U.S. international transactions, second quarter 1984 Essay

THE U.S.

current-account deficit increased to a record $24.4billion 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 directinvestment income receipts, largely due to capital losses, was onlypartly offset by higher interest receipts on U.S. portfolio investment.Service payments increased $2.

3 billion; interest payments on foreignportfolio investment in the United States increased strongly, andpayments for travel abroad were at a record level. In contrast to large increases in recent quarters, the merchandisetrade deficit decreased slightly to $25.7 billion. The faster increasein exports than in imports is expected to be temporary. In the private capital accounts, unusually large gross inflowsreflected a number of factors. There was a strong demand, largely bybanks, for foreign source funds to meet domestic credit demands relatedto rapid U.S.

expansion and Treasury financing. In addition, a markedrise in U.S. interest rates relative to those abroad and an appreciatingdollar created strong incentives for foreigners to place funds indollar-denominated assets in the United States. These capital inflowswere augmented by substantial inflows to finance mergers or takeovers ofseveral major U.S. corporations. Gross outflows also were large, as international credit demandsshifted to U.

S. banks to dund foreign banks’ participation in largeU.S. mergers, to fund their own foreign offices, to participate in loansto Mexico arranged by the International Monetary Fund (IMF), and to fundmidyear positioning by foreign banks.

On balance, bank-reported flowsshifted to small net outflows during the quarter, in contrast to strongnet inflows in the previous four quarters. The merger financing wasevident throughout the banking, nonbanking, and direct investmentaccounts. The statistical discrepancy (errors and omissions in reportedtransactions) was an inflow of $13.3 billion. U.

S. nonbankingconcerns’ claims on, and liabilities to, unaffiliated foreignersare not yet available for the second quarter. When available, they willinclude corporate borrowing to finance merger activity and should reducethe unreported inflows reflected in the statistical discrepancy. The statistical discrepancy in the first quarter was reviseddownward from an inflow of $13.5 billion to $5.9 billion, primarily dueto newly reported data on U.S. nonbanking concerns’ claims on, andliabilities to, unaffiliated foreigners.

Claims decreased (inflow) $1.7billion, and liabilities increased (inflow) a record $4.4 billion tofinance several large mergers. The U.S. dollar continued to appreciate in the second quarter. Theappreciation was 4 percent on a trade-weighted, quarterly average basisagainst the currencies of 22 OECD countries and 1 percent against thecurrencies of 10 industrial countries. Record levels were reachedagainst the Canadian dollar, Japanese yen, British pound, and severalEuropean 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 thelargest amount since early 1982. In addition, indications of continuedlow U.S.

inflation, together with strikes and weak expansions abroad,encourage large purchases of dollar-denominated assets. Temporaryweakness in mid-May partly reflected rumors about the vulnerability ofsome large U.S.

banks to international debt problems and unsettledmarket conditions. The dollar appreciated 3 percent against the Canadian dollar,largely due to the rise in U.S. interest rates and uncertainties aboutupcoming Canadian elections.

Increases in Canadian interest rates inline with U.S. rates failed to stop the steady decline of the Canadiandollar, and Canadian monetary authorities borrowed from U.S. and otherforeign banks and in the Eurobound market to prevent further declines inCanada’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 longcoal strike that cut industrial production and worsened the Britishtrade balance, as well as weakness in petroleum prices, contributed tothe pound’s steady decline. Also, large interest ratedifferentials in favor of dollar-denominated assets contributed to thepound’s weakness. The dollar appreciated about 1 percent on a quarterly average basisagainst each of the European Monetary System currencies.

However,increases during the quarter were 5 to 6 percent, as the dollar rosesteadily following a period of temporary weakness late in the firstquarter. The dollar reached record levels against the French franc andItalian lira, and the highest levels in 10 years against the Germanmark, Dutch guilder, and Belgian franc. A metalworkers’ strike inGermany weakened industrial production throughout Europe and tended toreduce European exports. The German central bank intervened severaltimes to support the mark during the quarter. Although the dollar was unchanged against the yen on a quarterlyaverage basis, it appreciated gradually over the quarter. Japanexperienced record capital outflows as rising U.

