U.S. international transactions, first quarter 1998.

DiLullo, Anthony J.

The international transactions accounts have been revised to reflect the incorporation of methodological and statistical improvements. In addition, some types of transactions have been reclassified, and some table formats have been changed. For a discussion of these changes, see "U.S. International Transactions, Revised Estimates for 1986-97" in this issue.

The U.S. current-account deficit--the combined balances on trade in goods and services, investment income, and unilateral transfers--increased to $47.2 billion in the first quarter of 1998 from $45.0 billion (revised) in the fourth (table A, chart 1).(1) An increase in the deficit on goods and services was partly offset by decreases in the balance on investment income and in net unilateral transfers.

[TABULAR DATA A NOT REPRODUCIBLE IN ASCII]

[CHART OMITTED]

In the capital account, net recorded inflows were $46.1 billion in the first quarter, compared with $97.1 billion in the fourth. Recorded capital outflows and inflows both decreased sharply; however, the drop in net outflows was substantially larger than the drop in net inflows.

The statistical discrepancy--errors and omissions in recorded transactions--was a positive $1.1 billion in the first quarter, in contrast to a negative $52.0 billion in the fourth quarter. The unusually large discrepancy in the fourth quarter is believed to reflect the imperfect recording of short-term capital flows.

The following are highlights for the first quarter of 1998:

* The deficit on goods and services rose, as exports decreased and imports increased.

* Sharp reversals occurred in U.S. bank claims and U.S. bank liabilities, as bank funds flowed out of the United States in the first quarter, when the Asian financial problems subsided and the demand for short-term credit abroad lessened. In the fourth quarter, large amounts of short-term funds had flowed into the United States to relend to the Eurodollar market as Asian financial problems intensified.

* Net foreign purchases of U.S. securities other than U.S. Treasury securities surged to a record, following a temporary slowdown in the fourth quarter that reflected the developments in Asia.

U.S. dollar in exchange markets

The developments described above both influenced and, in turn, were influenced by movements of the U.S. dollar in foreign exchange markets. Although economic fundamentals--relative rates of economic growth, inflation, and interest--were important in the markets' valuation of currencies, short-term factors also played a decisive role. These factors included market participants' changing perceptions of the seriousness of financial difficulties in Asian countries, including Japan, and the course of Europe's movement to monetary union and a single currency.

In the first quarter, the U.S. dollar appreciated 3 percent on a trade-weighted quarterly average basis against the currencies of 10 industrial countries (table B, chart 2). The dollar appreciated 4 percent against the major European continental currencies and 1 percent against the British pound. The dollar appreciated 2 percent against the Japanese yen and the Canadian dollar.

[TABULAR DATA B NOT REPRODUCIBLE IN ASCII]

[CHART OMITTED]

The dollar appreciated 4 percent on a quarterly average basis against the German mark and other major continental currencies. Most of the gain was early in the quarter. The dollar traded in a narrow range thereafter, mainly because little change was expected in business conditions and monetary polices in the United States or in Germany and the other major European economies. Agreement on many details of membership in the European Monetary Union (EMU) and the expectation that interest rates in key EMU countries would converge to the level of German interest rates enhanced stability between the dollar and the major continental currencies. In addition, the dollar was boosted as long-term interest-rate differentials in favor of the dollar edged up.

The U.S. dollar continued to appreciate against the Canadian dollar, but the appreciation moderated when Canadian authorities increased Canadian interest rates.

The dollar continued to appreciate against the Japanese yen, but less than in the fourth quarter. Apparent progress in stabilizing financial conditions in some Asian countries and anticipation of a fiscal stimulus program in Japan, where economic growth continued to deteriorate, allowed the yen to recoup some of its losses of late 1997. Despite the announcement of the fiscal stimulus program in late February, the yen lost most of the gains it had achieved earlier in the quarter, partly reflecting expectations of a continuing divergence in the prospects for a strong U.S. economy and a weakening Japanese economy.

Appreciation of the dollar against the currencies of several Asian countries other than Japan was less than in the fourth quarter, as financial conditions appeared more stable. The implementation of the International Monetary Fund's support programs for the Republic of Korea and for Thailand and the initiation of business and commercial reforms in some countries were contributing factors.

