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U.S. international transactions, second quarter 1992.

The U.S. current-account deficit was $17.8 billion in the second quarter Of 1992, Compared with a deficit of $5.9 billion (revised) in the first quarter (table A).(1) Most of the increase was due to a sharp rise in the merchandise trade deficit. However, the surpluses on both services and investment income decreased, and net unilateral transfers increased, each contributing to the deficit by small amounts.

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Net recorded capital inflows increased to $37.4 billion in the second quarter from $14.3 billion in the first. In the second quarter, large foreign official inflows were augmented by large private capital inflows, mostly into U.S. Treasury and corporate bonds.

The statistical discrepancy (errors and omissions in recorded transactions) was an outflow of $19.6 billion in the second quarter, following an outflow of $8.4 billion in the first.

U.S. dollar in exchange markets

From the end of March to the end of June, the dollar depreciated 5 percent on a trade-weighted basis against the currencies of 10 industrial countries and 4 percent against the combined currencies of 22 OECD countries and 4 newly industrialized countries in the Far East, returning to the same levels as at the end of December against most currencies (table B, chart 1). The dollar had risen strongly during the first quarter largely because of expectations of a rapid pickup in economic activity, but it fell in the second quarter when expectations of growth were tempered by discouraging reports on employment, new home sales, and durable goods orders. In addition, steep declines in both short-term and long-term U.S. interest rates to their lowest levels in 20 years further increased already wide interest-rate differentials against dollar assets. Consequently, the dollar approached historic lows against both the German mark and Japanese yen (chart 2).

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Against the German mark, the dollar depreciated 6 percent; German interest rates rose further as monetary authorities continued to be concerned about the high costs of unification, high wage settlements and inflation, and a money supply that was rising more rapidly than anticipated. The mark may also have benefited from uncertainties about whether key countries would join the European Monetary Union.

Against the Japanese yen, the dollar depreciated 4 percent; Japanese monetary authorities, in response to slowing growth and record trade surpluses, permitted interest rates in Japan to fall at about the same pace as rates in the United States.

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

Current Account

Merchandise trade

The merchandise trade deficit increased to $24.4 billion in the second quarter from $17.2 billion in the first. The increase was mostly the result of a rise in imports, both nonpetroleum and petroleum.

Exports. - Exports decreased $0.4 billion, or less than 1 percent, to $107.6 billion in the second quarter. Slower growth in major industrial countries has restrained exports in recent quarters, especially nonagricultural exports. However, nonagricultural exports to developing countries in Latin America and to "other" countries in Asia and Africa have continued to rise strongly.

Nonagricultural exports were unchanged at $97.1 billion in the second quarter; volume, in constant (1987) dollars, increased less than 1 percent (table C). In current dollars, a decrease in completed civilian aircraft from a record high in the first quarter was offset by a large increase in automotive products and a much smaller increase in computers, peripherals, and parts. The increase in automotive products was in passenger cars to Canada, in parts and accessories to Canada and Mexico, and in trucks, buses, and special purpose vehicles to Saudi Arabia.

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Agricultural exports decreased $0.3 billion, or 3 percent, to $10.5 billion in the second quarter; volume, in constant (1987) dollars, decreased 3 percent. The decrease in current dollars was largely in wheat exports to Eastern Europe, Pakistan, and Egypt. The decrease would have been larger if the price of wheat had not risen 9 percent. Prices were pushed higher, in part, because U.S. wheat stocks were at their lowest level since the 1975-76 marketing year.

Agricultural trade with republics of the former Soviet Union has changed dramatically since its dissolution. As recently as 1988 and 1989, the Soviet Union was a major buyer of U.S. agricultural products, especially wheat, nearly all on a cash basis. However, shipments dropped sharply in 1990 and 1991, and since the dissolution of the Soviet Union in December 1991, internal changes stemming from the organization of new governments and the transition to market-based economies have limited the foreign exchange available to purchase U.S. agricultural products.

In order to boost shipments in 1992, the United States has substantially expanded the use of its export credit guarantee program, whereby the U.S. Government guarantees the repayment of agricultural credits extended by U.S. banks in the event of default. The use of this program has helped increase the U.S. share of wheat imports by the Commonwealth of Independent States from 14 percent in the 1990-91 marketing year to about 33 percent in the 1991-92 marketing year. As of May 8,1992, no guarantee claims have been paid to U.S. banks for failure of covered program loans.