S. interest rates ledJapanese investors to buy U.S. Treasury bonds, and declining stockprices in Japan led some foreign investors to sell Japanese stocks. The dollar appreciated 13 percent against the Mexican peso, amidreports of Mexican capital flight and speculation that the rate of dailydevaluations would be increased or that a new major devaluation would beannounced. These pressures caused the peso to drop sharply in earlyMay, with some recovery later in the quarter. Merchandise trade In contrast to large increases in the U.

S. merchandise tradedeficit in the previous four quarters, the deficit decreased in thesecond quarter to $25.7 billion from $25.9 billion in the first. Exportswere slightly higher; an increase in nonagricultural exports was partlyoffset by a decrease in agricultural exports.

Imports also increasedslightly; an increase in petroleum imports was partly offset by adecrease in nonpetroleum imports. The pause in the trade deficit growthis unlikely to be sustained because the fundamental factors contributingto it–the high exchange value of the dollar, the rapid economicexpansion in the United States, and the weak expansions abroad–remainunchanged. Imports increased $0.5 billion, or 1 percent, to $80.3 billion, thesmallest increase since the onset of the domestic expansion. Petroleumimports increased $1.

1 billion or 8 percent, to $14.9 billion; importsfrom OPEC members were up $1.3 billion, or 24 percent, and more thanaccounted for the increase.

Increased petroleum imports went into bothincreased consumption and a buildup in domestic stocks. Most of thebuildup occured early in the quarter when attacks on a number of oiltankers in the Persian Gulf raised concern that future petroleumsupplies might be threatened. Despite the troubles in the Middle East,spot petroleum prices weakened later in the quarter, as increasedproduction more than made up for limited disruptions in supply. Theaverage price per barrel rose to $28.26 from $28.05 in the firstquarter, and the average number of barrels imported per day increased to5.

76 million from 5.40 million. Nonpetroleum imports decreased $0.5 billion, or 1 percent, to $65.4billion; volume decreased 2 percent. Some moderation in the economicexpansion in the second quarter, particularly a slowdown in inventoryaccumulation, probably contributed to the temporary pause in importgrowth. Most major commodity categories, except automotive products,decreased $0.

4 billion, to $14.2 billion; textile products fell $0.3billion from the record level in the first quarter, and gem diamondsfell $0.2 billion. Capital goods decreased $0.

3 billion, to $14$1billion, following a first-quarter surge in business machines andcomputers. Industrial supplies and materials were unchanged at $16.4billion. Iron and steel decreased $0.

2 billion; imports from LatinAmerican, which had increased strongly over the past year, accounted formost of the decrease. Brazilian restrictions on steel exports to theUnited States–established in the first quarter in response to U.S.steel industry anti-dumping complaints–reduced shipments by overone-third. Foods, feeds, and beverages decreased $0.2 billion, to $5.1billion.

Declines were widespread, except for coffee, which increased$0.2 billion. Automotive products increased $0.5 billion, to $13.8 billion, thefifth consecutive record quarterly level.

Most of the increase was dueto imports from Japan; Japanese auto imports increased substantially atthe beginning of the new year under the voluntary export restriction program, and imports of trucks and parts were also strong. Increasedtruck 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.

3billion; volume decreased 11 percent. Sunflower and other oil seeds andoils decreased following the sharp rise in the first quarter; soybeansand corn were also down. Exports to Western Europe fell sharply–37percent, 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 fewproducts 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 industrializedcountries in Asia, and United Kingdom.

Capital equipment increased $0.3billion, to $17.8 billion; the increase was more than accounted for bycomputers, up 11 percent, to $3.5 billion, for the quarter and up 37percent since the first quarter of 1983. Automotive exports decreased$0.4 billion, to $5.3 billion, due to a decrease in shipments ofcomplete autos, trucks, and parts to Canada.

(Much of the balance ofthe increase is in exports for which commodity detail is not available.)Service transactions Net service receipts fell sharply, down $4.9 billion to $3.4billion, the lowest quarterly level since 1975. Receipts decreased $2.6billion to $34.1 billion; payments increased $2.

