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U.S. international transactions in 1991.

In 1991, for the fourth consecutive year, the U.S. current account deficit narrowed substantially. The largest changes reflected improvements in the merchandise trade balance and special transactions related to the war in the Persian Gulf. The sharp reduction in the recorded U.S. current account deficit was mirrored by changes in recorded capital inflows and the statistical discrepancy.

A $27 billion increase in merchandise exports and an $8 billion reduction in merchandise imports yielded a $35 billion narrower trade deficit for the year (table 1); the trade deficit in 1991 was the smallest since 1983. Cash contributions by foreign governments to help pay costs of the Persian Gulf War reduced the size of the current account deficit $43 billion in 1991; the amount of these grants received in 1991 was much larger than that received in 1990. In addition, net receipts from services expanded $10 billion in 1991 because of a strengthening in such areas as travel, professional services, and royalties and license fees. Net investment income receipts changed little in 1991. As a result of these changes, the U.S. current account deficit narrowed dramatically (chart 1). Even after excluding the special cash grants by foreign government the U.S. current account deficit narrowed sharply, from $96 billion in 1990 to $51 billion in 1991.




Cyclical movements in economic activity at home and abroad and factors affecting U.S. international price competitiveness significantly influenced U.S. international transactions in 1991. The crisis in the Persian Gulf had large, but generally transitory, effects on the quarterly pattern of various components of U.S. international transactions.

Relative Growth Rates

From 1989 through 1991, economic growth abroad, on average, exceeded growth in the United States, and this difference contributed to the narrowing of the external deficit (chart 2). With the U.S. economy moving further into recession in the first quarter of 1991, consumer and investment spending declining, and business inventories being drawn down, expenditures on imported goods and services fell. Even though growth in domestic spending turned positive in the second quarter, spending by consumers on goods and by producers on durable equipment remained weak. By the third quarter, increased spending both by consumers and by producers supported some growth in U.S. gross domestic product (GDP). Imports accelerated sharply, and were probably an important component of a runup in inventories when industrial production fell and overall activity flattened out in the fourth quarter. Over the entire year, U.S. real GDP grew about 1/4 percent (fourth quarter over fourth quarter).

During 1991, economic growth in major U.S. export markets on average also slowed, although not as much as that in the United States. However, investment spending in key countries remained strong and was of particular importance to U.S. exports.

To some extent, the deceleration of economic activity in some foreign industrial economies was an ongoing response to tighter policies introduced earlier, which were designed to counter inflationary pressures and to bring economic activity to more sustainable, noninflationary levels. The general slowdown in the major industrial countries continued longer than had been expected, however. Declines in business confidence, the need for households and businesses to reduce high levels of debt, and concerns about the quality of assets on the balance sheets of banks also negatively affected economic activity in some countries. The pattern of growth varied considerably among major industrial countries (table 2). Pronounced recessions in Canada and the United Kingdom that began in 1990 extended into 1991, with only tentative signs of any recovery by year-end. In France and Italy, growth remained positive but sluggish. In Japan and western Germany, growth was brisk early in 1991, but slowed markedly later in the year. Among industrial countries, investment spending was strong only in western Germany, mainly in response to tight capacity utilization in the manufacturing sector and opportunities and needs related both to unification and to developments in Eastern Europe.

Slowing growth, and in some cases actual declines, in overall output implied that several major industrial economies were operating below potential during 1991. Accordingly, inflation in those countries continued to moderate during the year, with average inflation as measured by the consumer price index (CPI) in the foreign Group of Ten (G-10) countries subsiding by the better part of a percentage point to near 4 percent (chart 3). Particularly large improvements were evident in the United Kingdom and Sweden. In addition, a drop in oil prices and the weakening of the dollar after midyear reduced the upward pressure on prices abroad. In contrast, upward pressure on prices continued in Germany during 1991 as the level of economic activity remained high.

