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U.S. international transactions in 1992.

After declining in each of the previous four years, the U.S. current account deficit widened substantially in 1992. A larger merchandise trade deficit and the end of one-time cash contributions by foreign governments associated with the Persian Gulf War accounted for most of the change. Excluding the change in foreign cash transfers, the current account deficit increased somewhat less than the trade deficit, owing to a strengthening of net service receipts. Nevertheless, the widening of the current account deficit was dramatic (chart 1).

A $23 billion increase in merchandise exports was more than offset by a $46 billion increase in merchandise imports, so that the merchandise trade deficit widened for the first time since 1987 (table 1). The end of Gulf War-related cash grants by foreign governments eliminated a $43 billion offset to U.S. unilateral transfers abroad; overall, net transfers swung from an inflow of $8 billion in 1991 to an outflow of $31 billion in 1992. Net service receipts expanded $10 billion in 1992, mainly because of reduced payments by the U.S. military for services purchased abroad and insurance payments recovered from foreign reinsurers for losses caused by hurricanes in the United States and its territories. Net investment income receipts declined $6 billion, mostly as a result of larger direct investment payments to foreigners due to the U.S. economic recovery.

The substantial current account deficit was more than matched by recorded net capital inflows, both official and private. Thus, the statistical discrepancy in the US. international transactions accounts was negative.


Cyclical movements in economic activity at home and abroad, movements in U.S. international price competitiveness, and swings in the rates of return on real and financial assets at home and abroad significantly influenced U.S. international transactions in 1992. The main economic factor in the widening of the external deficit (excluding the transitory effects of payments for the Persian Gulf War) was that economic growth in the United States exceeded that of its major industrial country trading partners.

Relative Growth Rates

From 1989 through 1991, economic growth abroad on average exceeded growth in the United States (chart 2). U.S. households and businesses struggled to redress structural imbalances generated over the 1980s. Pressures to restructure balance sheets, reinforced by more cautious lending practices of U.S. financial institutions, slowed U.S. economic growth, and the relative slowdown in U.S. growth contributed to the narrowing of the external deficit. During 1992, balance sheet adjustment became less of a restraint on the economy, and U.S. domestic demand rose 3.7 percent. Much of the pickup was in the consumer sector: Private consumption surged at a 5 percent annual rate during the first quarter, flattened during the second quarter, and rose more than 4 percent at an annual rate during the second half of the year. Real expenditures on residential structures also picked up. In addition, real expenditures on business fixed investment rose sharply: Significant price reductions and the push to acquire state-of-the-art technology spurred real outlays for office and computing equipment, and demand for other machinery began to grow as well, as the pace of economic expansion lifted expectations of future sales, increased profits, and improved cash flow. As a consequence of the pickup in domestic expenditures, real merchandise imports during 1992 rose at double-digit rates.

At the same time, a slowdown in economic growth in major US. export markets restrained exports (table 2). Despite reductions in interest rates and other measures taken by some foreign governments to boost spending and stimulate activity, average year-over-year growth of the economies of the United States' industrial country trading partners was a disappointing 1 percent. Among the major foreign industrial countries, only Canada, where the earlier recession had been quite severe, showed signs of a moderate pickup in growth, boosted partly by the U.S. recovery. Growth in Japan and Germany, previously fairly strong, weakened significantly. Most other European countries also recorded only weak growth. Although departure from the exchange-rate mechanism (ERM) of the European Monetary System in September allowed short-term interest rates in Italy and the United Kingdom to fall, interest rates in Europe on balance remained fairly high during the year as German authorities sought to blunt inflationary pressures. Other factors that appear to have contributed to the generally disappointing demand in industrial countries were persistent low levels of business confidence, continued adjustments of spending to reduce high levels of debt on household and firm balance sheets, a reduced pace of lending in some countries, and worries about problems in the financial sector.

Among U.S. trading partners in developing countries, economic performance in 1992 appears to have been mixed; on average, however, their growth is estimated to have been stronger than in major foreign industrial countries. Economic activity in Asia expanded at a particularly strong 7 percent annual rate, led by growth in China of nearly 13 percent. However, output growth fell to relatively low rates on average in countries in the Western Hemisphere; growth declined sharply in Brazil as a result of political problems and turned down slightly in Mexico as the authorities sought to limit the current account deficit and further reduce inflation.

