U.S. International transactions, second quarter 2001 - Cover Story

Survey of Current Business, Oct, 2001 by Douglas B. Weinberg

THE U.S. current-account deficit--the combined balances on trade in goods and services, income, and net unilateral current transfers--decreased to $106.5 billion in the second quarter of 2001 from $111.8 billion (revised) in the first quarter (table A). (1) The decrease was more than accounted for by a decrease in the deficit on goods, as imports decreased more sharply than exports, and by an increase in the surplus on services, as receipts increased and payments decreased. The deficit on income and net outflows for unilateral current transfers both increased.

In the financial account, net recorded financial inflows--net acquisitions by foreign residents of assets in the United States less net acquisitions by U.S. residents of assets abroad--were $124.7 billion in the second quarter, up from $103.5 billion (revised) in the first. Financial inflows for foreign-owned assets in the United States decreased less than financial outflows for U.S.-owned assets abroad.

The statistical discrepancy--errors and omissions in recorded transactions--was a negative $18.4 billion in the second quarter and a positive $8.1 billion in the first.

The following are highlights for the second quarter of 2001:

* Slowing economic activity in the United States and in most foreign countries contributed to sharp decreases in exports and imports of goods and in receipts and payments of income.

* Net foreign purchases of U.S. securities other than U.S. Treasury securities remained strong, but they decreased from the record high in the first quarter.

* Net U.S. purchases of foreign securities were the highest since the second quarter of 1999, reflecting an increase in exchanges of stock related to foreign acquisitions of U.S. companies.

* U.S. claims and U.S. liabilities reported by U.S. banks and by U.S. nonbanking concerns changed by substantially different amounts in the second quarter than in the first quarter, resulting in large swings in financial flows.

U.S. dollar in exchange markets

In the second quarter, the U.S. dollar appreciated 3 percent on a nominal, trade-weighted quarterly average basis against the group of seven major currencies that are widely traded in international markets (table B, chart 1). The U.S. dollar appreciated 6 percent against the euro and 4 percent against the Japanese yen.

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Economic reports indicated that U.S. economic activity was slowing rapidly, largely as a result of sharp declines in domestic investment in equipment and software and in U.S. exports. U.S. businesses reported that profitability continued to decline and that the near-term outlook for sales and profitability remained uncertain. In this environment, U.S. monetary authorities further eased monetary policy by lowering the target federal funds rate, in a series of three steps, to 3.75 percent from 5.0 percent (chart 2). (In the third quarter, the target federal funds rate was reduced further, in two steps, to 3.00 percent.) The dollar was strengthened by hopes that the rapid easing of U.S. monetary policy, which brought the officially targeted U.S. interest rate below the officially targeted euro-area interest rate, would lead to a pickup in U.S. economic activity in the near future.

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Economic reports indicated that economic activity in the euro area was also slowing rapidly, but it was slightly stronger than economic activity in the United States. The euro-area slowdown, which was particularly notable in Germany and Italy, prompted the European Central Bank to reduce its rate on refinancing operations by 25 basis points to 4.5 percent. (In the third quarter, the rate on refinancing operations was reduced further, in two steps, to 3.75 percent.) Indications that inflationary pressures might not be receding contributed to depreciation of the euro.

Economic conditions in Japan failed to improve, as reports showed that economic output changed little in the first quarter and that Japanese exports and domestic investment were weakening in the second quarter. The Bank of Japan downgraded its assessment of the condition of the Japanese economy, and monetary authorities maintained operations that kept the call rate close to zero. The election in April of a new Japanese Prime Minister who promised structural reform and fiscal restraint had little lasting impact on the value of the yen.

Against other currencies, the U.S. dollar appreciated 3 percent against the British pound, 5 percent against the Swiss franc, 1 percent against the Canadian dollar, and 13 percent against the Brazilian real. In contrast, the U.S. dollar depreciated 5 percent against the Mexican peso.

Current Account

Goods and services

The deficit on goods and services decreased to $88.9 billion in the second quarter from $95.0 billion in the first. The deficit on goods decreased, and the surplus on services increased.

Goods.--The deficit on goods decreased $4.7 billion, to $107.8 billion, in the second quarter. Since a record high in the fourth quarter of 2000, the goods deficit has narrowed $10.7 billion. In the second quarter, exports and imports both decreased much more sharply than in the first quarter, and imports decreased more in value than exports.