3 billion to $30.7billion. The dollar’s appreciation and higher U.S.

interest ratescontributed to the fall in net service receipts. The dollar’sappreciation resulted in large capital losses on U.S. direct investmentabroad and contributed to a sharp increase in net payments for travel.Higher U.

S. interest rates contributed to a more rapid rise in interestpayments on portfolio investment than in interest receipts. Receipts of income on U.S.

direct investment abroad decreased $3.9billion to $4.5 billion. The dollar’s appreciation resulted inlarge capital losses ($2.2 billion) related to currency translation,especially in Canada and European countries, and may have also reducedoperating earnings. Also, a large capital loss was related to thewriteoff of a U.S.

company’s holdings in the Caribbean area.Strikes, weak expansions in some European countries, and soft petroleummarkets also reduced operating earnings, which fell $1.0 billion beforecapital losses. Interest payments increased $0.1 billion to $1.0billion, as borrowing through Netherlands Antilles finance affiliatesremained large.

Payments of income in foreign direct investment in theUnited States were virtually unchanged at $2.5 billion. A moderateincrease in operating earnings associated with the U.

S. expansion wasoffset by a shift to small capital losses from first-quarter gains.Interest payments increased $0.1 billion to $0.7 billion, due to a largeloan to a U.S.

affiliate for use in a buy-out of minority stockholders. REceipts of income on other private investment increased $1.0billion to $14.

8 billion, due to rising interest rates and a sharpincrease in U.S. bank claims in the second quarter. In May, Federalbank supervisory authorities jointly recommended changes in bankaccounting practices for nonaccruing loans, which resulted in a smallreduction in earnings reported by U.S. banks. Under the regulations,banks must classify loans as nonaccruing whenever interest payments are90 days or more overdue. The new regulations are mandatory forthird-quarter financial reports, but many banks effected the changeimmediately and reclassified a number of loans to Argentina andVenezuela.

Interest arrears on the reclassified loans are now reflectedin the income estimates. Payments of income on other private investmentcontinued to increase strongly, up $1.3 billion, to $9.7 billion,reflecting rising interest rates, together with an increase in U.S. bankliabilities. During the past year, large net borrowing by banks causedpayments to increase $o.

8 billion, or 40 percent, against an increase inreceipts of $2.5 billion, or 20 percent. U.S. Government income receipts increased $0.3 billion, to $1.

jbillion, in the second quarter; Government income payments increased$0.1 billion, to $4.8 billion.

Net payments for travel increased sharply; payments rose $0.6billion to $4.1 billion, and receipts declined $0.1 billion to $2.8billion. Dollar appreciation encouraged U.S.

residents to travel abroadand slowed the increase in foreign visitors to the United States. Theincrease in U.S. travel abroad on foreign-flag carriers caused passengerfare payments to increase 25 percent to $1.

8 billion; receipts increasedslightly. 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 billionto $2.6 billion. Many major weapons delivery programs were recentlycompleted, and deliveries under new programs, although scheduled, havenot 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. Foreigncurrency holdings decreased slightly, reflecting a single U.S.intervention sale of German marks to support the dollar in disorderlymarkets. the U.S.

reserve position with the IMF and holdings of specialdrawing rights each increased $0.3 billion. U.S. claims on foreigners reported by U.S. banks increased $24.

ibillion, compared with a $2.0 billion decrease in the first quarter.Much of the increase was related to the financing of mergers in theUnited States.

In some instances, large credits to consortiums offoreign banks were arranged to finance merger activity, becauseloan-to-capital ratios of many U.S. banks limited the amount of fundsthat each could advance to a single borrower. Much of themerger-related corporate borrowing began to be repaid by the end of thesecond quarter, as borrowers substituted funds borrowed in the U.S.commercial paper market and the Eurobond market for relatively high costbank funds. U.S.

banks also advanced funds to their own foreign officesin May and June; to foreign banks for midyear positioning; and– in alimited amount–to Mexico in May, in conjunction with an IMFz-arrangeddebt restructuring program. Claims on several developing countries inSoutheast Asia increased strongly, probably related to brisk economicactivity in those countries. Net U.S. purchases of foreign securities were $0.8 billion in thesecond 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-termfloating rate issues by the Swedish Government to refinance its bankborrowings. The attractiveness of the issues was enhanced by includingannual options permitting investors to resell the issue.

