U.S. international transactions, second quarter 1984 Essay

THE U.S. current-account deficit increased to a record $24.4
billion in the second quarter from $19.7 billion (revised) in the first,
as net service receipts fell to their lowest quarterly level in 9 years.
Services receipts decreased $2.6 billion; a sharp fall in direct
investment income receipts, largely due to capital losses, was only
partly offset by higher interest receipts on U.S. portfolio investment.
Service payments increased $2.3 billion; interest payments on foreign
portfolio investment in the United States increased strongly, and
payments for travel abroad were at a record level.



In contrast to large increases in recent quarters, the merchandise
trade deficit decreased slightly to $25.7 billion. The faster increase
in exports than in imports is expected to be temporary.

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In the private capital accounts, unusually large gross inflows
reflected a number of factors. There was a strong demand, largely by
banks, for foreign source funds to meet domestic credit demands related
to rapid U.S. expansion and Treasury financing. In addition, a marked
rise in U.S. interest rates relative to those abroad and an appreciating
dollar created strong incentives for foreigners to place funds in
dollar-denominated assets in the United States. These capital inflows
were augmented by substantial inflows to finance mergers or takeovers of
several major U.S. corporations.



Gross outflows also were large, as international credit demands
shifted to U.S. banks to dund foreign banks’ participation in large
U.S. mergers, to fund their own foreign offices, to participate in loans
to Mexico arranged by the International Monetary Fund (IMF), and to fund
midyear positioning by foreign banks. On balance, bank-reported flows
shifted to small net outflows during the quarter, in contrast to strong
net inflows in the previous four quarters. The merger financing was
evident throughout the banking, nonbanking, and direct investment
accounts.


The statistical discrepancy (errors and omissions in reported
transactions) was an inflow of $13.3 billion. U.S. nonbanking
concerns’ claims on, and liabilities to, unaffiliated foreigners
are not yet available for the second quarter. When available, they will
include corporate borrowing to finance merger activity and should reduce
the unreported inflows reflected in the statistical discrepancy.



The statistical discrepancy in the first quarter was revised
downward from an inflow of $13.5 billion to $5.9 billion, primarily due
to newly reported data on U.S. nonbanking concerns’ claims on, and
liabilities to, unaffiliated foreigners. Claims decreased (inflow) $1.7
billion, and liabilities increased (inflow) a record $4.4 billion to
finance several large mergers.



The U.S. dollar continued to appreciate in the second quarter. The
appreciation was 4 percent on a trade-weighted, quarterly average basis
against the currencies of 22 OECD countries and 1 percent against the
currencies of 10 industrial countries. Record levels were reached
against the Canadian dollar, Japanese yen, British pound, and several
European currencies. Rapidly rising U.S. short-term interest rates,
which reflected strong expansion, contributed to the appreciation. U.S.
rates were higher than a weighted average of foreign rates by the
largest amount since early 1982. In addition, indications of continued
low U.S. inflation, together with strikes and weak expansions abroad,
encourage large purchases of dollar-denominated assets. Temporary
weakness in mid-May partly reflected rumors about the vulnerability of
some large U.S. banks to international debt problems and unsettled
market conditions.



The dollar appreciated 3 percent against the Canadian dollar,
largely due to the rise in U.S. interest rates and uncertainties about
upcoming Canadian elections. Increases in Canadian interest rates in
line with U.S. rates failed to stop the steady decline of the Canadian
dollar, and Canadian monetary authorities borrowed from U.S. and other
foreign banks and in the Eurobound market to prevent further declines in
Canada’s international reserves. Additional demands for U.S.
dollars late in the quarter were to make semiannual bond payments.



The dollar appreciated 3 percent against the British pound. A long
coal strike that cut industrial production and worsened the British
trade balance, as well as weakness in petroleum prices, contributed to
the pound’s steady decline. Also, large interest rate
differentials in favor of dollar-denominated assets contributed to the
pound’s weakness.


The dollar appreciated about 1 percent on a quarterly average basis
against each of the European Monetary System currencies. However,
increases during the quarter were 5 to 6 percent, as the dollar rose
steadily following a period of temporary weakness late in the first
quarter. The dollar reached record levels against the French franc and
Italian lira, and the highest levels in 10 years against the German
mark, Dutch guilder, and Belgian franc. A metalworkers’ strike in
Germany weakened industrial production throughout Europe and tended to
reduce European exports. The German central bank intervened several
times to support the mark during the quarter.



Although the dollar was unchanged against the yen on a quarterly
average basis, it appreciated gradually over the quarter. Japan
experienced record capital outflows as rising U.S. interest rates led
Japanese investors to buy U.S. Treasury bonds, and declining stock
prices in Japan led some foreign investors to sell Japanese stocks.



