U.S. international transactions, third quarter 1984 Essay

THE U.S. current-account deficit was a record $32.

9 billion in thethird quarter, compared with $24.7 billion in the second. The $8.2billion increase was largely accounted for by an increase in themerchandise trade deficit from $25.8 billion to $33.1 billion. Importssurged after being nearly unchanged in the previous quarter; exportsincreased slightly. Net service receipts decreased $0.

2 billion to $3.1billion. A $1.7 billion increase in receipts of income on U.S.investment abroad was nearly offset by an increase in payments of incomeon foreign investment in the United States. Net travel and othertransportation payments increased $0.

4 billion. Net unilateral transfers increased $0.6 billion to $2.8 billion. Among the private capital accounts, claims on foreigners reportedby U.S.

banks decreased $18.4 billion, in contrast to an increase of$20.6 billion in the second quarter. Liabilities to private foreignersand international financial institutions (excluding U.

S. Treasurysecurities) reported by banks decreased $3.9 billion, in contrast to anincrease of $20.8 billion. The shifts both in claims and liabilitiesreflected reversals of large second-quarter interbank flows.

Inaddition, low demand for funds in industrial countries and a smallreduction in claims on countries in Latin America contributed to thethird-quarter decrease in claims, and a flattening of U.S. loan demandto the decrease in liabilities. Net inflows on U.S. direct investment abroad were $1.1 billion,compared with $2.1 billion.

Net inflows from Netherlands Antilles finance affiliates slowed as borrowing to finance U.S. mergers subsided.Net inflows for foreign direct investment in the United States slowed to$4.3 billion from $8.

8 billion; the second-quarter total had beenboosted by an unusually large purchase of additional equity in a U.S.company. Net U.S. purchases of foreign securities increased $0.

4 billion to$1.2 billion. Net foreign purchases of U.S. Treasury securities were$5.2 billion, following $6.5 billion in the second quarter. Netpurchases of U.

S. securities other than U.S. Treasury securities were$1.7 billion, compared with $0.6 billion.

A significant decline ininterest rates and a change in withholding tax regulations spurred thesale abroad of $1.9 billion in new bond issues by U.S. corporations. The statistical discrepancy (errors and omissions in reportedtransactions) was a net inflow of $10.6 billion.

U.S. dollar in exchange markets The U.

S. dollar continued to appreciate in the third quarter; on atrade-weighted basis, the dollar posted the largest gains in fourquarters against the currencies of industrial countries. Favorable rates of return on U.S. dollar assets compared with other assets andrepeal of the 30-percent withholding tax on interest earned bynonresidents on U.S. investments more than offset the effects of thepeaking of most U.

S. short-term interest rates in July and August. Alsocontributing to the dollar’s appreciation were indications duringthe quarter that U.S. inflation would not accelerate and that economicactivity in key industrial countries was weaker than expected, partlythe result of prolonged strikes in the United Kingdom and Germanyearlier in the year. Intervention to slow the dollar’s sharpadvance against the German mark was conducted by German and, to alimited extent, United States authorities in September. On a trade-weighted quarterly average basis, the U.

S. dollarappreciated 7 percent and 5 percent against the currencies of 10industrial and 22 OECD countries, respectively (chart 6, table C). Thedollar appreciated 7 to 9 percent against the European Monetary Systemcurrencies, 9 percent against the Swiss franc, 8 percent against theBritish pound, and 6 percent against the Japanese yen.

The dollarappreciated less than 2 percent against the Canadian dollar. Merchandise trade The merchandise trade deficit was a record $33.1 billion in thethird quarter, compared with $25.8 billion in the second.

Importsincreased $8.2 billion to $88.6 billion, and exports increased $0.9billion to $55.5 billion. Nonpetroleum imports increased $8.7 billion, or 13 percent, to$74.2 billion.

The increase was all in volume. All major end-usecommodity categories increased substantially, led by increases of $2.8billion, or 21 percent, in machinery; $1.9 billion, or 14 percent, inconsumer goods; and $1.3 billion, or 8 percent, in nonpetroleumindustrial supplies and materials. Only a small part of the increasemay have been attributable to anticipation of restrictions on textileand steel imports later in the year. (A tightening of restrictions ontextiles was announced by the U.

