U.S. international transactions: third quarter of 2005

Survey of Current Business, Jan, 2006 by Mai-Chi Hoang, Matthew J. Argersinger

THE U.S. current-account deficit--the combined balances on trade in goods and services, income, and net unilateral current transfers--decreased to $195.8 billion (preliminary) in the third quarter of 2005 from $197.8 billion (revised) in the second quarter (table A, chart 1). (1) The largest contributor to the decrease was a decrease in net outflows (payments) for unilateral current transfers, which mostly resulted from inflows (receipts) related to the catastrophic damage caused by Hurricanes Katrina and Rita. In addition, the balance on income shifted to a surplus from a deficit, and the surplus on services increased. In contrast, the deficit on goods increased.

[GRAPHIC OMITTED]

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--increased to $272.9 billion in the third quarter from $150.6 billion in the second quarter. Financial outflows for U.S.-owned assets abroad slowed, and financial inflows for foreign-owned assets in the United States picked up.

The statistical discrepancy--errors and omissions in recorded transactions--was a negative $76.8 billion in the third quarter, compared with a positive $47.5 billion in the second quarter.

The following are highlights for the third quarter of 2005:

* Goods exports increased much less than in previous quarters.

* Goods imports picked up, mostly as a result of a surge in petroleum and petroleum products.

* The surplus on services was the highest in nearly 3 years.

* Net outflows for unilateral current transfers decreased.

* Net foreign private purchases of U.S. securities were exceptionally strong. Net purchases of U.S. Treasury securities picked up, and net purchases of other U.S. securities increased to a record level.

* Financial flows for U.S. direct investment abroad shifted to net inflows from net outflows.

Selected economic and financial market developments

In the third quarter, the U.S. dollar appreciated 1 percent on a nominal, trade-weighted, quarterly average basis against a group of seven major currencies that are widely traded in international markets (table B, chart 2). The U.S. dollar appreciated 3 percent against both the euro and the Japanese yen, and it depreciated 3 percent against the Canadian dollar.

[GRAPHIC OMITTED]

In the United States, data releases in the third quarter indicated that the U.S. economy in the second quarter continued to expand in the 3- to 4-percent range. Releases indicated that the deficit on U.S. trade in goods and services on a 3-month moving average basis had resumed increasing after briefly decreasing. U.S. monetary authorities raised the target level for the Federal funds rate by 50 basis points, to 3.75 percent. U.S. long-term interest rates and U.S. stock prices edged higher. Hurricanes Katrina and Rita caused extensive damage to the U.S. Gulf Coast, including a loss of petroleum production and refining capacity and other disruptions that affected the value of oil and other commodities that are traded internationally by the United States. As a result, there were large changes ill prices in some commodity and financial markets, but the changes in most markets except for energy products proved to be temporary.

In Europe, data releases indicated that economic growth in the euro area remained in the 1- to 2-percent range in the second quarter. Among countries with larger economies, economic activity in Germany and France weakened, activity in Italy picked up, and activity in Spain remained relatively strong. Euro area monetary policy was unchanged, and the minimum bid rate on main refinancing operations, a key policy-controlled interest rate, remained at 2 percent.

In Japan, reports showed that economic growth was weaker in the second quarter than in the first quarter. The value of the yen and the U.S. dollar were both affected, at least temporarily, by the official Chinese announcement of the small revaluation of the renminbi and the move to a managed floating exchange-rate regime with reference to a basket of currencies.

In Canada, reported economic growth strengthened to about 3 percent. Canadian monetary authorities raised the target for the overnight rate for the first time in nearly a year, to 2.75 percent. In addition, the currencies of some commodity abundant countries, including the Canadian dollar, appreciated as the prices of oil and some other commodities rose sharply.

Current Account

Goods and services

The deficit on goods and services increased $9.2 billion, to $182.8 billion in the third quarter from $173.6 billion in the second quarter. An $11.0 billion increase in the deficit on goods was partly offset by a $1.8 billion increase in the surplus on services.

Goods

The deficit on goods increased to $197.9 billion in the third quarter from $186.9 billion in the second quarter, as exports slowed and imports picked up. The third-quarter increase in the deficit followed a much smaller increase in the second quarter.