Imports. - Imports increased $6.8 billion, or 5 percent, to $132.0 billion in the second quarter. Over the past five quarters, a strong increase in capital goods has been accompanied by significant increases in consumer goods, nonpetroleum industrial supplies and materials, and foods, feeds, and beverages (chart 3). Consumer goods - from China, the newly industrialized countries, and, to a much lesser extent, Mexico - have been the largest contributor to this rise in noncapital imports; consumer goods from Japan have changed little.

Nonpetroleum imports increased $4.2 billion, or 4 percent, to $119.0 billion in the second quarter; volume, in constant (1987) dollars, increased 5 percent. In current dollars, the largest increases were in capital goods (mostly in computers, peripherals, and parts and in completed civilian aircraft), in nonpetroleum industrial supplies and materials (mostly in nonferrous metals, which were boosted by a significant step-up in prices), and in consumer goods. By area, the largest increases were in capital goods from Western Europe, nonpetroleum industrial supplies and materials from "other" countries in Asia and Africa, and consumer goods from Mexico, "other" countries in Asia and Africa, and Japan.

Petroleum imports increased $2.6 billion, or 25 percent, to $13.0 billion in the second quarter. The average price per barrel increased to $17.48 from $15.27; the average number of barrels imported daily increased to 8.12 million from 7.44 million. Despite these sharp increases, the number of barrels imported and their average price were no higher than a year ago. In the second quarter, consumption and domestic production decreased, while inventories increased.

Balances by area. - The deficits with both the industrial countries and the developing countries increased in the second quarter. With the industrial countries, the deficit increased $5.9 billion, to $13.8 billion, mostly as a result of a drop in the trade surplus with Western Europe; the balance with Japan was unchanged. With the developing countries, the deficit increased $1.3 billion, to $10.6 billion, mostly as a result of an increase in the deficit with OPEC members in Africa.

Service transactions

The surplus on service transactions decreased to $13.0 billion in the second quarter from $13.8 billion in the first. Receipts decreased to $44.4 billion from $44.7 billion, and payments increased to $31.5 billion from $30.9 billion.

Travel receipts were unchanged at $13.7 billion; higher receipts from Mexico offset lower receipts from overseas. Travel payments were unchanged at $10.9 billion; higher payments to Mexico offset a decrease in payments overseas.

Passenger fare receipts increased slightly to $4.3 billion, and passenger fare payments increased slightly to $2.9 billion.

Other transportation receipts increased $0.2 billion, to $6.3 billion, as a result of higher ocean port expenditures. Other transportation payments were little changed at $5.8 billion.

Other private service receipts decreased to $12.3 billion from $12.8 billion, and other private service payments increased to $6.7 billion from $6.2 billion.

Transfers under U.S. military sales contracts dropped to $2.8 billion from $3.0 billion; they had been especially high in the previous two quarters because of a bunching of aircraft deliveries. Direct defense expenditures abroad dropped to $3.4 billion from $3.6 billion. Unexpectedly strong expenditures on contractual services have slowed the pace of decline in overall expenditures in recent quarters. Other key components of direct defense expenditures, such as expenditures by U.S. military personnel and expenditures for petroleum, have declined more rapidly, reflecting the sizable reduction of U.S. forces abroad.

Investment income

The surplus on investment income dropped to $1.4 billion in the second quarter from $4.5 billion in the first. An increase in payments of income on foreign assets in the United States accounted for most of the drop; receipts of income on U.S. assets abroad decreased by a small amount.

Direct investment income. - Receipts of income on U.S. direct investment abroad decreased slightly to $12.9 billion in the second quarter. Operating earnings were virtually unchanged, as a decline in Western Europe (partly due to weak auto sales) was offset by an increase in the Pacific Rim countries.

Income on foreign direct investment in the United States shifted to a profit of $1.3 billion in the second quarter from a loss of $0.9 billion in the first. The shift partly resulted from a reduction in losses of U.S. affiliates of Japanese banks.

Portfolio investment income. - Receipts of income on other private investment abroad were $13.6 billion in the second quarter, compared with $14.1 billion in the first. Sharply lower interest rates and further substantial reductions in bank claims reduced bank income receipts; the reduction in bank income receipts was partly offset by larger receipts of dividends and interest on U.S. holdings of foreign securities. Net U.S. purchases of foreign securities were particularly strong throughout 1991 and have remained relatively strong in the first half of 1992. Receipts of income on U.S. Government assets increased slightly to $1.6 billion.

Payments of income on other private investment in the United States were $15.7 billion, compared with $15.3 billion; the increase primarily reflected increased interest payments on foreign holdings of U.S. corporate bonds, which have increased strongly over the past year. In contrast, dividend payments slowed further as a result of net foreign sales of U.S. stocks in the past two quarters, and falling short-term interest rates reduced interest payments on U.S. bank liabilities. Payments of income on U.S. Government liabilities increased slightly to $9.7 billion.

