U.S. International transactions in 2001 - statistical analysis - Statistical Data Included

Federal Reserve Bulletin, May, 2002 by William L. Helkie, Sara B. Holland

The U.S. current account deficit narrowed noticeably in 2001. Both imports and exports of goods and services fell during the year in response to a global weakening of economic activity. The decline in the deficit followed a substantial widening during most of the past decade. For 2001, a smaller merchandise trade deficit and a slightly larger surplus in trade in services offset a continued widening of the deficit on investment income.

Meager foreign economic growth and the continued real appreciation of the dollar throughout the year induced a $61 billion decline in the value of U.S. exports of goods and services. The slowing in the U.S. economy caused imports of goods and services to fall even more--$89 billion. In the third quarter the deficit declined further, but only temporarily, because payments for imported services were reduced by a one-time large estimated insurance payment from foreign insurers (reported on an accrual basis) related to the destruction caused by the terrorist attacks of September 11. The net effect of these developments was a $28 billion narrowing in the goods and services deficit for 2001 (table 1).

The deficit in investment income widened slightly. Higher net payments on the growing net portfolio liability position were nearly offset by higher net receipts from direct investment. Weak growth abroad and the effect of lower oil prices on the profitability of U.S. energy companies lowered the return on U.S. foreign direct investment assets; slower growth in the United States reduced the return on foreign direct investment assets in the United States by an even greater amount. The deficit on unilateral transfers narrowed slightly.

Although smaller than the deficit in 2000, the U.S. current account deficit in 2001 was still large relative to U.S. historical experience (chart 1). The U.S. current account deficit is the counterpart of a net inflow of foreign capital that represents a source of saving (of more than $400 billion) to help finance U.S. domestic investment. To finance the U.S. current account deficit, net private capital flowed in at a record pace in 2001 and included unprecedented net inflows through private securities transactions. Net official capital outflows were slight. The statistical discrepancy in the U.S. international accounts was negative, indicating either small unrecorded net capital outflows or an underreporting of the current account deficit.

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MAJOR ECONOMIC INFLUENCES ON U.S. INTERNATIONAL TRANSACTIONS

Several factors had a significant influence on U.S. international transactions in 2001: cyclical movements in U.S. and foreign economic activity, a decline in primary commodity prices, movements in U.S. international price competitiveness, swings in the rates of return on real and financial assets at home and abroad, and the terrorist attacks of September 11.

U.S. Economic Activity

In 2001 the U.S. economy turned in its weakest performance in a decade, and the slowing pace of activity contributed to a decline in U.S. imports. Real gross domestic product increased at an annual rate of 3/4 percent in the first half of the year and remained virtually stagnant in the second half (table 2). Although the effects of the weakening economy were broadly felt, the manufacturing sector was especially hard hit. Faced with slumping demand both in the United States and abroad, manufacturers cut production aggressively to limit excessive buildups of inventories relative to sales. In addition, businesses sharply reduced their investment spending with particularly dramatic cuts in outlays for high-technology equipment. Firms trimmed payrolls through most of the year, and by year-end the unemployment rate moved up 1 3/4 percentage points, to around 5 3/4 percent. Job losses were especially large following the terrorist attacks of September 11, which had extremely adverse effects on certain sectors of the economy--most notably the air transportation and hospitality industries.

Growth of household spending slowed last year but remained sufficiently strong to provide an important source of support to overall final demand. Consumption spending was stimulated last year by lower interest rates, cuts in federal taxes, declining energy prices, and, in the autumn, higher spending on motor vehicles arising from automaker's aggressive marketing of financial incentives to consumers. After September 11, spending declined in certain travel- and tourism-related categories including air transportation, hotels and motels, and recreation services. Favorable mortgage interest rates helped sustain real expenditures on housing. In all, however, the slowing of household spending, combined with the sharp drop in business spending, led to a decline in real imports in 2001.

Foreign Economic Activity

A substantial weakening of economic growth in foreign economies in 2001 contributed to a decline in U.S. exports. Early in the year, activity abroad was depressed by high oil prices, the global slump in the high-tech sector, and spillover from the U.S. economic slowdown. The September terrorist attacks further heightened economic uncertainty. The weakening in economic activity abroad prompted some foreign central banks to reduce interest rates and some foreign governments to take stimulative fiscal measures. Despite these actions, growth in foreign economies was near zero on average over the year (table 2).