Canadian newissues were $0.3 billion; others included a $0.1 billion World Bankfloating rate issue and small issues from Japan and Israel. Intransactions in outstanding bonds, redemptions increased to $0.7billion, mostly attributable to Canada and a European regionalorganization. In other transactions in outstanding bonds, net salesincreased to $0.

7 billion as bond prices fell sharply, reflecting thesharp rise in interest rates. In stocks, $0.2 billion in new issues,primarily from the United Kingdom and Canada, was offset by $0.2 billionin net sales of outstanding stocks, mostly from Japan. Foreign stockmarkets, except in France, were down sharply during the quarter, andrising 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 $3.0billion, largely reflecting capital (currency translation) losses fromthe dollar’s appreciation. Intercompany debt inflows increased$2.9 billion to $5.2 billion.

there were large borrowings throughNetherlands Antilles finance affiliates, with over one-half of the $3.5billion 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 theirequity in these affiliates in conjunction with the just mentionedborrowings.

A U.S. company’s sale of most of its interest inAustralian mining properties to an Australian company resulted in areduction in equity in Australia (inflow). (Related transactions appearin the capital account for foreign direct investment in the UnitedStates.) 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 ofindustrial countries increased $0.

8 billion; an increase in holdings ofsmaller European countries was partly offset by a decrease in those ofother industrial countries, which sold dollars when their currenciescame under strong pressure in exchange markets. Assets of OPEC membersdecreased $2.2 billion, slightly less than in the first quarter. MiddleEastern OPEC members reduced assets by more than double thefirst-quarter rate; there were large inflows from other OPEC members.Assets of other countries incresed $0.9 billion; the increase was morethan accounted for by inflows from several Southeast Asian developingcountries. U.S.

liabilities to private foreigners and international financialinstitutions reported by banks (including U.S. Treasury securities)increased $28.2 billion. Foreign purchases of U.S.

Treasury securitieswere a record $6.5 billion, up from $1.4 billion. Rising U.S. interestrates, dollar appreciation, and declining bond and equity prices abroadall encouraged inflows.

In addition, investors’ preferencesshifted towards U.S. Treasury issues, as shown in chart 7 by thelimited rise in 90-day U.S. TReasury bill rates compared with the sharpincrease in rates banks had to offer in unsettled financial markets toattract 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 ratesrelative to rates abroad and dollar appreciation made placement of fundsin the United States highly attractive. The demand for these funds wasrelated to the U.S.

expansion and Treasury financing needs. Some ofthese funds were U.S.

residents’ deposits previously placed atCaribbean offices. These deposits offshore have increased strongly inrecent quarters; a substantial portion of them represents proceeds of ofcommercial paper borrowing by U.S. bank holding companies depositedabroad and then returned to the U.S. parent bank. Another factorcontributing to the rise in liabilities was the previously mentionedlarge-scale merger financing. Data for U.

S. liabilities to unaffiliated foreigners reported bynonbanking concerns are not available for the second quarter, but theyare expected to show large net inflows reflecting corporate borrowing tofinance mergers, as in the first quarter. Inflows for foreign direct investment in the United Statesincreased sharply, up $5.3 billion to $7.7 billion, the second largestquarterly total on record. Intercompany account inflows increased $3.

4billion 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 oflending by a U.S. financial affiliate to its parent of proceeds obtainedby borrowing in the U.S. commercial paper market. Equity capitalinflows increased $1.7 billion to $2.

4 billion, largely because offoreign company established a new U.S. holding company to acquire theU.S. and foreign properties of a U.S. company.

REinvested earnings wereunchanged at $1.0 billion. Net foreign purchases of U.S. securities other than U.S. Treasurysecurities decreased to $0.6 billion from $1.5 billion, well under thequarterly rate that prevailed in the previous year and a half.Contributing factors were declining equity prices and investorpreferences for Treasury securities and other short-term investments.

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