Unilateral transfers

Net unilateral transfer payments were $7.7 billion in the second quarter, up from $7.0 billion in the first. The step-up was due mostly to an increase in U.S. Government grants to $3.0 billion from $2.6 billion; second-quarter disbursements were boosted by grants to Israel that normally would have been disbursed in the fourth quarter of 1991 but were postponed. The second-quarter disbursements were partly offset by receipts of $0.8 billion in cash contributions from coalition partners in Operation Desert Storm. Although these receipts were significantly higher than in the previous quarter, this pattern will not continue, because less than $0.3 billion remains in outstanding pledges to the United States.

U.S. Government pensions and other transfers increased to $1.1 billion from $0.9 billion as a result of higher contributions to the United Nations to meet the U.S. share of expanded peace-keeping operations.

Capital Account

Net recorded capital inflows increased to $37.4 billion in the second quarter from $14.3 billion in the first. U.S. assets abroad increased about the same in both quarters, but foreign assets in the United States increased substantially more in the second quarter than in the first.

U.S. assets abroad

U.S. assets abroad increased $5.7 billion in the second quarter, following an increase of $4.3 billion in the first. Outflows in both quarters were held down by substantial reductions in U.S. banks' claims.

U.S. official reserve assets. - U.S. official reserve assets decreased $1.5 billion in the second quarter, following a $1.1 billion increase in the first. Holdings of German marks declined during the second quarter as part of an ongoing program with German monetary authorities to reduce U.S. holdings through a series of off-market transactions.

Claims reported by banks. - U.S. claims on foreigners reported by U.S. banks decreased $12.6 billion in the second quarter, following a decrease of $15.9 billion in the first.

Banks' own claims payable in dollars decreased $2.6 billion, following a $1.1 billion decrease. Although interest-rate differentials favored borrowing in dollars and may have encouraged limited interbank lending to Western Europe in the second quarter, widespread repayments of U.S. bank credits by both banks and nonbanks abroad continued, especially by banks in the Caribbean, and few new credits were extended. The main reasons for the reduced activity in the first half of 1992 were the same as those in 1991: Slowing economic growth in industrial countries; the pullback of Japanese banks from the U.S. market; weakening demand for syndicated bank credits that was aggravated by a further slowdown in international financing of mergers and acquisitions; alternative financing that was available in the debt securities markets at attractive interest rates; and U.S. banks' caution over the credit worthiness of borrowers and the adequacy of their own capital positions.

Banks' domestic customers' claims payable in dollars decreased $9.7 billion, following a decrease of $2.0 billion. Most of the second-quarter decrease was in deposits with foreign branches of U.S banks, mainly in the Caribbean, but also in the United Kingdom. U.S. money market mutual funds reduced their holdings of Eurodollar certificates of deposit - the fifth consecutive quarterly drop in their offshore deposits - as investor inflows into the mutual funds fell substantially.

Foreign securities. - Net U.S. purchases of foreign securities were nearly unchanged in the second quarter, decreasing $0.1 billion, to $8.6 billion. However, the strong pace of investment in foreign stocks slowed sharply as net purchases were halved, while net purchases of foreign bonds accelerated.

Net U.S. purchases of foreign bonds increased to $5.3 billion from $1.2 billion as a result of substantial foreign new issues and a resumption of demand for outstanding bonds, especially bonds from the United Kingdom and the Caribbean. Gross purchases and gross sales increased throughout the quarter. Foreign new issues in the United States increased to $5.3 billion from $4.7 billion; the continued strength reflected further declines in U.S. interest rates and stable inflation prospects. Both foreign governments and lower-rated (less than prime-rated) European companies took advantage of favorable borrowing conditions. Borrowing in the first half of the year slowed moderately from the very strong pace in the first half of 1991.

Net U.S. purchases of foreign stocks decreased to $3.3 billion from $7.5 billion. Although net purchases were strong in April, slowing economic growth abroad and falling stock prices in most major markets dampened U.S. demand for these assets in May and June. U.S. residents' gross purchases remained strong throughout the quarter, but they were more than offset by rising gross sales. Net purchases from Western Europe decreased $2.0 billion, mostly from decreased sales in the United Kingdom, where stock prices declined sharply in May and June. Net purchases from Japan decreased $1.2 billion, reflecting a 13-percent decline in stock prices, falling real estate values, and further weakness in corporate earnings, especially in the banking sector. Although net purchases of outstanding issues slowed sharply, new issues of stock in the United States, largely related to privatization of assets in Latin America, remained strong. During the first half of the year, transactions in both outstanding stocks and new issues were only about two-thirds of the pace in the first half of 1991.