U.S. Price Competitiveness

The change in price competitiveness of U.S. export-and import-competing industries depends on the relative movements of inflation rates here and abroad and on changes in the foreign exchange value of the dollar. Because of relatively tighter monetary policies abroad, 1992 inflation rates in the foreign Group of Ten (G-10) countries were, on average, lower than U.S. rates (chart 3). The continuing efforts of U.S. businesses to contain production costs and boost efficiency were reflected in the U.S. consumer price index rising by just 3.1 percent for the year.

However, foreign price inflation fell even further in 1992. All major industrial countries operated below their potential rates of output (some considerably so), and inflation rates were generally moderate. Average CPI inflation in the foreign G-10 countries was only 2 1/2 percent, almost 1 1/2 percentage points below the 1991 average rate. Pass-through effects from depreciation of exchange rates in the United Kingdom, Italy, and Canada were moderate. Wage inflation also decelerated in most foreign industrial countries. The main exception to the generally deflationary pattern abroad was western Germany, where inflation remained at about 3 3/4 percent and concerns about inflationary pressures contributed to the reluctance of monetary authorities to ease more rapidly.

In nominal terms, the multilateral trade-weighted foreign exchange value of the US. dollar, measured in terms of the other G-10 currencies, rose nearly 6 percent from December 1991 to December 1992. The dollar appreciated over the first three months of 1992 amid expectations of strengthening economic recovery in the United States. Over the summer, however, the dollar declined to a point below the previous year's low, as growth of the U.S. economy was perceived to be more sluggish than expected and the Federal Reserve eased short-term interest rates further. The dollar reversed direction again in the fall, strengthening sharply in the wake of turmoil in the European Monetary System and, more important, on evidence of increased momentum of the U.S. economic expansion and sluggish conditions in foreign industrial economies.

The net rise in the weighted average dollar over 1992 primarily reflected sharp declines in several European currencies and in the Canadian dollar. Denmark's rejection of the Maastricht Treaty in early June called into question the future of European monetary and political union and led to pressures on the ERM. In September, the pressures intensified enough to force Italy and the United Kingdom to withdraw from the ERM, and their currencies depreciated sharply. For the year as a whole, the Italian lira and the British pound declined 20 percent and 18 percent respectively versus the U.S. dollar. Several other European currencies, including those of Spain, Portugal, and several Scandinavian countries, also depreciated sharply against the dollar in the fall. The parity of the French franc with the German mark was maintained within the ERM, but at the cost of relatively high French short-term interest rates in the face of a sluggish French economy and rising unemployment.

The dollar fell more than 7 percent on balance against the German mark from December 1991 to August 1992, as German monetary policy, responding to relatively high German money growth and inflation, remained tight longer than market participants had expected. That rise of the mark was more than reversed over fall and winter, however, as it became clear that German economic activity had turned significantly downward and as German monetary policy was eased somewhat.

The dollar depreciated about 4 1/2 percent on balance against the yen during 1992, despite a noticeable decline in Japanese gross domestic product during the second and third quarters and a significant reduction in Japanese interest rates over the year. The net strengthening of the yen probably was due, at least in part, to market reactions to a substantial widening of Japan's external surplus.

A broad measure of the price competitiveness of U.S. goods and services is the "real," or "price-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 (chart 4). U.S. prices have fallen relative to average prices in dollars in both foreign G-10 and developing countries since the mid-1980s. However, because of developments in foreign exchange markets during 1992, primarily during the fourth quarter, the real value of the dollar against the foreign G-10 currencies ended the year higher than it began.

Another aggregated measure of U.S. export price competitiveness, which gives a somewhat different picture of recent developments, is the ratio of average consumer prices in dollars in G-10 and developing countries to U.S. export prices (chart 5). From a long-term perspective, fluctuations in nominal exchange rates during 1992 did not significantly affect the improvement in the prices of U.S. goods relative to the prices of foreign goods and services as they had in earlier periods (that is, 1981-85). Some of the improvement is due to the decline in prices of traded goods relative to prices of nontraded goods during recent years.