The dollar appreciated 13 percent against the Mexican peso, amid
reports of Mexican capital flight and speculation that the rate of daily
devaluations would be increased or that a new major devaluation would be
announced. These pressures caused the peso to drop sharply in early
May, with some recovery later in the quarter. Merchandise trade



In contrast to large increases in the U.S. merchandise trade
deficit in the previous four quarters, the deficit decreased in the
second quarter to $25.7 billion from $25.9 billion in the first. Exports
were slightly higher; an increase in nonagricultural exports was partly
offset by a decrease in agricultural exports. Imports also increased
slightly; an increase in petroleum imports was partly offset by a
decrease in nonpetroleum imports. The pause in the trade deficit growth
is unlikely to be sustained because the fundamental factors contributing
to it–the high exchange value of the dollar, the rapid economic
expansion in the United States, and the weak expansions abroad–remain
unchanged.



Imports increased $0.5 billion, or 1 percent, to $80.3 billion, the
smallest increase since the onset of the domestic expansion. Petroleum
imports increased $1.1 billion or 8 percent, to $14.9 billion; imports
from OPEC members were up $1.3 billion, or 24 percent, and more than
accounted for the increase. Increased petroleum imports went into both
increased consumption and a buildup in domestic stocks. Most of the
buildup occured early in the quarter when attacks on a number of oil
tankers in the Persian Gulf raised concern that future petroleum
supplies might be threatened. Despite the troubles in the Middle East,
spot petroleum prices weakened later in the quarter, as increased
production more than made up for limited disruptions in supply. The
average price per barrel rose to $28.26 from $28.05 in the first
quarter, and the average number of barrels imported per day increased to
5.76 million from 5.40 million.



Nonpetroleum imports decreased $0.5 billion, or 1 percent, to $65.4
billion; volume decreased 2 percent. Some moderation in the economic
expansion in the second quarter, particularly a slowdown in inventory
accumulation, probably contributed to the temporary pause in import
growth. Most major commodity categories, except automotive products,
decreased $0.4 billion, to $14.2 billion; textile products fell $0.3
billion from the record level in the first quarter, and gem diamonds
fell $0.2 billion. Capital goods decreased $0.3 billion, to $14$1
billion, following a first-quarter surge in business machines and
computers. Industrial supplies and materials were unchanged at $16.4
billion. Iron and steel decreased $0.2 billion; imports from Latin
American, which had increased strongly over the past year, accounted for
most of the decrease. Brazilian restrictions on steel exports to the
United States–established in the first quarter in response to U.S.
steel industry anti-dumping complaints–reduced shipments by over
one-third. Foods, feeds, and beverages decreased $0.2 billion, to $5.1
billion. Declines were widespread, except for coffee, which increased
$0.2 billion.



Automotive products increased $0.5 billion, to $13.8 billion, the
fifth consecutive record quarterly level. Most of the increase was due
to imports from Japan; Japanese auto imports increased substantially at
the beginning of the new year under the voluntary export restriction program, and imports of trucks and parts were also strong. Increased
truck imports from Canada were partly offset by lower imports of parts.



Exports increased $0.7 billion, or 1 percent, to $54.6 billion.
Agricultural exports decreased $1.0 billion, or 10 percent, to $9.3
billion; volume decreased 11 percent. Sunflower and other oil seeds and
oils decreased following the sharp rise in the first quarter; soybeans
and corn were also down. Exports to Western Europe fell sharply–37
percent, or $1.2 billion.



Nonagricultural exports increased $1.7 billion, or 4 percent, to
$45.3 billion, nearly all in volume. The increase was limited to a few
products however; there were no signs of a generalized pickup.
Industrial supplies and materials were up $0.5 billion to $13.8 billion,
mostly due to fuel exports to Canada, Japan, newly industrialized
countries in Asia, and United Kingdom. Capital equipment increased $0.3
billion, to $17.8 billion; the increase was more than accounted for by
computers, up 11 percent, to $3.5 billion, for the quarter and up 37
percent since the first quarter of 1983. Automotive exports decreased
$0.4 billion, to $5.3 billion, due to a decrease in shipments of
complete autos, trucks, and parts to Canada. (Much of the balance of
the increase is in exports for which commodity detail is not available.)
Service transactions



Net service receipts fell sharply, down $4.9 billion to $3.4
billion, the lowest quarterly level since 1975. Receipts decreased $2.6
billion to $34.1 billion; payments increased $2.3 billion to $30.7
billion. The dollar’s appreciation and higher U.S. interest rates
contributed to the fall in net service receipts. The dollar’s
appreciation resulted in large capital losses on U.S. direct investment
abroad and contributed to a sharp increase in net payments for travel.
Higher U.S. interest rates contributed to a more rapid rise in interest
payments on portfolio investment than in interest receipts.



