U.S. international transactions in 1990.
Changes in rates of economic growth in the United States and abroad, oil price developments, and government transfers associated with the crisis in the Persian Gulf heavily influenced the quarterly pattern of adjustment in the current account during 1990. The fluctuations in U.S. price competitiveness resulting from the appreciation of the dollar against the currencies of several major trading partners during 1989 and its subsequent depreciation also influenced the pattern of trade during 1990.
Although the U.S. current account deficit narrowed in 1990, it remained substantial. Much of the large net capital inflow that was necessarily the counterpart of the deficit did not show up in the recorded data, however. As a result, the statistical discrepancy in the U.S. international transactions accounts rose to a record $73 billion.
INFLUENCE ON U.S. INTERNATIONAL
U.S. international transactions in 1990 were shaped to a considerable extent by certain underlying economic factors. Perhaps most important were changes in rates of economic growth in the United States and abroad and changes in the price competitiveness of U.S. products. During the latter part of the year, Iraq's invasion of Kuwait and the subsequent threat of military conflict in the Persian Gulf produced additional effects on U.S. international transactions. Oil import prices rose, and foreign profits of U.S. oil companies increased. Military exports and imports expanded, foreign governments made transfers to the U.S. government to help defray the costs of Desert Shield, and the U.S. government forgave Egyptian debt related to earlier military sales. Also, foreign demand for U.S. currency grew.
Relative Growth Rates
In 1990, U.S. economic growth slowed noticeably, and by the fourth quarter the economy slipped into recession (table 1). In comparison with the fourth quarter of 1989, little real growth occurred in consumer spending or in producers' durable equipment expenditures (excluding computers). The economic slowdown tended to depress the growth of U.S. demand for imported goods and services and to reduce the profits earned by foreign direct investors in the United States.
Economic growth in major U.S. export markets abroad also slowed on average in 1990, though not as sharply as U.S. growth did (table 1). The slowdown of growth abroad affected U.S. exports of goods and services and the profits earned on U.S. direct investment abroad. Economic performance across countries varied considerably. For the Group of Ten (G-10) countries, average growth slowed markedly after the first quarter; during 1990 Canada and the United Kingdom moved into recessions, but economic activity continued strong in Germany and Japan. Economic growth in the other industrial and developing countries important to U.S. exports was mixed as well. In Latin America, Mexico was able to sustain fairly strong growth but other countries, such as Argentina and Brazil, had slowdowns or recessions that were associated with stabilization programs. The newly industrializing economies of Asia (NIEs) continued to grow rapidly.
U.S. Price Competitiveness
The competitiveness of U.S. export and import-competing industries depends on a variety of factors, including relative productivity growth, wage rates, the costs of inputs other than labor, exchange rates, shifts in the composition of demand, and firms' pricing decisions and profit margins. On an aggregate level, there are several useful indicators of price competitiveness.
One overall measure of pressures on price competitiveness is the real exchange rate: that is, the nominal exchange rate adjusted for relative inflation. The trend in the real exchange value of the dollar relative to the currencies of major U.S. trading partners has been down since the mid-1980s, a trend that suggests improved U.S. price competitiveness (chart 2). However, the real value of the dollar did rise on balance relative to other G-10 currencies in 1989, to an average level 7 percent above that of 1988. The indicated decline in U.S. price competitiveness probably had a lingering negative effect on the U.S. trade position in 1990. However, the subsequent decline in the dollar in the latter part of 1989 and in 1990 led to a cumulative improvement in U.S. price competitiveness and appears to have had a significant stimulative effect on net exports by the last quarter of 1990.
Another aggregate measure indicating changes in price competitiveness is unit labor costs in manufacturing in the United States compared with those in othr industrial countries. As chart 3 indicates, translated into dollars an average of unit labor costs for other major industrial countries has risen substantially relative to U.S. costs as the dollar has fallen from its 1985 peak. At present, manufacturing in the United States appears to have a significant cost advantage over manufacturing in these other countries--a situation representing a shift from that in the first half of the 1980s.
DEVELOPMENTS IN MERCHANDISE TRADE
Improvement in the U.S. merchandise trade balance slowed in 1990, with the deficit narrowing only $6 billion for the year--half the rate of decline recorded in 1989. The increase in the value of exports was almost matched by the increase in the value of imports (table 2). Moreover, a comparison of the trade balance in the fourth quarter of 1990 with that in the fourth quarter of 1989 shows no improvement at all.