S. Government in August, and plans tonegotiate limits on certain categories of shipments from steel-exportingcountries were announced in September.) Cumulative dollar appreciation continued to be a major factor inthe growth of nonpetroleum imports. By the third quarter, the dollarcost of imports of manufactured goods had increased only 6 percent overits 1980 quarterly average (chart 7). In contrast, the average producerprice index of manufactured goods in OECD countries, excluding theUnited States, had increased more than 30 percent.

In the UnitedStates, the producer price index had increased 20 percent. Petroleum imports decreased $0.4 billion, or 3 percent, to $14.

5billion. The average number of barrels imported daily decreased to 5.67million from 5.76 million; the average price per barrel was nearlyunchanged at $27.91. Nonagricultural exports increased $1.2 billion, or 3 percent, to$46.

5 billion; volume increased 4 percent. A $0.6 billion increase inexports of automotive products to Canada was largely related to strongsales in the United States of large-size automobiles, many of which areassembled in Canada. Most other major end-use commodity categoriesincreased slightly. Nonagricultural exports continued to be restrainedby the dollar’s cumulative appreciation. Although the unit-valueindex of U.

S. exports of manufactured goods increased 21 percent from1980 to the third quarter, the foreign currency cost almost doubled(chart 7). Agricultural exports decreased $0.2 billion, or 3 percent, to $9.0billion; volume increased 1 percent. The decrease, mostly to WesternEurope, partly reflected price decreases in soybeans, wheat, and corn.Supplies from other exporting countries were ample, and harvests in someimporting countries were better than expected.

Increases in imports from Western Europe, Japan, and newlyindustrialized countries in Asia more than accounted for the $7.3billion increase in the trade deficit. Imports from those areasincreased $2.5 billion, $2.8 billion, and $3.

1 billion, respectively;exports to them were nearly unchanged. Imports from Canada decreased$0.7 billion, and imports from other areas increased $0.5 billion.Exports to Canada decreased $0.9 billion, and exports to other areas,largely to Latin America, increased $1.5 billion. Service transactions Net service receipts were $3.

1 billion, a decrease of $0.2 billionfrom the second quarter. Receipts increased $1.

8 billion to $36.2billion. Payments increased $2.1 billion to $33.1 billion. Increasesboth in receipts and in payments of income on investments accounted formost of the changes.

Receipts of income on U.S. direct investment abroad increased $0.8billion to $5.4 billion. Capital losses (largely currency-related)remained large at $2.

5 billion, but were $0.5 billion less than in thesecond quarter; second-quarter losses had included a large nonrecurringwriteoff of an affiliate of a U.S.

petroleum company. Weak expansion inkey European countries and weak worldwide petroleum demand continued torestrain growth in operating earnings of foreign affiliates. Earningsof nonpetroleum affiliates increased $0.

5 billion, and earnings ofpetroleum affiliates increased $0.4 billion. Payments of income onforeign direct investment in the United States increased $0.3 billion to$3.0 billion.

Receipts on income on other private investment increased $1.0billion to $15.7 billion, largely the result of higher average interestrates for the quarter. (Some interest arrears on nonaccruing loanscontinued and are reflected in the estimates.) Payments on incomeincreased $0.9 billion to $10.

7 billion, also due to higher averagerates. Receipts of income on U.S.

Government assets decreased $0.1billion to $1.3 billion.

Payments of income increased $0.3 billion to$5.1 billion. Net travel payments increased $0.2 billion. Payments increased$0.

1 billion to $4.1 billion. Further dollar appreciation continued toencourage U.

S. travel overseas, although the rate of increase in thenumber of travelers slowed from the second quarter. Payments to Canadaand Mexico were nearly unchanged. Receipts decrease $0.1 billion to$2.8 billion.

A decrease of $0.2 billion from overseas and Canada waspartly offset by a $0.1 billion increase from Mexico for travel in theborder area and in the U.

S. interior. Passenger fare payments wereunchanged at $1.7 billion, and receipts decreased $0.2 billion to $0.7billion. Other transportation payments increased $0.4 billion to $3.

9billion, largely the result of increased freight payments formerchandise imports. Other transportation receipts increased $0.2billion to $3.6 billion, reflecting increased earnings from portservices.