The merchandise trade deficit widened to $96 billion in 1992, up from $73 billion in 1991 (table 3). Imports grew almost twice as fast as exports as the economic recovery in the United States gained momentum but economic growth in markets for U.S. exports remained sluggish. Early in the year, the deficit narrowed somewhat when a drop in oil prices lowered the value of imports. The deficit widened sharply in the second quarter, however, when imports surged and exports remained about unchanged. During the remainder of 1992, both imports and exports continued to grow strongly, and the deficit increased further.


Merchandise exports grew 6 1/2 percent in real terms over the four quarters of 1992. The increase in nominal terms was only slightly less, as prices of exports changed very little. Sixty percent of total U.S. exports went to industrial countries: 26 percent to Western European countries, 21 percent to Canada, 11 percent to Japan, and 2 percent to Australia and New Zealand. These countries accounted for only 15 percent of the growth in U.S. exports, however. Most of the growth in exports was due to increased shipments to developing countries in Latin America and Asia.

About three-fourths of the increase in exports was in capital goods and automotive products, and more than one-third of the rise was in consumer goods and agricultural products. Aircraft accounted for about 15 percent of the increase in exported capital goods, but most of the rise occurred in the first part of the year; deliveries in the second half of the year were 12 percent less than those in the first half. The value of machinery exports grew 7 percent; these exports expanded steadily throughout the year, with more than 80 percent of the increase going to developing countries (half the increase to Asia and half to Latin America). The rise was strongest in high-tech equipment, especially semiconductors, telecommunications equipment, and computers (including accessories and parts). For automotive products, most of the rise in exported vehicles went to Taiwan, Saudi Arabia, Venezuela, and Hong Kong, and most of the increase in exported parts went to Mexico and Canada. Two-thirds of the increase in exported consumer goods went to developing countries (largely to countries in Latin America, particularly to Mexico).

The value of agricultural exports increased approximately 10 percent in 1992, as deliveries of wheat, soybeans, meat, and dairy products increased sharply. U.S. government programs (that is, loan guarantees and donations) pushed up shipments of wheat and dairy products to countries in Eastern Europe and the former Soviet Union. Wheat shipments to these two areas were especially strong during the first half of 1992, whereas dairy shipments to these areas were largest during the second half of the year. Exports of soybeans were particularly strong in the third quarter because of a bunching of shipments to Japan, Mexico, and China. Increased exports of meat went mostly to Japan and Mexico.


During 1992, merchandise imports grew 11 percent in real terms. As with exports, the increase was about the same in nominal terms, as prices of imports on average changed little during the year. Although all major categories of imports rose, nearly two-thirds of the increase was in capital goods and consumer goods. Somewhat smaller increases were recorded for automotive products and industrial supplies. The value of imported oil rose only slightly.

The value of imported capital goods, increasing steadily throughout the year, rose 11 percent. As with exports, the strongest increases were in high-tech equipment. Computers (including accessories and parts) accounted for more than 40 percent of the increase in the value of imported capital goods; the increase came largely from Japan and developing countries in Asia. U.S. domestic sales of computers were very strong beginning in the summer, fueled by price wars and a push by US. businesses to upgrade personal computers and workstations to take advantage of improvements in software. Most of the sales were at the lower end of the spectrum of computer products--items that are often imported. Excluding computers, imports of capital goods rose 8 percent, led by semiconductors, telecommunications equipment, business equipment, and aircraft (including engines and parts). Imported aircraft came mainly from France, the Netherlands, and the United Kingdom.

Imported consumer goods rose 14 percent. Most of the increase occurred during the second half of the year as the U.S. economy began to pick up more strongly: Imports surged during the third quarter and eased slightly during the fourth. Thirty-three percent of the increase in consumer goods imports came from China, and another 45 percent came from other developing countries in Asia and Latin America; Western Europe and Canada together contributed another 18 percent of the increase, and Japan contributed 4 percent.

Imports of automotive products rose 7 percent. About 50 percent of the increase came from Canada (two-thirds vehicles, one-third parts), and another 30 percent came from Mexico (almost entirely parts). The remaining increase came mainly from Germany (almost entirely vehicles). The value of automotive imports from Japan was about the same in 1992 as in 1991.