Receipts of income on U.S. direct investment abroad decreased $3.9
billion to $4.5 billion. The dollar’s appreciation resulted in
large capital losses ($2.2 billion) related to currency translation,
especially in Canada and European countries, and may have also reduced
operating earnings. Also, a large capital loss was related to the
writeoff of a U.S. company’s holdings in the Caribbean area.
Strikes, weak expansions in some European countries, and soft petroleum
markets also reduced operating earnings, which fell $1.0 billion before
capital losses. Interest payments increased $0.1 billion to $1.0
billion, as borrowing through Netherlands Antilles finance affiliates
remained large. Payments of income in foreign direct investment in the
United States were virtually unchanged at $2.5 billion. A moderate
increase in operating earnings associated with the U.S. expansion was
offset by a shift to small capital losses from first-quarter gains.
Interest payments increased $0.1 billion to $0.7 billion, due to a large
loan to a U.S. affiliate for use in a buy-out of minority stockholders.



REceipts of income on other private investment increased $1.0
billion to $14.8 billion, due to rising interest rates and a sharp
increase in U.S. bank claims in the second quarter. In May, Federal
bank supervisory authorities jointly recommended changes in bank
accounting practices for nonaccruing loans, which resulted in a small
reduction in earnings reported by U.S. banks. Under the regulations,
banks must classify loans as nonaccruing whenever interest payments are
90 days or more overdue. The new regulations are mandatory for
third-quarter financial reports, but many banks effected the change
immediately and reclassified a number of loans to Argentina and
Venezuela. Interest arrears on the reclassified loans are now reflected
in the income estimates. Payments of income on other private investment
continued to increase strongly, up $1.3 billion, to $9.7 billion,
reflecting rising interest rates, together with an increase in U.S. bank
liabilities. During the past year, large net borrowing by banks caused
payments to increase $o.8 billion, or 40 percent, against an increase in
receipts of $2.5 billion, or 20 percent.



U.S. Government income receipts increased $0.3 billion, to $1.j
billion, in the second quarter; Government income payments increased
$0.1 billion, to $4.8 billion.



Net payments for travel increased sharply; payments rose $0.6
billion to $4.1 billion, and receipts declined $0.1 billion to $2.8
billion. Dollar appreciation encouraged U.S. residents to travel abroad
and slowed the increase in foreign visitors to the United States. The
increase in U.S. travel abroad on foreign-flag carriers caused passenger
fare payments to increase 25 percent to $1.8 billion; receipts increased
slightly. Other transportation receipts and payments were unchanged, at
$3.3 billion and $3.5 billion, respectively.



Transfer under U.S. military sales contracts increased $0.1 billion
to $2.6 billion. Many major weapons delivery programs were recently
completed, and deliveries under new programs, although scheduled, have
not yet begun. Direct defense expenditures abroad were unchanged at
$2.9 billion.



Net unilateral transfers were unchanged at $2.1 billion. U.S.
assets abroad



U.S. official reserve assets increased $0.6 billion. Foreign
currency holdings decreased slightly, reflecting a single U.S.
intervention sale of German marks to support the dollar in disorderly
markets. the U.S. reserve position with the IMF and holdings of special
drawing rights each increased $0.3 billion.



U.S. claims on foreigners reported by U.S. banks increased $24.i
billion, compared with a $2.0 billion decrease in the first quarter.
Much of the increase was related to the financing of mergers in the
United States. In some instances, large credits to consortiums of
foreign banks were arranged to finance merger activity, because
loan-to-capital ratios of many U.S. banks limited the amount of funds
that each could advance to a single borrower. Much of the
merger-related corporate borrowing began to be repaid by the end of the
second quarter, as borrowers substituted funds borrowed in the U.S.
commercial paper market and the Eurobond market for relatively high cost
bank funds. U.S. banks also advanced funds to their own foreign offices
in May and June; to foreign banks for midyear positioning; and– in a
limited amount–to Mexico in May, in conjunction with an IMFz-arranged
debt restructuring program. Claims on several developing countries in
Southeast Asia increased strongly, probably related to brisk economic
activity in those countries.