Among U.S. trading partners in developing countries in 1991, economic performance was mixed, but on average growth was stronger than that in major foreign industrial countries. Investment expenditures, in particular, contributed to the strength of the expansion in key countries. In Mexico, growth of investment expenditures has been stronger than growth of overall GDP over the past two years (table 2); some of this strength may reflect anticipation of a North American Free Trade Agreement among the United States, Canada, and Mexico. Investment spending also expanded in 1991 in other Latin American countries, notably Venezuela and Argentina, and has been strong in economies such as Korea, Saudi Arabia, Thailand, and Hong Kong.
2. Economic growth in selected foreign economies,
 Percent, year over year
 GNP or GDP growth Investment growth (1)
 1990 1991(2) 1990 1991(2)
Canada 1 -2 -3 -4
United Kingdom 1 -2 -2 -11
France 3 1 4 -2
Italy 2 1 3 2
Germany (western) 5 3 9 7
Japan 5 4 10 3
Mexico 4 4 13 9
Argentina 0 5 -15 20
Korea 9 8 24 16
Hong Kong 3 4 8 10
(1.) Gross fixed capital formation.
(2.) Data for 1991 are partly estimated
SOURCES. Various national sources.

US. Price Competitiveness

Consumer prices in the United States rose less in 1991 than prices on average in foreign industrial countries (chart 3) and tended to improve the international competitive position for U.S. goods and services. Since the mid-1980s, the major factor contributing to gains in U.S. international price competitiveness, however, has been movements in exchange rates.

A broad measure of the price competitiveness of U.S. goods and services is the "real," or "CPI-adjusted" foreign exchange value of the dollar, which is computed as the ratio of U.S. consumer prices to foreign consumer prices translated into dollars at current nominal exchange rates. Two such measures of the dollar's real exchange rate are shown in chart 4. U.S. prices have trended down relative to average prices in dollars in both foreign G-10 countries and in developing countries since the mid-1980s. The sharp decline relative to prices in other G-10 countries, in particular, largely reflected depreciations of the dollar's nominal foreign exchange value against the currencies of those countries.

In 1991, the dollar appreciated in CPI-adjusted terms over the first half of the year against foreign G-10 currencies. This appreciation, which indicated a temporary deterioration of U.S. price competitiveness, was largely reversed during the latter part of 1991. In the first quarter of 1992, the dollar moved up again. Against the currencies of developing countries, the dollar depreciated fairly steadily in real terms in 1991.

A consolidated measure of U.S. export price competitiveness is the ratio of average consumer prices in dollars in G-10 countries and developing countries to U.S. export prices (chart 5). From the longer-term perspective shown in this chart, one can see that the fluctuations in exchange rates during 1991 did not significantly alter the improvement in U.S. price competitiveness, which has been a significant source of stimulus to U.S. exports for several years.

At current exchange rates, the United States appears to hold an edge in labor costs relative to those in Germany and Japan (table 3). In 1990, average labor compensation per hour in manufacturing in Japan was somewhat below the U.S. level, whereas that in Germany was significantly above the U.S. level. At the same time, according to rough estimates, labor productivity in the manufacturing sector in Japan and Germany was about 25 to 30 percent below that in the United States.(1) As a result, unit labor costs, that is, compensation divided by productivity, in Japan were somewhat above the U.S. level and in Germany were substantially above the U.S. level. Since 1985, German and Japanese unit labor costs have risen in comparison to U.S. costs (chart 6). This comparative rise can be attributed largely to the appreciation of the mark and the yen against the dollar over that period.
3. Index of unit labor costs in manufacturing
 in Japan and Germany relative to that
 in the United States, 1990
 1990 U.S. level = 1.00
 Item States Japan Germany
Compensation per hour 1.00 .87 1.47
Output per hour
 (productivity) 1.00 .71 .76
Unit labor costs
 (compensation divided
 by output) 1.00 1.20 1.93
Source . See note 1 in the text.