Current Account

Goods and services

The deficit on goods and services increased to $34.9 billion in the first quarter from $28.5 billion in the fourth. The deficit on goods increased to $55.7 billion from $49.8 billion, and the surplus on services decreased to $20.8 billion from $21.4 billion.

Goods.--The deficit on goods increased $5.9 billion, to $55.7 billion, in the first quarter. The decrease reflected both a decrease in exports and an increase in imports.

Exports.-- Exports decreased $2.8 billion, or 2 percent, to $171.5 billion in the first quarter. Quantities, measured in chained (1992) dollars, were virtually unchanged (table C). Prices decreased 2 percent.

[TABULAR DATA C NOT REPRODUCIBLE IN ASCII]

Nonagricultural exports decreased $1.8 billion, or 1 percent, to $157.4 billion. Quantities decreased less than 1 percent, and prices decreased 1 percent. In value, most major commodity categories--capital goods, industrial supplies and materials, and consumer goods--decreased (chart 3). The exception was automotive vehicles and parts, which increased.

[CHART OMITTED]

Capital goods decreased $1.1 billion, or 1 percent, to $75.5 billion and accounted for nearly two-thirds of the decrease in nonagricultural exports. Capital goods other than civilian aircraft, engines, and parts decreased $2.4 billion. Almost half of the decrease was accounted for by computers, peripherals, and parts and by semiconductors, which had also decreased substantially in the fourth quarter. In value, computers, peripherals, and parts decreased 7 percent, reflecting falling prices, a buildup in inventories abroad, and weakened purchases from Asian countries; prices decreased 10 percent, and quantities increased 3 percent. In value, semiconductors decreased 2 percent, reflecting falling chip prices and weakened purchases of computers; prices decreased 2 percent, and quantities were virtually unchanged. Industrial-type machinery accounted for most of the remainder of the decrease in capital goods. In contrast, civilian aircraft, engines, and parts increased $1.3 billion in value; the increase, which was more than accounted for by deliveries to Western Europe, partly reflected a catchup in deliveries that were slowed by production problems and parts shortages toward the end of 1997.

Nonagricultural industrial supplies and materials decreased $0.9 billion, or 3 percent, to $36.0 billion. Fuels and lubricants dropped $0.8 billion, reflecting worldwide weakness in petroleum prices; there were smaller decreases in most other types of industrial supplies and materials. In contrast, precious metals, largely nonmonetary gold, increased substantially.

Consumer goods decreased $0.1 billion, or 1 percent, to $19.6 billion. Automotive vehicles and products increased $0.3 billion, or 1 percent, to $19.4 billion; the increase was led by automotive parts to Europe, where U.S. auto manufacturers are expanding operations. "Other" exports were virtually unchanged at $5.8 billion.

Agricultural exports decreased $1.0 billion, or 7 percent, to $14.1 billion; quantities decreased 2 percent, and prices decreased 4 percent. In value, soybeans to Western Europe, Asia, and Latin America fell $0.9 billion and accounted for nearly all the decrease. Soybean prices, which have declined for the last three quarters, are now 20 percent below their peak in the second quarter of 1997. Exports of wheat, mainly to Pakistan, and corn, mainly to Taiwan, also decreased. Wheat prices are now 15 percent and corn prices are now 13 percent below their prices of a year ago.

Imports.--Imports increased $3.0 billion, or 1 percent, to $227.2 billion in the first quarter. Quantities, measured in chained (1992) dollars, increased 5 percent (table C). Prices decreased 3 percent. In value, an increase in nonpetroleum imports was partly offset by a sharp drop in petroleum imports.

Nonpetroleum imports increased $6.5 billion, or 3 percent, to $213.4 billion. All major commodity categories increased strongly, but especially consumer goods and automotive products (chart 3). Consumer goods increased $1.8 billion, or 3 percent, to $52.3 billion. Entertainment equipment, apparel, and household goods accounted for most of the increase. Consumer goods have increased in each of the last eight quarters, reflecting strength in domestic consumer spending. Automotive vehicles, engines, and parts increased $3.7 billion, or 5 percent, to $37.0 billion; the strong gain in the first quarter, following a pause in the fourth, was attributable to passenger cars from Japan and Canada.