Net U.S. purchases of foreign securities were $0.8 billion in the
second quarter, compared with net sales of $0.6 billion in the first.
The shift was more than accounted for by $1.7 billion in long-term
floating rate issues by the Swedish Government to refinance its bank
borrowings. The attractiveness of the issues was enhanced by including
annual options permitting investors to resell the issue. Canadian new
issues were $0.3 billion; others included a $0.1 billion World Bank
floating rate issue and small issues from Japan and Israel. In
transactions in outstanding bonds, redemptions increased to $0.7
billion, mostly attributable to Canada and a European regional
organization. In other transactions in outstanding bonds, net sales
increased to $0.7 billion as bond prices fell sharply, reflecting the
sharp rise in interest rates. In stocks, $0.2 billion in new issues,
primarily from the United Kingdom and Canada, was offset by $0.2 billion
in net sales of outstanding stocks, mostly from Japan. Foreign stock
markets, except in France, were down sharply during the quarter, and
rising U.S. interest rates attracted funds away from equities.



U.S. direct investment abroad shifted $5.4 billion, to inflows of
$1.9 billion. REinvested earnings decreased $3.4 billion to $3.0
billion, largely reflecting capital (currency translation) losses from
the dollar’s appreciation. Intercompany debt inflows increased
$2.9 billion to $5.2 billion. there were large borrowings through
Netherlands Antilles finance affiliates, with over one-half of the $3.5
billion total associated with a single large merger-related transaction.
Equity capital outflows increased $0.4 billion to $1.0 billion. U.S.
parents of Netherlands Antilles finance affiliates increased their
equity in these affiliates in conjunction with the just mentioned
borrowings. A U.S. company’s sale of most of its interest in
Australian mining properties to an Australian company resulted in a
reduction in equity in Australia (inflow). (Related transactions appear
in the capital account for foreign direct investment in the United
States.) Foreign assets in the United States



Foreign official assets in the United States decresed $0.6 billion,
following a $2.8 billion decrease in the first quarter. Assets of
industrial countries increased $0.8 billion; an increase in holdings of
smaller European countries was partly offset by a decrease in those of
other industrial countries, which sold dollars when their currencies
came under strong pressure in exchange markets. Assets of OPEC members
decreased $2.2 billion, slightly less than in the first quarter. Middle
Eastern OPEC members reduced assets by more than double the
first-quarter rate; there were large inflows from other OPEC members.
Assets of other countries incresed $0.9 billion; the increase was more
than accounted for by inflows from several Southeast Asian developing
countries.



U.S. liabilities to private foreigners and international financial
institutions reported by banks (including U.S. Treasury securities)
increased $28.2 billion. Foreign purchases of U.S. Treasury securities
were a record $6.5 billion, up from $1.4 billion. Rising U.S. interest
rates, dollar appreciation, and declining bond and equity prices abroad
all encouraged inflows. In addition, investors’ preferences
shifted towards U.S. Treasury issues, as shown in chart 7 by the
limited rise in 90-day U.S. TReasury bill rates compared with the sharp
increase in rates banks had to offer in unsettled financial markets to
attract funds through 90-day certificates of deposits (CD’s).



Bank liabilities other than U.S. Treasury securities increased
$21.7 billion. As in the first quarter, rising U.S. interest rates
relative to rates abroad and dollar appreciation made placement of funds
in the United States highly attractive. The demand for these funds was
related to the U.S. expansion and Treasury financing needs. Some of
these funds were U.S. residents’ deposits previously placed at
Caribbean offices. These deposits offshore have increased strongly in
recent quarters; a substantial portion of them represents proceeds of of
commercial paper borrowing by U.S. bank holding companies deposited
abroad and then returned to the U.S. parent bank. Another factor
contributing to the rise in liabilities was the previously mentioned
large-scale merger financing.



Data for U.S. liabilities to unaffiliated foreigners reported by
nonbanking concerns are not available for the second quarter, but they
are expected to show large net inflows reflecting corporate borrowing to
finance mergers, as in the first quarter.



Inflows for foreign direct investment in the United States
increased sharply, up $5.3 billion to $7.7 billion, the second largest
quarterly total on record. Intercompany account inflows increased $3.4
billion to $4.2 billion, largely reflecting a substantial loan to a U.S.
subsidiary to purchase a U.S. company. Excluding this transaction,
intercompany accounts shifted to small net outflows, mostly because of
lending by a U.S. financial affiliate to its parent of proceeds obtained
by borrowing in the U.S. commercial paper market. Equity capital
inflows increased $1.7 billion to $2.4 billion, largely because of
foreign company established a new U.S. holding company to acquire the
U.S. and foreign properties of a U.S. company. REinvested earnings were
unchanged at $1.0 billion.



Net foreign purchases of U.S. securities other than U.S. Treasury
securities decreased to $0.6 billion from $1.5 billion, well under the
quarterly rate that prevailed in the previous year and a half.
Contributing factors were declining equity prices and investor
preferences for Treasury securities and other short-term investments.

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