U.S. international transactions, second quarter 2002 - Illustration

Survey of Current Business, Oct, 2002 by Patricia E. Abaroa, Elena L. Nguyen

THE U.S. current-account deficit--the combined balances on trade in goods and services, income, and unilateral current transfers--increased to $130.0 billion in the second quarter of 2002 from $112.5 billion (revised) in the first quarter (table A). (1) The increase was mostly attributable to an increase in the deficit on goods, as a surge in goods imports more than offset a rebound in goods exports. An increase in the deficit on income, as income payments rose more than income receipts, also contributed to the increase in the current-account deficit. In contrast, the surplus on services increased, as services receipts increased more than services payments, and net outflows for unilateral current transfers decreased.

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 $80.4 billion in the second quarter, compared with $87.6 billion (revised) in the first. Financial outflows for U.S.-owned assets abroad increased more than financial inflows for foreign-owned assets in the United States.

The statistical discrepancy--errors and omissions in recorded transactions--was a positive $49.4 billion in the second quarter, following a positive $24.7 billion in the first.

The following are highlights for the second quarter of 2002:

* Goods imports surged as a result of strong gains in all major commodities. Goods exports turned up after decreasing for six consecutive quarters.

* Direct investment income payments more than doubled, and direct investment income receipts also increased.

* Net foreign purchases of U.S. securities other than U.S. Treasury securities increased strongly as a result of record net foreign purchases of U.S. corporate and agency bonds.

* Net financial inflows for foreign direct investment in the United States decreased to the lowest level in more than 10 years. The decrease reflected a shift to net intercompany debt outflows and a slowdown in net equity capital inflows.

U.S. dollar in exchange markets

In the second quarter, the U.S. dollar depreciated 4 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). From the end of the first quarter to the end of the second quarter, the dollar depreciated sharply, falling 12 percent against the euro and 10 percent against the Japanese yen.

CHART 1

Nominal Indexes of Foreign Currency Price of the U.S. Dollar

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After reaching a more than 16-year high against the group of major currencies in the first quarter, the dollar depreciated in the second quarter. Economic releases indicated that U.S. economic activity was expanding more modestly in the second quarter than in the previous two quarters. U.S. financial markets were also adversely affected by growing concerns over corporate profitability and governance. Although economic activity abroad was also weak, there were signs of recoveries in major markets in Europe, Asia, and Canada.

The dollar fell to a 28-month low against the euro near the end of the second quarter. The euro benefitted from changes in interest-rate differentials in favor of owning euro-denominated assets. In addition, concerns about inflationary influences in the euro area eased, and business sentiment surveys showed signs of a possible recovery in manufacturing, despite continued weakness in Germany.

The yen appreciated against the dollar, as rising exports and gains in Japanese stock market prices gave investors hope for a modest improvement in Japan's economic conditions. Japanese monetary authorities attempted to stem the yen's rise by selling yen in foreign exchange markets on seven separate occasions.

In contrast, the U.S. dollar appreciated sharply against the currencies of several major Latin American countries that were experiencing substantial economic and financial difficulties. From the end of the first quarter to the end of the second quarter, the dollar appreciated 27 percent against the Argentine peso, 22 percent against the Brazilian real, and 10 percent against the Mexican peso. The Argentine peso has lost over 60 percent of its value since it was allowed to float early this year after the Government's default on its international debt. The Brazilian real depreciated in the second quarter amid mounting concern about the country's economic and financial situation and the servicing of its large foreign debt.

Current Account

Goods and services

The deficit on goods and services increased to $110.6 billion in the second quarter from $95.5 billion in the first. A large increase in the deficit on goods more than offset a small increase in the surplus on services.

Goods

The deficit on goods increased to $122.6 billion in the second quarter from $106.4 billion in the first. The deficit had also increased in the first quarter after decreases throughout 2001. In the second quarter, imports surged an unprecedented amount, and exports increased strongly; in contrast, imports and exports had decreased substantially in 2001 (chart 2).