Direct investment. - Net capital outflows for U.S. direct investment abroad were $11.0 billion in the second quarter, compared with $15.1 billion in the first. The decrease reflected a decline in inter-company debt outflows to $4.7 billion from $8.3 billion, largely as a result of reduced outflows to affiliates in the United Kingdom, and a decline in equity capital outflows to $2.1 billion from $3.7 billion, largely as a result of reduced outflows to affiliates in the Caribbean. These declines were partly offset by an increase in reinvested earnings to $4.2 billion from $3.7 billion.

Foreign assets in the United States

Foreign assets in the United States increased $43.1 billion in the second quarter, following an increase of $18.6 billion in the first. The step-up was largely due to foreign purchases of corporate and U.S. Treasury debt securities.

Foreign official assets. - Foreign official assets in the United States increased $21.1 billion, virtually the same amount as in the previous quarter (table D). The accumulation of dollar assets by industrial countries picked up to $13.3 billion from $6.1 billion. Dollar assets of OPEC members decreased $2.2 billion, following an increase of $2.5 billion. Dollar assets of "other" countries increased $10.0 billion after an increase of $12.7 billion, as sizable inflows continued from both the Far East and Latin America.

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Liabilities reported by banks. - U.S. banks reduced their liabilities to private foreigners and international financial institutions by $5.1 billion in the second quarter, following a $4.5 billion decrease in the first. U.S.-owned banks sharply curtailed their foreign borrowing, primarily by a large reduction in positions with their affiliated offices in the Caribbean. Weak demand for bank credit, both domestic and international, was a primary reason for the reduction. In addition, foreigners had little incentive to place deposits in the United States because of a further widening of already large, adverse interest-rate differentials, dollar depreciation, and strong preferences for longer term fixed income securities as the yield curve steepened in the United States. Japanese-owned banks further cut back their positions with home offices in Japan.

U.S. Treasury securities. - Transactions in U.S. Treasury securities shifted to net purchases of $10.3 billion in the second quarter from net sales of $0.8 billion in the first. A resumption of the rise in U.S. bond prices and a steep yield curve favoring longer term instruments contributed to strong foreign demand. Japan's net purchases of $5.2 billion reflected a steeper drop in bond rates in Japan than in rates in the United States, as well as uncertainties in Japanese financial markets. International bond mutual funds accounted for most of the $5.3 billion in net purchases from the Caribbean.

Other U.S. securities. - Net foreign purchases of U.S. securities other than U.S. Treasury securities more than doubled in the second quarter, increasing $6.3 billion, to $10.9 billion. Strong foreign demand for U.S. bonds was sustained throughout the quarter, while sales of stocks slowed sharply.

Japanese and other Asian investors accounted for one-half of the step-up in net purchases of U.S. Government agency bonds to $5.1 billion from $2.7 billion. Rising U.S. bond prices and uncertain prospects in Japanese financial markets contributed to sustained purchases throughout the quarter. New bond issues sold abroad by U.S. corporations remained strong, increasing $1.0 billion, to $7.1 billion. U.S. corporate demand for funds and a lowering of Eurobond borrowing costs pushed borrowing activity in the first half of 1992 ahead of the strong pace of borrowing in the first half of 1991. Throughout the second quarter, gross purchases of bonds strengthened more rapidly than gross sales.

Net foreign sales of U.S. stocks slowed sharply to $1.0 billion from $3.1 billion. The large amount of profit-taking that was present early in the first quarter abated; Japanese investors slowed their net sales to $0.7 billion from $3.3 billion, and Western European investors slowed their net sales to $1.1 billion from $1.7 billion. Both gross purchases and gross sales of stocks were somewhat lower in the second quarter than in the first.

Direct investment. - Foreign direct investment in the United States shifted to net capital inflows of $6.0 billion in the second quarter from outflows of $3.8 billion in the first. Most of the change was the result of intercompany debt, which shifted to inflows of $3.7 billion from outflows of $4.8 billion, largely with affiliates in continental Europe. Reinvested earnings were -$2.6 billion, compared with -$4.5 billion. Equity capital inflows decreased to $4.9 billion from $5.4 billion.

Tables 1 through 10 follow.

(1.) Quarterly estimates of U.S. current- and capital-account components are seasonally adjusted when significant seasonal patterns are present. The accompanying tables present both adjusted and unadjusted estimates.
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Author:Bach, Christopher L.
Publication:Survey of Current Business
Date:Sep 1, 1992
Words:3585
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