Special Factors

Besides the underlying factors just reviewed, the crisis in the Persian Gulf, which began in August 1990 and erupted briefly into war in the first quarter of 1991, strongly influenced the quarterly pattern of U.S. trade and current account developments during the year. For the most part, the disruptions were transitory. Oil prices, which had jumped in the fall of 1990, returned to pre-crisis levels by the second quarter of 1991; quantities of oil shipped were also disrupted over the same period. As a result, profits of U.S. oil companies on their overseas operations, which are part of the U.S. current account, gyrated sharply from late 1990 through the first part of 1991. Automotive exports to Saudi Arabia and Kuwait surged in the second and third quarters as vehicles and parts lost in the war were replaced. However, the war-related transactions with the greatest effect on the U.S. current account were cash contributions from foreign governments to offset some of the costs of the war. These cash contributions were recorded as positive unilateral transfers in the U.S. current account in the fourth quarter of 1990 and throughout 1991.


The U.S. merchandise trade balance improved substantially in 1991. The deficit narrowed $35 billion in 1991 compared with an improvement of $8 billion in 1990, as exports increased and imports declined (table 4).


Strong Expansion of Exports

Merchandise exports continued their strong expansion over the four quarters of 1991. In nominal terms, exports rose 7 percent, about the same pace of increase as that recorded in the preceding year. In real terms, the growth was even stronger - about 9 percent - as prices of exports on average declined slightly, reflecting in large part falling prices of exported industrial supplies.

The key element in export growth during 1991 was capital goods (chart 7). Nearly two-thirds of the increase in the value and quantity of exports (fourth quarter over fourth quarter) reflected strong growth in shipments of capital goods; two-thirds of that increase went to developing countries and one-third went to industrial countries.

Despite the sluggish overall economic growth recorded by many U.S. trading partners, high levels of investment expenditures in key countries, especially in developing countries in Latin America and Asia, boosted U.S. exports of capital equipment. Among developing countries, the largest increases in exports of U.S. capital equipment in 1991 (year over year) went to Mexico, Venezuela, Korea, and Saudi Arabia, countries recording strong investment growth. Among industrial countries, the largest increases went to Germany, also a country with strong investment growth in 1991. However, a decrease in shipments of capital goods to Canada and the United Kingdom in 1991 reflected recessions accompanied by a sharp drop in investment expenditures in both countries.

All major components of exported capital goods expanded strongly in 1991. The quantity of exported computers and parts increased steadily during the year (upper left panel of chart 7), with particularly strong increases in exports going to developing countries in Latin America. Substantial increases in exports of computers and parts also went to developing countries in Asia as well as to Germany and Canada. Deliveries of aircraft also rose sharply to both industrial and developing economies - especially France, Germany, Switzerland, Brazil, Singapore, Korea, and China. The quantity of all other capital goods exported also increased; most of the increase in shipments went to Mexico and Japan (especially industrial and service-industry machinery) and to Venezuela (oil drilling equipment).

Exports of items other than capital goods, which accounted for nearly 60 percent of the total quantity exported in 1991, grew more slowly on average but showed distinctly different patterns for different items. For automotive exports, a large part of the jump recorded in the second and third quarters was a surge in shipments to Kuwait and Saudi Arabia as these countries replaced vehicles and parts lost in the war. Agricultural exports picked up toward the end of 1991 as shipments of grain to Russia and other members of the Commonwealth of Independent States increased. Other exports, primarily nonagricultural industrial supplies and consumer goods, were flat on average until the fourth quarter. The quantity of exported nonagricultural industrial supplies, which was nearly 25 percent of all exports, grew only 2 percent in 1991 (fourth quarter over fourth quarter) compared with 11 percent in 1990. Exported consumer goods, which provided a noticeable boost to export growth in 1990 particularly to Europe, sagged during 1991 and rose above levels recorded at the end of 1990 only in the fourth quarter.