For the most part, the U.S. trade picture continued to improve, but oil market developments masked this improvement in 1990. Excluding oil imports, the U.S. trade deficit decreased $17 billion--less than the $23 billion improvement in 1989, but still substantial.
The value of U.S. agricultural exports declined slightly in 1990 from the high 1989 level (table 2). Crop yields that were average to better than average in the United States and in the rest of the world allowed for a further replenishing of stocks and resulted in the continued downward drift of agricultural prices from the drought-induced highs of 1988. The price of wheat led the decline in agricultural export prices in 1990. Strong world production of wheat and lackluster imports by the Soviet Union and China resulted in a gradual erosion of prices over the year.
Special factors influenced the quarterly pattern of U.S. exports. Large purchases of corn by the Soviet Union, which had resumed in the fourth quarter of 1989, tailed off rapidly after the second quarter of 1990. Exports of the new crop of soybeans got off to a slow start late in 1990. South America provided stiff competition for U.S. products in a market hurt by dwindling purchases by the Soviet Union and Pakistan because of financial considerations.
The value of nonagricultural exports expanded about 9 percent in 1990 (year over year), down from an even stronger 13 percent pace in 1989. As chart 4 indicates, increases in quantity accounted for most of the growth in value, and these increases were concentrated in the first and last quarters. The slowdown in economic growth in the major U.S. trading partners after the first quarter, however, negatively affected the expansion of the quantity of U.S. exports. The lingering negative effects of the decline in U.S. price competitiveness in 1989 associated with the higher exchange value of the dollar relative to the average of other G-10 currencies also probably contributed to the slowing of export growth. Nevertheless, exports picked up strongly again in the fourth quarter, despite continued slow growth abroad on average, possibly because the stimulative effects of the cumulative gains in price competitiveness during 1990 began to show through.
Over the four quarters of 1990, increases in the quantity of exports were largest for consumer goods, capital goods, and industrial supplies (table 3). However, the percentage increase in exports of consumer goods and capital goods other than computers was smaller over the four quarters of 1990 than it wa for the previous year. Exports of automotive products were flat, while exports of foods declined.
Export price increases (measured in dollars) were rather modest over the four quarters of 1990 and were about in line with increases in U.S. domestic producer prices (weighted by export shares). The fixed weight price index for U.S. nonagricultural exports increased 4 percent between the fourth quarter of 1989 and the fourth quarter of 1990. Small price increases (measured in dollars), combined with the sharp depreciation in the average foreign exchange value of the dollar, imply that export prices of U.S. goods measured in foreign currencies declined substantially on average. On the whole, U.S. exporters appear to have taken advantage of the opportunity to improve their price competitiveness abroad rather than to raise profit margins on their foreign sales when the dollar fell.
In terms of destination, the growth in the value of nonagricultural exports varied considerably from country to country (table 4). The growth of exports to Canada was sluggish, a development that reflected that country's economic recession. In contrast, exports to Western Europe, particularly consumer goods, commercial aircraft and other capital goods, and industrial supplies, were strong. Exports to Mexico also increased sharply, particularly shipments of automotive parts for use by Ford, General Motors, and Chrysler in their Mexican plants. Led by increased deliveries of commercial aircraft and consumer goods, exports to Japan grew 12 percent.
The value of non-oil imports rose about 3 percent during 1990 (year over year). On a fourth-quarter-to-fourth-quarter basis, imports grew a modest 3 percent, despite the substantial depreciation of the dollar relative to the currencies of major U.S. trading partners during this period. Declines in the prices of many primary products contributed to the overall weakness in import prices. In addition, some exporters to the United States, faced with slack demand, may well have allowed their profit margins to decline rather than suffer further declines in sales.
The quantity of U.S. non-oil imports also grew slowly during 1990, largely because of the slowdown in U.S. economic activity (table 5). On a fourth-quarter-to-fourth-quarter basis, imports of capital goods other than computers and industrial supplies were essentially flat, and imports of consumer goods and foods, feeds, and beverages declined. Growth of computer imports--at 9 percent--was far below the strong 1989 pace.