Transfers under U.S. military sales contracts were $2.7 billion, anincrease of $0.

2 billion. Increased deliveries to a number of countrieswere partly offset by a decrease in deliveries to the Middle East.Direct defense expenditures were unchanged at $3.0 billion.

Net unilateral transfers increased to $2.8 billion from $2.2billion, largely reflecting revisions in U.

S. Government proceduresunder which appropriated grant funds are made available to foreignmilitary sales customers. U.S.

assets abroad U.S. reserve assets increased $0.8 billion in the third quarter,compared with an increase of $0.6 billion in the second. Foreigncurrency holdings increased $0.2 billion as the result of limitedintervention purchases of German marks in September. The U.

S. reserveposition in the International Monetary Fund and U.S. holdings of specialdrawing rights each increased $0.

3 billion. Claims on foreigners reported by U.S. banks decreased $18.

4billion, compared with an increase of $20.6 billion. The shiftreflected a reversal of large second-quarter interbank transactions.

Inaddition, low demand for funds in many industrial countries and somefurther small reduction in U.S. banks’ loan exposure abroad,particularly in some developing countries, were contributing factors.

Claims on U.S. banks’ own foreign offices and on unaffiliatedforeign banks each decreased almost equally; together, they accountedfor nearly all of the decrease in bank-reported claims. Partlyoffsetting was a slight increase in claims on foreign public borrowers.The increase, largely in claims on Latin America, was partly related toan agreement between Argentina and the International Monetary Fund on aproposed austerity program and to a rescheduling of some external publicdebt of Mexico and Venezuela. The reversal of second-quarter transactions dominated third-quarterinterbank developments. In the second quarter, large withdrawals fromforeign banks, particularly from foreign offices of U.S.

banks,reflected concerns over actual and potential losses from substandard loans by a few large U.S. banks. To offset those withdrawals,unaffiliated foreign banks borrowed heavily from U.S. banks, and U.S.

parent banks deposited funds in their foreign offices. In the thirdquarter, as those concerns abated, unaffiliated foreign banks repaidsome of the funds borrowed from U.S. banks, and U.

S. parent bankswithdrew some deposits from foreign offices. In addition, large creditsto foreign banks dropped sharply, as merger-related corporate borrowingsubsided and other U.S. loan demand flattened. Net U.S. purchases of foreign securities were $1.

2 billion,compared with $0.8 billion in the second quarter. The increase was morethan accounted for by a $0.7 billion increase in net purchases ofstocks, mainly in the United Kingdom, the Netherlands, and Hong Kong,where prices advanced sharply. Net U.S. purchases of foreign bonds were$0.

5 billion, down from $0.8 billion. Foreign new issues in the UnitedStates were only $0.9 billion–from Canada, France, Finland, and theInter-American Development Bank–following extraordinarily large newissues from Sweden in the previous quarter.

Redemptions were nearlyunchanged at $0.7 billion, and transactions in outstanding bonds shiftedto small net purchases of $0.3 billion from net sales of $0.7 billion. Net inflows on U.S.

direct investment abroad were $1.1 billion,compared with $2.1 billion. Net intercompany debt inflows were $3.6billion, down from $5.

1 billion. Inflows from Netherlands Antillesfinance affiliates decreased $2.0 billion to $1.5 billion–about thesame level of borrowing that prevailed prior to the merger-dominatedborrowing of the second quarter (table D). Also, the repeal in July ofthe 30-percent withholding tax on interest earned by nonresidents onU.S. investments may have led some U.

S. companies to issue Eurobondsdirectly to supplement or substitute for borrowing through their financeaffiliates (chart 8). Intercompany debt inflows from Western Europeanaffiliates increased $1.5 billion from less than $0.1 billion. Most ofthe increase reflected a shift to inflows from trading companyaffiliates in Switzerland.

Equity capital outflows decreased $1.0billion to less than $0.1 billion. Outflows to most areas decreased; anet inflow from Japan was largely due to the sale of a petroleumaffiliate. Reinvested earnings were $2.5 billion, compared with $2.0billion. Foreign assets in the United States Foreign official assets in the United States decreased $1.