Imported industrial supplies (other than oil) were 9 percent higher in 1992 than in 1991. Categories recording increases outnumbered those showing declines. Some of the larger increases were in lumber, steel, chemicals, natural gas, and miscellaneous supplies; the larger declines were recorded in newsprint and metals.

In 1992, 60 percent of U.S. non-oil imports came from industrial countries (about 20 percent each from Canada, Western Europe, and Japan). Non-oil imports from these countries grew 8 percent and accounted for more than 45 percent of the increase in imports in 1992. Imports from developing countries in Asia and Latin America expanded 15 percent, with the largest increases coming from China and Mexico.

The value of oil imports increased only slightly, as a gain in oil consumption resulting from the rebound in economic activity was roughly offset by a decline in the price of imported oil. As a result of mild winter weather and strong OPEC production, oil prices began the year at relatively depressed levels--approximately $19.00 per barrel for spot West Texas intermediate (WTI) (chart 6). Spot prices of WTI rose from March through June when OPEC restrained output and oil market participants perceived a shift in Saudi Arabian pricing policy in light of European Community proposals for a carbon tax. The pickup in U.S. economic activity helped keep prices firm through October as the continued absence of Iraq left the oil market with little excess capacity. Mild weather in the fourth quarter, coupled with production increases by Saudi Arabia, Iran, and Kuwait, pushed prices down almost continuously through December, with spot WTI prices at the turn of the year just above $19.00 per barrel, essentially where they had been at the beginning of 1992. Near the end of January 1993, spot WTI prices rose to more than $20.00 per barrel as OPEC appeared ready to rein in production. Since then, spot WTI prices have fluctuated between $19 and $21 per barrel as market perceptions of the adequacy of OPEC production cuts have changed.

In three of the four quarters of 1992, the quantity of oil imports posted increases relative to 1991 rates. The increases resulted from growing consumption (triggered by increased U.S. economic activity) and declining domestic oil production. For the year as a whole, consumption increased 0.3 million barrels per day while production fell 0.2 million barrels per day. Since 1985, U.S. oil production has generally been falling, with a temporary increase in 1991 brought about by the large gain in oil prices during the Persian Gulf crisis. In 1992, US. oil production resumed the downward course typical of mature oil exploration areas (table 4).


Net receipts from service transactions increased $10 billion in 1992. Most of the change occurred as payments by the U.S. military for services provided by foreigners declined $3 billion and as $4 billion of insurance was recovered from foreign reinsurers for damage caused by Hurricanes Andrew and Iniki in late August and mid-September. However, areas that had provided a solid boost to net service receipts in earlier years, such as travel, passenger fares, and business, professional, and technical services, increased very little, on net (table 5).

The slowdown in industrial economies abroad restrained not only transportation service receipts but also receipts from foreigners for other services. After increasing in the first quarter of 1992, receipts from foreign travelers in the United States leveled off before picking up in the fourth quarter. The depreciation of the US. dollar during the middle of the year held down payments by U.S. travelers abroad as well.

Transfers under US. military sales contracts (exports) were about the same in 1992 as they were a year earlier; after being especially high in the fourth quarter of 1991 and the first quarter of 1992 because of a bunching of aircraft deliveries, military exports declined during the remainder of the year. Military expenditures abroad (imports) dropped $3 billion in 1992; key components such as expenditures by U.S. military personnel on foreign services and expenditures for petroleum declined rapidly, the decline reflecting the sizable reduction of U.S. forces abroad. The pace of decline for military imports was slowed by a continuing relatively strong level of expenditures on contractual services.

Losses recovered from foreign reinsurers for damage caused by Hurricanes Andrew and Iniki increased net insurance receipts in the third quarter of 1992. (The full amount of recoveries is recorded on an accrual basis when disasters occur, rather than when claims are presented to the insurance companies. Net insurance transactions are part of "other private services" in the current account). The amount of insurance recovered from foreign companies reduced recorded service payments, as total insurance payments are calculated as premiums paid less losses recovered.


In 1992, the U.S. current account recorded, besides the $41 billion decline in foreign cash grants to the United States to help finance the Persian Gulf War, a $6 billion decline in net investment income and a $2 billion rise in other net transfers.

Investment Income

Net investment income fell. Net income from both direct and portfolio investments contributed to the decline (table 6).