Overall, the quantity of U.S. merchandise exports grew at a healthy 9 percent rate in 1991, despite the substantial slowing of growth abroad, because of the positive influence of past gains in the price competitiveness of U.S. goods and the relative strength of investment demand. Comparing the curves plotted in chart 8 provides a historical perspective on the influence of changes in price competitiveness on U.S. exports. The ratio of U.S. real nonagricultural exports (excluding computers) to foreign GDP can be used as a rough way to show movements in exports that exclude the effects of changes in aggregate foreign spending. Movements in U.S. international price competitiveness are measured as the ratio of foreign consumer prices to U.S. export prices. From its low point in early 1985, which coincided with the peak in the dollar's foreign exchange value, U.S. price competitiveness has increased dramatically. That increase reflects a combination of a cumulative depreciation of the dollar and increases in average foreign prices in local currencies relative to U.S. export prices. As can be seen by the relationship of the two curves in the chart, increases in exports (excluding the effects of changes in foreign economic activity) have generally lagged improvement in U.S. price competitiveness by a year or more on average. This increase in competitiveness since the mid-1980s has resulted in a steady rise in the U.S. share of exports by the members of the Organisation for Economic Co-operation and Development to world markets (excluding exports to the United States). The U.S. share increased in 1991 to levels that were last recorded a decade earlier.

Slower Growth of Imports

The value of U.S. merchandise imports declined slightly in 1991. All of the decrease in value resulted from a drop in prices of imported oil from the inflated levels recorded in the second half of 1990 after Iraq invaded Kuwait. Excluding oil, imports rose 1 percent both in value and in quantity (year over year), the slowest rate of increase since 1982.

The recession and expectations about economic recovery buffeted non-oil imports during the quarters of 1991. Imports declined early in the year, as weak domestic spending reduced the demand for foreign goods. As the likelihood of an economic recovery in the United States increased after the end of the Gulf War, imports turned up - specially imports of consumer goods, computers, and automotive products (chart 9) - and continued strong through the summer. The upturn in imports in the second quarter and especially in the third quarter was proportionally much steeper than the increase in domestic demand (chart 10). When spending was more sluggish than anticipated in the fourth quarter, some of the additional quantities of imports, particularly consumer goods, apparently remained in inventories, and import growth slowed considerably.

Two distinct trends developed in 1991 among categories of imports - sharp increases in imported consumer goods and computers and declines in other imports. The increase in imported consumer goods came largely from China, particularly in apparel and household goods, and to a lesser extent from Latin America. For computers, the increase in imports persisted throughout the year and came not only from Asia, especially Taiwan, Singapore, Malaysia, China, and Japan, but also from other industrial countries, particularly the United Kingdom, Ireland, Germany, and Canada, where some U.S. companies have increased operations.

All other non-oil imports on average declined in 1991, even though the quarterly pattern was uneven. This unevenness was especially evident for automotive imports (the upper right panel of chart 9), which were 3 percent lower in value and 5 percent less in quantity in 1991 than in 1990. Sharp declines in the quantity imported from Europe reflected the effects of both the recession and the loss of price competitiveness. The value of automotive imports from Japan was about the same in 1991 as in 1990, because a steadily rising average unit value for imported cars about offset declines in quantity. Imports from Canada, largely from the U.S. Big Three producers operating in Canada under the automotive free trade agreement., were also little different in 1991 than in 1990. On the other hand, imports of automotive products; from Mexico jumped 13 percent and totaled $8 billion in 1991. U.S. automotive producers dramatically increased the number of vehicles they assembled in Mexico for export, largely to the United States. Production of cars for export by Ford jumped 26 percent to 111,983 units in 1991, and production by Chrysler rose 22 percent. All of the increase in production for export by General Motors in 1991 was of Chevrolet Cavaliers that were shipped directly to Canada and therefore were not counted in U.S. trade statistics.

Prices of non-oil imports changed little in 1991 (fourth quarter over fourth quarter). Increases in the first and fourth quarters were about offset by declines in the second and third quarters. The declines in prices of non-oil imports resulted in large part from worldwide decreases in prices of primary commodities and the effect of the dollar's appreciation during the year on prices of finished manufactured goods. The increase in prices of non-oil imports in the fourth quarter of 1991 reflected primarily a turnaround in prices of imported consumer goods (partly in response to the decline of the dollar) and higher prices of imported automotive products at the beginning of a new model year.

Oil Imports

The value of oil imports fell more than 17 percent in 1991 (year over year), as the conclusion of the Persian Gulf War and the sluggish U.S. economy pushed down both the price and the quantity of imported oil.