0 billionin the third quarter, compared with a decrease of $0.3 billion in thesecond (table B). Assets of industrial countries decreased $2.

7billion, in contrast to an increase of $0.9 billion. Decreases largelyreflected intervention to support a few key currencies in exchangemarkets, as the dollar reached record highs against many Europeancurrencies in September. Assets of OPEC members decreased $0.

6 billion.Although considerably less than the previous quarter’s $2.2 billiondecrease, the third-quarter decrease was the eighth consecutivequarterly decrease and reflected continued weakness in world petroleummarkets. Assets of other countries, particularly several newlyindustrialized countries in Asia, increased $2.3 billion, compared witha $0.

9 billion increase. U.S. liabilities to private foreigners and international financialinstitutions reported by banks (excluding U.S. Treasury securities)decreased $3.9 billion, compared with an increase of $20.

8 billion. Theshift reflected a reversal of large second-quarter inflows from U.S.banks’ foreign offices, mainly in the United Kingdom and Caribbean,and a flattening of domestic loan demand. In addition, financing needsfor large-scale mergers diminished. Partly offsetting the decrease wasan increase in liabilities to unaffiliated foreign banks and otherprivate foreigners.

Those inflows remained relatively strong, despitethe significant decline in U.S. short-term rates by the end of thequarter and despite the attractiveness of alternative long-terminvestments in the United States. Net foreign purchases of U.

S. Treasury securities were $5.2billion, following record second-quarter purchases of $6.5 billion.

Those purchases partly reflected the continued preference of manyforeign investors for U.S. Treasury securities, although concern aboutrisks associated with certificates of deposit as alternative investmentslessened. Net foreign purchases of U.S. securities other than U.S.

Treasurysecurities were $1.7 billion, compared with $0.6 billion. Much of theincrease was due to the $1.

9 billion in new bond issues sold abroad byU.S. corporations–the first sizable amounts issued directly in theEurobond market in 10 years (chart 8). A large decline in long-termrates in the Eurobond market spurred U.

S. corporations to raise capital,partly to replace relatively expensive short-term bank debt that hadbeen incurred in the first half of the year. Also, repeal of the30-percent withholding tax on interest earned by nonresidents on U.S.investments permitted U.S.

corporations to raise funds directly inEurobond markets at the same, lower cost as funds raised throughNetherlands Antilles finance affiliates. (Net funds raised byNetherlands Antilles finance affiliates were about the same in the thirdquarter as in the second, after allowance is made for several largemerger-related transactions.) Net foreign purchases of outstandingcorporate bonds and U.

S. agency bonds were $0.8 billion, compared with$0.

5 billion. Record net sales of stocks of $1.0 billion by foreignerswere largely from Swiss accounts.

Inflows for foreign direct investment in the United States were$4.3 billion, compared with $8.8 billion. Intercompany debt inflowswere $1.3 billion, compared with $4.4 billion; the second-quarter inflowhad been boosted by a large loan to a U.

S. subsidiary to purchaseadditional equity in a U.S.

company. Equity capital inflows were $1.8billion, compared with $3.3 billion. An inflow of $0.

7 billion fromCanada was mainly for acquisitions, as were inflows of $0.4 billion fromJapan. There were no net inflows from Australia, after a $1.5 billioninflow in the previous quarter. Inflows from Western Europe were $0.6billion, compared with $0.8 billion.

Reinvested earnings were unchangedat $1.2 billion. Reconciliation of U.S.-Canadian current-account statistics Reconciliation of the 1983 bilateral current-account statistics ofthe United States and Canada and revision of the 1982 current-accountreconciliation were completed in November 1984 (table E).

The 1982United States and Canadian statistics were fully reconciled. Fullreconciliation of the 1983 statistics was not possible because ofdifferences in investment income transactions that could not besatisfactorily resolved at this time. Revisions in the U.S. international transactions data based on thereconciliations with Canada will be incorporated in the published datain June 1985 as far as possible.

Full substitution of the reconcileddata for the previously published data is not possible because U.S.transactions with other areas would be affected. Current-account reconciliations for the years 1970-81 appear in theJune 1975, September 1976, September 1977, December 1979, June 1981,December 1981, December 1982, and December 1983 issues of the SURVEY OFCURRENT BUSINESS.


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