Imports of all automotive products were up only slightly in 1990. Declines in imports of trucks and parts nearly offset a sharp rise in imports of passenger cars. On a year-over-year basis, the geographic pattern of car imports diverged considerably. The number of units imported from Canada, Mexico, and Germany rose strongly; on the other hand, imports from Japan, Korea, and Sweden dropped. For Japanese auto makers, increased production at their U.S. plants more than offset declines in imports. Sales of Japanese nameplate cars were about 4 percent higher in 1990 than in 1989, in contrast to the decline in sales by U.S. Big Three auto makers.
While the value of U.S. non-oil imports overall grew slowly in 1990, there were significant differences across countries of origin (table 6). Automotive products accounted for more than half of the sharp increase in non-oil imports from Mexico, a result of increased production in Mexico by U.S. auto makers. Imports from Canada rose slightly, while imports from Western Europe, particularly Germany, were somewhat stronger. In contrast, imports from Japan, particularly capital goods and automotive products, declined. There was also a decline in imports, primarily consumer goods, from the Asian NIEs; however, imports from other low-wage Asian countries increased.
The value of oil imports jumped $11 billion in 1990 to $62 billion. On a fourth-quarter-to-fourth-quarter basis, the increase was even larger--$22 billion at an annual rate. Price developments accounted for most of the increase in value.
The price of imported oil, which had increased in the fourth quarter of 1989 as a result of extremely cold weather, fell almost continuously in the first half of 1990 (see chart 5). Rapid increases in OPEC production, combined with milder weather in the first quarter, permitted a restoration of previously depleted stocks as well as softer prices. However, the OPEC agreement in mid-July to limit production, followed shortly by the invasion of Kuwait by Iraq, ended the period of falling prices. The initial results of Iraq's invasion of Kuwait were a reduction in world production, precautionary stock building, and a sharp increase in prices to a peak of $40 per barrel for West Texas intermediate for several days in early October. By November, rapid increases in oil production, both within OPEC and in the North Sea, had entirely offset the loss of supply from Iraq and Kuwait (table 7). This increase in production, coupled with slowing world economic growth and a mild winter, brought prices back to a range of $26 to $28 per barrel in December and early January and left world stocks at historically quite comfortable levels. Oil markets reacted favorably to the success of Operation Desert Storm, and prices settled at roughly $20 per barrel by the end of March.
The volume of U.S. oil imports grew only 1 percent in 1990 (year over year), despite the continued decline in U.S. oil production (chart 6). The decline in oil prices since 1982 has discouraged expenditures on exploration and development in the United States and has resulted in lower production. Imports in 1990 supplied almost half of U.S. consumption, up from a range of 35 percent to 40 percent in the early 1980s.
The volume of oil imports varied substantially from quarter to quarter in 1990. An extremely cold December in 1989 pushed stocks of petroleum and products in the United States well below average historical levels by year-end. A scramble by companies to replenish these stocks in the first quarter resulted in imports averaging 8.9 million barrels per day--the highest rate of imports since the first quarter of 1979--despite unusually mild weather. Falling world oil prices in the second quarter encouraged additional stockbuilding from the healthy first-quarter levels and, coupled with further declines in U.S. crude oil production (especially in Alaska), kept imports relatively high through July.
The invasion of Kuwait by Iraq boosted precautionary stockbuilding of petroleum products in the United States, which fueled continued strength in imports in the third quarter. However, in contrast to the rest of the world, stocks in the United States were worked off in the fourth quarter and at the end of the first quarter of 1991 stood somewhat below historical average levels. These stocks were drawn down as refineries cut production in the face of weak economic activity and mild winter weather to perform needed maintenance. Imports for the fourth quarter fell below 7.2 million barrels per day in the face of these drawdowns of stocks.
NONTRADE CURRENT ACCOUNT
The surplus on nontrade current account grew from $5 billion in 1989 to $9 billion in 1990 (table 8). Increases in net receipts of investment income and net exports of services were partly offset by an increase in net U.S. unilateral transfers abroad.