The price of oil, which had been falling gradually from the peak level reached in October 1990 (chart 11), fell dramatically in January 1991 at the outset of Operation Desert Storm as it became apparent that reasonably ample supplies would be maintained. Through September 1991, prices in spot markets fluctuated between $19 and $22 per barrel. In October, heightened concerns over the availability of Russian supplies during the winter, coupled with the continued delay in the return of Iraqi production to the world oil market, pushed prices above $24 per barrel. However, generally mild weather in the fourth quarter and sluggish economic activity in the industrial countries led to a decline in prices. At the year's end, the spot price for West Texas Intermediate hovered around $19 per barrel. During the opening months of 1992, oil prices declined slightly on balance with the continuation of mild weather, sluggish economic activity, and strong OPEC production.

The quantity of oil imports, which had plunged after the sharp rise in oil prices in the fall of 1990, increased over the first three quarters of 1991 as inventories, which had been run down while oil prices were high, were rebuilt. In the fourth quarter, the quantity of imported oil turned down again, reflecting sluggish U.S. activity and unseasonably warm weather. For the year as a whole, the quantity of oil imported fell, largely as a result of a decline in oil consumption (table 5). Consumption of oil fell 0.4 million barrels per day in 1991 relative to 1990, largely as a result of weak economic activity. Moreover, the sharp price increases in late 1990 stimulated U.S. oil production in 1991 and resulted in the first annual increase in production since 1985. Finally, the drawdown in Strategic Petroleum Reserves that was announced at the outset of Operation Desert Storm also served to reduce imports.
5. U.S. oil consumption, production, and imports,
 selected years, 1980-91
 Millions of barrels per day
 Item 1980 1985 1990 199(1p)
Consumption 17.1 15.7 17.0 16.6
Production 10.8 11.2 9.7 9.8
Imports 6.9 5.1 8.0 7.6
(p) Preliminary.
SOURCE. Department of Energy, Energy Information Administration.



Aside from developments in merchandise trade, the U.S. current account in 1991 recorded a steady improvement in net service receipts, little change in net investment income receipts, and sharp swings in unilateral transfers.

Growing Net Service Receipts

Net receipts from service transactions increased $10 billion in 1991 (table 6), continuing an upward trend that began in 1986. Almost all of the increase in 1991 was in payments by foreigners for services provided by U.S. residents. Payments by U.S. residents to foreigners for services were roughly the same in 1991 as in 1990.

More than half of the increase in service receipts from foreign residents was attributable to a 12 percent jump in receipts for travel and tourist expenditures in the United States. Receipts from overseas visitors rebounded sharply after the Persian Gulf hostilities, and receipts from Canada and Mexico also rose, especially in border areas. The remaining increase in service receipts was spread among a wide range of private services, especially for royalties and license fees, and business, professional, and technical services.

While U.S. payments to foreigners for services were only slightly higher in 1991 than in 1990, there were largely offsetting movements among different items. Foreign expenditures by the U.S. military fell during 1991, after having peaked during the Persian Gulf crisis in the fourth quarter of 1990 and the first quarter of 1991. The rate of decline in military payments increased during the year as the number of troops stationed abroad, especially in Europe, was reduced. Expenditures by U.S. residents on travel abroad increased only marginally in 1991, reflecting the effects of both the sagging U.S. economy and the drop-off in travel early in the year associated with the war in the Persian Gulf. On the other hand, payments to foreigners for telecommunications services rose 17 percent in 1991.
6. Service transactions, 1988-91
 Billions dollars
 Item 1988 1989 1990 1991
Service transactions, net 10 22 26 36
Receipts 102 116 133 145
 Travel and passenger fares 38 46 53 59
 Transportation 19 21 22 23
 Royalties and license fees 11 12 15 16
 Business, professional, and
 technical receipts 5 6 8 9
 Education 4 5 5 6
 Military sales 9 8 10 10
 Other service receipts 16 19 20 21
Payments 92 94 107 109
 Travel and passenger fares 41 43 48 49
 Transportation 20 21 23 23
 Telecommunications 5 5 6 7
 Military payments 15 15 17 16
 Other service payments 12 11 13 14
 SOURCE. U.S. Department of Commerce, Bureau of Economic Analysis,
U.S. international transactions accounts.

