April. In addition, foreign funds financed increases in lending to U.S. securities dealers. Foreign-owned banks in the United States also drew on funds from banks in Western Europe and the Caribbean, while repaying funds borrowed from Japanese and Canadian affiliates. Liabilities payable in foreign currencies decreased $0.6 billion, in contrast to an increase of $6.9 billion in the first quarter.

Custody liabilities of banks' domestic customers shifted from a decrease of $2.4 billion to an increase of $3.2 billion.

Net foreign sales of U.S. Treasury securities by private foreigners and international financial institutions increased to $2.6 billion from $1.6 billion, the third consecutive quarter of net sales. Sales were heavy early in the quarter when the dollar depreciated. Later in the quarter, there was a shift to strong net purchases, especially by Japanese investors, due to strengthening of the dollar and a wide interest differential in favor of dollar-denominated assets.

Net foreign purchases of U.S. securities, other than U.S. Treasury securities, remained strong at $15.9 billion, although down from $18.5 billion. Net foreign purchases of U.S. corporate stocks were $8.3 billion, compared with a record $9.8 billion in the first quarter; net purchases during the first two quarters of 1987 exceeded the record 1986 annual total. Net Japanese purchases, which accelerated following liberalization of foreign investment restrictions last year, were $4.0 billion in the second quarter, compared with $3.4 billion. Purchases from the United Kingdom, although smaller than in the first quarter, remained strong.

Bonds newly issued abroad by U.S. corporations slowed to $5.9 billion from $7.0 billion, due to rising long-term interest rates. Convertible issues of industrial companies picked up because of strong equity prices. There were few issues by banks; nonbank financial corporations, who had borrowed heavily since early 1986, also had few issues. U.S. dollar issues decreased, and foreign currency issues denominated in German marks and Swiss francs increased moderately.

Net inflows for foreign direct investment in the United States decreased to $7.2 billion from $7.7 billion. Equity inflows increased to $2.6 billion from $1.8 billion, reflecting the acquisition of a U.S. financial firm by a Japanese firm and the recapitalization of a manufacturing affiliate by a French firm. Several acquisitions in the second quarter were financed entirely by borrowing from domestic (U.S.) sources so that no direct investment capital flows were generated. Intercompany debt inflows, at $3.8 billion, were $0.6 billion lower than in the first quarter, but remained large for the third consecutive quarter. Reinvested earnings decreased $0.7 billion to $0.8 billion.

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: CHART 5 Indexes of Foreign Currency Price of the U.S. Dollar (1977 = 100)

Table: CHART 6 Selected Interest Rates

Table: CHART 7 World Commodity Price Index

Table: D.--Selected Direct Investment Transactions with Netherlands Antilles Finance Affiliates

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

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

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 Transactions, by Area
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Author:Krueger, Russell C.
Publication:Survey of Current Business
Date:Sep 1, 1987
Words:3648
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