In recent years, unilateral transfers have k amounted to net outflows averaging about $15 billion per year, largelly composed of U.S. government grants and pensions to foreign residents. However, the crisis in the Persian Gulf had a significant effect on the level of transfers for the fourth quarter of 1990, and, as a result, the outflow for the year rose to $21 billion. The United States forgave Egypt's debt related to earlier military sales (an outflow of approximately $7 billion). On the other hand, the U.S. government received significant transfers from other governments to help defray the costs of Desert Shield (about $4 billion). Substantially larger contributions by foreign governments to help cover the costs of Desert Storm are expected in 1991.
Net services, which include military exports and imports, also reflected the effects of the crisis in the Persian Gulf. Military sales rose $2 billion in 1990, largely a result of increased deliveries of equipment to coalition partners in the Middle East. It should be noted, however, that shipments of material and equipment from the United States for use by U.S. troops abroad are not counted as exports. Military expenditures abroad also rose in 1990, by $2 billion, because of increased purchases abroad associated with operations in the Middle East. This total does not include in-kind supplies (for example, fuel, water, and housing) provided to U.S. forces by other countries.
The net balance on services other than military sales and expenditures continued to improve, a trend that reflected the U.S. comparative advantage in producing certain kinds of services and the same relative price and income movements that have led to continued improvements in the U.S. trade balance. In line with the growing importance of services in U.S. international transactions, both exports and imports of services grew more rapidly than trade in goods. Travel and passenger fares accounted for nearly half of the increase in service receipts; the same two categories plus other transportation accounted for more than half the increase in payments.
Net investment income was positive in 1990, in contrast to a small negative amount in 1989 (table 8). Increases in net direct investment receipts outweighed increases in net portfolio investment payments. Direct investment receipts were larger than those in 1989, mainly because of temporary spikes in petroleum pricesk and profits: Income of affiliates of U.S. petroleum companies abroad (before capital gains or losses) increased 30 percent. In contrast, income reported by manufacturing affiliates abroad declined, despite the recent rapid growth in U.S. direct investment abroad and the lower foreign exchange value of the dollar, which tends to inflate the dollar value of profits earned by U.S. companies in other countries. Recessions in Canada and the United Kingdom, countries that account for about one-third of all U.S. direct investments abroad, tended to depress incomes earned by U.S. investors.
The returns reported by foreigners on their direct investments in the United States generally have been low in recent years, and income in 1990 was depressed further by the slowdown in U.S. economic activity. Since the beginning of 1987, foreigners have added more than $200 billion to their direct investments in the United States, but reported income payments on all direct investments of foreigners in the United States were lower in 1990 than they were in 1987.
Net portfolio investment payments increased only slightly, despite continued growth in U.S. net international indebtedness. The deterioration in the net portfolio position was masked in part by the decision to forgive Egypt's military sales debt and the accounting treatment that credited cumulative interest arrears as paid in the fourth quarter. A decline in average interest rates also tempered somewhat the growth in net payments.
CAPITAL ACCOUNT TRANSACTIONS AND
THE STATISTICAL DISCREPANCY
The net capital inflows that were the counterpart to continuing U.S. current account deficits went ; largely unrecorded in 1990 (table 9). As a result, the statistical discrepancy in the U.S. international transactions accounts reached $73 billion. In principle, the sum of all transactions in the U.S. balance of payments accounts, a double-entry bookkeeping system, should equal zero. For each transaction there should be two equal entries of opposite sign. In practice, the recorded accounts never sum exactly to zero because the data that reflect the debit and credit counterparts of each single transaction generally are obtained from different sources. The statistical discrepancy recorded for the international transactions account is the net errors and omissions in all the components.
A positive statistical discrepancy represents some combination of net unrecorded exports to foreigners of goods, services, kand investment income and net unreported capital inflows from abroad. While errors and omissions do occur in the reporting of current account transactions as well as capital account transactions, the more than three-fold increase in the statistical discrepancy from $22 billion in 1989 was probably accounted for largelly by net unreported private capital flows. The actual current account is not likely to have improved by the additional $50 billion represented by the increase in the statistical discrepancy between 1989 and 1990. Based on past history, the recorded improvement in the current account in 1990 was not smaller than would have been expected, given movements in relative prices and incomes. Changes in holdings of official monetary authorities also are likely to be reported accurately, especially since a large part of official reserves in the United States are held on a custodial basis at the Federal Reserve Bank of New York. In addition, foreign data sources do not give any indication of large increases in official dollar holdings that did not show up in the U.S. statistics.