Investment Income

On balance, net investment income receipts changed only marginally in 1991. Net income receipts from direct investments declined a bit, and-net income payments on portfolio investments (private plus government) grew slightly (table 7).
7. U.S. net investment income, 1988-91
 Billions of dollars
 Item 1988 1989 1990 1991
Investment income, net 5 3 12 9
Direct investment income, net 37 42 53 51
 Capital gains or losses (-), net -1 -0 3 0
 Other direct investment
 income, net 38 43 50 51
 Receipts 50 54 54 52
 Capital gains or losses (-) 0 2 1 2
 Other direct investment
 income receipts 50 52 53 49
 Payments 14 12 2 0
 Capital gains or losses (-) 1 2 -2 2
 Other direct investment
 income payments 13 10 4 -2
Portfolio income, net -31 -40 -41 -42
 Receipts 60 75 76 64
 Private 54 69 66 56
 Government 7 6 10 8
 Payments 92 114 116 106
 Private 62 79 78 67
 Government 30 36 38 39
 SOURCE. U.S. Department of Commerce, Bureau of Economic Analysis
U.S. international transactions accounts.

Income received from U.S. direct investments abroad exceeded income paid to foreigners on their direct investments in the United States by $51 billion in 1991. This difference was about the same as that recorded in 1990. Income earned abroad in 1991 by affiliates of U.S. companies dropped about $4 billion, exclusive of capital gains and losses, from the amount recorded in 1990 as economic conditions weakened, especially in such key countries for U.S. investments as Canada and the United Kingdom. However, earnings by foreigners on their direct investments in the United States virtually collapsed. For 1991, earnings by foreign direct investors amounted to a net loss of $2 billion, excluding capital gains and losses; this loss represented a fall of approximately $6 billion from the 1990 level and a drop of more than $10 billion from 1988 and 1989 levels. While foreign petroleum and manufacturing affiliates operating in the United States experienced cyclical declines in income, other foreign affiliates, in such industries as real estate, insurance, banking, and trade, experienced heavy losses that totaled about $5 billion for the year.

Net income payments to foreigners on portfolio investments (private plus government) changed little between 1990 and 1991 despite a large decrease in interest rates. Portfolio income receipts from foreigners amounted to $64 billion in 1991, $12 billion less than in 1990. Portfolio income payments to foreigners also declined in 1991, about the same amount that receipts declined. While a decrease in interest rates tends to reduce both portfolio income receipts and payments, for the United States the decline in interest rates reduces income payments more than income receipts because the United States has a net liability position in recorded portfolio capital. Had the U.S. net portfolio position been unchanged in 1991 from the level recorded at the end of 1990, the decline in interest rates during the year would have reduced net income payments roughly S4 billion. But in 1991 there was a significant deterioration in the net portfolio position. Because most of this deterioration occurred in the second half of the year, the effect of this change on income payments for the year was relatively small. However, the negative effect of an increase in net liabilities about offset the positive effect of the decline in interest rates. and net portfolio income payments in 1991 were about the same as in 1990.

Unilateral Transfers

Transactions relating to the Persian Gulf War had a huge effect on unilateral transfers (table 8). The largest of the war-related transactions was the cash contribution made by foreign governments to the U.S. government to offset costs of the war. These cash grants were recorded as positive unilateral transfers in the fourth quarter of 1990 and in all four quarters of 1991, with the largest contribution occurring in the first quarter. The offset in the balance-of-payments accounts to cash grants received was a reduction in net foreign assets in the United States. The specific component reduced depended on whether the cash payments were financed by reduced holdings of official assets in the United States, by borrowing or drawdowns of official investments in the Euromarkets, or both.

The United States has made several large grants to foreign governments for debt forgiveness. In the fourth quarter of 1990, the United States granted Egypt $7 billion in debt forgiveness, essentially making repayment on Egypt's behalf of principal ($5 billion) and of interest ($2 billion) owed to the U.S. government; an additional $1 billion was provided in the first quarter of 199 1. Grants by the U.S. government to forgive outstanding debts also were provided during the year to Poland and to various developing countries, primarily in Latin America.