The recovery in direct investment payments by foreign-owned subsidiaries in the United States accounted for the moderate $4 billion decline in net direct investment income in 1992; the unprecedented net losses in 1991 were turned around to small net profits of $0.4 billion. The swing resulted primarily from a cyclical improvement in profits of subsidiaries in manufacturing and the end of losses reported by foreign-owned banks and insurance companies. However, the level of direct investment payments was far from the peak of $12 billion reached in 1988.

Direct investment receipts from U.S.-owned affiliates abroad rose slightly in 1992, to $50 billion. Increased profits in other industries offset the downturn in manufacturing and oil industries.

Net income on portfolio investments (private plus government) fell $3 billion, despite a large decrease in interest rates. Portfolio investment receipts from foreigners amounted to $60 billion, $16 billion less than in 1991. Portfolio income payments to foreigners also declined, but by a lesser amount--about $14 billion. A decrease in interest rates usually reduces both receipts and payments on portfolio investments; however, for the United States an interest rate decline reduces income payments more than receipts because the United States has a net recorded liability position in portfolio capital. Had the U.S. net portfolio position been unchanged in 1992 from the level recorded at the end of 1991, the decline in interest rates by itself would have reduced net income payments roughly $4 billion. But in 1992 the net portfolio position deteriorated significantly, and the deterioration more than accounted for the $3 billion decline in net portfolio income during the year.

Unilateral Transfers

The conclusion of transactions relating to the Persian Gulf War greatly affected net unilateral transfers, as foreign cash grants to the United States to help finance the war declined $41 billion. At the same time, U.S. government grants to foreign countries rose. A large part of the increase went to Israel, the result of both additional grants to finance military purchases and adjustments to the disbursement schedule; part of the grants that normally would have been disbursed in the fourth quarter of 1991 were postponed until the second quarter of 1992, and the full amount of grants for fiscal year 1994 were paid out in the fourth quarter of 1992. Another reason for the increase in net unilateral transfers was larger contributions to meet the US. share of expanded peacekeeping operations.


In 1992, the U.S. current account deficit was substantial, net capital inflows were even larger than the current account deficit, and the statistical discrepancy was significantly negative (table 7). In contrast, the U.S. current account deficit, net capital flows, and the statistical discrepancy in 1991 had been close to zero.

Substantial inflows were recorded for both official and private capital. Foreign official holdings in the United States increased $40 billion, more than double the increase in 1991. Inflows from both industrial and other countries were substantial.

The net inflow of private capital in 1992, $32 billion, is in contrast to 1991, when private capital had recorded a net outflow. Banks, particularly foreign-related banks, more than accounted for the net inflow. The inflow coincided in general with an expansion of U.S. assets at foreign-related banks other than those based in Japan. In 1991, in contrast, foreign-based banks, spurred by a change in reserve requirements, had rapidly expanded their large time deposits in the United States and relied less on inflows from abroad to finance asset growth. Moreover, in 1991 demand for funds in the Euro-markets had been strong because of borrowing by certain countries to fund contributions to the cost of Desert Storm.

Securities transactions, reflecting the continued growing internationalization of financial markets, also contributed to the net inflow of capital in 1992. Foreigners added substantially to their holdings of U.S. government and corporate bonds. In contrast, they made net sales of U.S. equities. U.S. net purchases of foreign stocks and bonds were very strong, accompanied by a record pace for foreign bond issues in the United States.

U.S. direct investment abroad was very strong in 1992, up from 1991. Outflows to Latin America and Asia grew, and outflows to Europe were substantial. Foreign direct investment in the United States, however, remained depressed, far below the peak of almost $70 billion in 1989. Merger and acquisition activity in the United States has generally fallen from the highs of the 1980s, and foreign investors in particular may have been discouraged by the disappointing returns on much recent foreign investment in the United States.


Over the year ahead, US. imports of goods and services should grow more rapidly than U.S. exports of goods and services as the U.S. domestic economy continues to grow faster than the economies of its major industrial trading partners. The degree to which the U.S. external deficits widen in 1993 will depend largely on the strength of the economic recovery in foreign industrial countries and on the effects of the recent appreciation of the weighted average value of the dollar on U.S. price competitiveness.
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Author:Helkie, William L.
Publication:Federal Reserve Bulletin
Date:May 1, 1993
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