One obvious omission from the data on private capital flows is increases in foreign holdings of U.S. currency. Fragmentary evidence indicates a sharp rise in net shipments of U.S. currency abroad by banks in 1990. (1) Increased foreign demand for U.S. currency could well have been stimulated by increased political and economic instability in many parts of the world.
An increase in foreign holdings of U.S. currency could explain only part of the statistical discrepancy in 1990. However, pinpointing exactly where the other errors and omissions occurred is difficult. In recent decades, financial innovation, technological change, deregulation of financial markets, and elimination of capital controls have all contributed to the increasing internationalization of financial markets. New channels for capital flows involving new instruments and new participants have developed; therefore information from a limited number of large financial intermediaries and corporations located in the United States no longer covers the bulk of international capital flows. These developments have made the tracking of international ; capital flows far more problematical at a time when obtaining additional resources to devote to data collection has been difficult.
Recorded capital flows indicate an increase in net inflows reported by banks. However, net inflows resulting from securities transactions and direct investment were down sharply, and other recorded capital inflows were small. Relative interest rate movements made dollar assets less attractive relative to assets denominated in yen or marks and made raising funds in the United States to finance acquisitions and operations more attractive for multinational corporations. Despite continued large-scale acquisitions of U.S. businesses by foreigners, and direct investment capital inflow fell from $75 billion in 1989 to only $26 billion in 1990; the capital outflow reported by U.S. direct investors abroad increased from $32 billion in 1989 to a record $36 billion in 1990. k
Nevertheless, as long as the United States runs substantial current account deficits and net official capital inflows are small, the sum of recorded and unrecorded net private capital inflows must be large and positive: That is, the balance of payments accounts must sum to zero. Changes in relative interest rates can be reflected in changes in exchange rates and shifts in the composition of capital flows, but not, initially at least, in shifts in realized net capital flows overall. Only over time, as the current account responds to a decline in the dollar's value, can realized net capital inflows decline. The recorded data on private capital flows in 1990, which show a sharp decline in net inflows, should be viewed with suspicion.
INTERNATIONAL INVESTMENT POSITION
Although continuing U.S. current account deficits and net capital inflows certainly imply faster growth of foreign assets in the United States than of U.S. assets abroad, the Bureau of Economic Analysis (BEA) did not publish an overall estimate of the net U.S. international investment position last year. BEA argued that, because some components of the investment position are measured at historical cost while others are measured at current market value, adding components based on such a mix of valuations would not provide a useful indicator of the level of the investment position. The valuation of direct investment at historical cost may very well understate the net investment position because U.S. direct investment abroad is much older on average than foreign direct investment in the United States. BEA is preparing alterntive estimates of the direct investment position based on market value and replacement cost for publication later this year.
Not all significant corrections to the data tend to increase the net investment position of the United States. The investment position is estimated using data on recorded capital flows. However, the statistical discrepancy in the U.S. international transactions accounts ksince 1975 has tended to be both large and positive, cumulating to more than $275 billion. If, as suspected,k unrecorded capital inflows account for a significant part of the cumulative positive discrepancy, then net foreign assets in the United States are underestimated to that extent.
PROSPECTS FOR 1991
The U.S. current account deficit is likely to shrink rapidly in 1991 if oil prices remain at about their current level. An important, but transitory, factor behind the expected improvement in the current account is substantial unilateral transfers from foreign governments to cover the costs of Desert Storm. In addition, the U.S. recession will cut temporarily into U.S. imports of goods and services and payments of profits on foreign direct investment in the United States. Moreover, k the improvement in U.S. price competitiveness resulting from the substantial depreciation of the foreign exchange value of the dollar in 1990 is likely to continue to have favorable effects on the trade balance in 1991. These favorable effects will diminish subsequently, especially if the recentk strengthening of the dollar persists.
(1) Transactions that result in increased foreign holdings of U.S. currency do not always contribute net to the statistical discrepancy. In a system of double-entry bookkeeping, it depends on whether the other side of the transaction is reported or omitted as well. In the case of net shipments of currency abroad by banks, the other side of the transaction (the payment to the bank for the currency) is reported and does contribute to a positive discrepancy.
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|Publication:||Federal Reserve Bulletin|
|Date:||May 1, 1991|
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