Other transfers reflect grants by the U.S. government for development and related assistance, for the financing of military purchases, and for private remittances and transfers. Grants financing military purchases dropped from $6.1 billion in 1990 to $3.7 billion in 1991; these grants had been boosted in 1990 when the United States assisted Israel, Egypt, and Turkey during military operations in the Persian Gulf. Private remittances to support the emigration of Soviet and Ethiopian Jews to Israel remained strong.



The sharp reduction in the U.S. current account deficit in 1991 was mirrored by, changes in recorded capital inflows and the statistical discrepancy (table 9).


The statistical discrepancy in the international accounts, which had jumped to $64 billion in 1990, declined to negative $3 billion in 1991. While there are certainly errors and omissions in the recording of current account transactions, no obvious reasons were apparent as to why the statistical discrepancy should have increased so much in 1990: the jump was most likely the result of errors and omissions in the reporting of capital flows. Unfortunately, these doubts about the accuracy of the capital flow data in 1990 make it impossible to draw any useful conclusions from comparing recorded capital flows in 1990 with those in 1991.

Net inflows of official capital during 1991 were partially offset by net outflows of private capital. Net foreign official inflows amounted to $21 billion despite net intervention sales of dollars in foreign exchange markets by the G-10 countries and despite the drawdown of the reserves held in the United States by certain countries to finance their transfers to the United States to cover the cost of Operation Desert Storm. Some countries financed part of their contributions to cover the cost of Operation Desert Storm by borrowing and liquidating investments in the Euromarkets rather than by drawing on their reserve holdings in the United States. Countries that were not members of the G-10 or OPEC recorded the largest increases in official reserve holdings in the United States.

Net private capital outflows were $18 billion in 1991. Most of the outflows were from banks and probably in large part reflected three factors. As mentioned earlier, certain governments increased the net demand for funds in the Euromarkets by financing their contributions to Desert Storm there. Secondly, a shift in the pattern of funding by some U.S. agencies and branches of foreign banks occurred after the Federal Reserve eliminated certain reserve requirements in December 1990. These agencies and branches increased their issuance of large time deposits in the United States and reduced their reliance on borrowing from abroad. And finally, weak growth of bank credit in the United States in 1991 also reduced the need to borrow from abroad.

Securities transactions in 1991 reflected the continued internationalization of financial markets; although the net inflow was modest, private foreigners added substantially to their holdings of U.S. stocks and bonds, while U.S. residents bought net foreign stocks and bonds on a large scale. Reflecting interest rate developments that encouraged shifting from short- to long-term financing, issuance of foreign bonds in the United States and issuance of Eurobonds by U.S. corporations were both strong. In addition, investment funds located in the Caribbean were very active in the market for U.S. Treasury securities.

Capital outflows associated. with U.S. direct investment abroad remained strong, at $30 billion. The European Community received almost half of the outflow in 1991 as U.S. investors positioned themselves to take advantage of EC 1992. In addition, U.S. investors participated in the privatization of previously state-owned enterprises. One of the largest privatizations involved investment in Telefonos de Venezuela by a GTE-led consortium. In contrast, foreign direct investment in the United States remained far below recent peaks, totaling $22 billion in 1991 compared with $37 billion in 1990 and $71 billion in 1989. Foreign takeovers of U.S. businesses declined, and reinvested earnings were depressed by the recession. Direct investment inflows from Japan fell to only $4 billion in 1991 from $17 billion in 1990.


Over the year ahead, U.S. imports of goods and services should grow more rapidly than last year as the domestic economy recovers from recession. At the same time, exports should continue to expand and may grow at a somewhat faster rate later in the year in response to a gradual strengthening of economic growth in several key markets, especially if increases in investment expenditures in developing countries continue at last year's rate. However, the

scope for further progress in narrowing the U.S. external deficit will depend on the ability of the U.S. economy to improve its productivity and price performance relative to trends in foreign countries.
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Author:Morisse, Kathryn
Publication:Federal Reserve Bulletin
Date:May 1, 1992
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