Nonpetroleum industrial supplies and materials increased $1.3 billion, or 3 percent, to $37.8 billion. Over half of the increase was in nonmonetary gold. Smaller increases were posted for building materials, reflecting an increase in domestic construction, and for most other categories. Capital goods increased $1.0 billion, or 2 percent, to $67.2 billion. The increase was led by computers, peripherals, and parts; telecommunications equipment; and oil-drilling, mining, and construction machinery. In value, semiconductors decreased 2 percent; prices decreased 5 percent, and quantities increased 1 percent.

Petroleum imports decreased $3.4 billion, or 20 percent, to $13.7 billion--the lowest level since the first quarter of 1995. The large decrease was more than accounted for by a sharp drop in prices to $13.89 per barrel from $17.72. The average number of barrels imported daily increased to 10.82 million from 10.61 million. The sharp drop in petroleum prices reflected abundant supplies and slower growth in worldwide demand for petroleum.

Balances by area.--The deficit on goods increased $5.9 billion, to $55.7 billion, in the first quarter. Since the beginning of financial difficulties in Asia in mid-1997, the deficit with most of the Asian countries has increased because of a slowing in exports to the area. The deficit with Asia, excluding Japan, increased $3.5 billion, to $27.1 billion; the Republic of Korea accounted for $1.9 billion of the increase. The deficit with Japan increased $1.6 billion, to $16.8 billion. In North America, the deficit with Canada increased $1.5 billion, to $5.8 billion. The balance with Latin America shifted from a surplus of $0.3 billion to a deficit of $1.4 billion, reflecting both a decrease in the surplus with Brazil and an increase in the deficit with Mexico. In contrast to the changes in most areas, the deficit with Western Europe decreased $2.3 billion, to $4.8 billion.

Services.--The services surplus decreased $0.5 billion, to $20.8 billion, in the first quarter. The decrease reflects both a decrease in exports and an increase in imports.

Travel receipts from foreign visitors to the United States were virtually unchanged at $18.2 billion. Receipts from all areas--overseas, Canada, and Mexico--were virtually the same as in the fourth quarter. Payments by U.S. residents for travel abroad increased $0.4 billion, to $13.2 billion, as U.S. travelers increased their expenditures in overseas countries and in Mexico. Expenditures in Canada decreased.

Passenger fare receipts, at $5.4 billion, and passenger fare payments, at $4.6 billion, were each unchanged from the fourth quarter.

"Other" transportation receipts decreased $0.3 billion, to $6.5 billion. Most of the decrease was in freight receipts, reflecting a drop in receipts of U.S. carriers on shipments to Asia as a result of a decrease in exports and of depressed freight rates on Pacific routes. A drop in receipts for port services reflected a sharp drop in prices paid for bunker fuel by foreign ocean carriers in U.S. ports. "Other" transportation payments decreased $0.2 billion, to $7.2 billion. Freight payments to foreign air carriers decreased slightly. Payments for port services also decreased as a result of lower fuel prices paid by U.S. air carriers abroad.

Royalties and license fees receipts decreased $0.1 billion, to $8.3 billion, and royalties and license fees payments increased $0.3 billion, to $2.9 billion. In the first quarter, payments included fees for the U.S. rights to broadcast the winter Olympics.

"Other" private services receipts decreased $0.4 billion, to $21.7 billion. Affiliated receipts decreased $0.2 billion, to $6.5 billion, and unaffiliated receipts decreased $0.2 billion, to $15.2 billion) Among unaffiliated transactions, financial services decreased $0.4 billion, largely as a result of reduced placements of new issues; the decrease was partly offset by an increase in other types of business services. "Other" private services payments decreased $0.3 billion, to $12.5 billion. A decrease in affiliated payments was only partly offset by an increase in unaffiliated payments. Among unaffiliated transactions, financial services were virtually unchanged; other types of business services increased.

Transfers under U.S. military agency sales contracts increased $0.5 billion, to $4.7 billion. The increase included a surge in shipments of electronic equipment to Japan. Direct defense expenditures abroad increased $0.1 billion, to $3.2 billion.

Investment income

The deficit on investment income decreased to $3.1 billion in the first quarter from $4.2 billion in the fourth. Income receipts increased; payments were virtually unchanged.

Direct investment income.--Income on U.S. direct investment abroad increased $0.7 billion, to $26.1 billion, in the first quarter. All of the increase was in earnings; net interest receipts were virtually unchanged. Earnings in several European countries were boosted by a pickup in economic activity. In Germany and France, earnings of manufacturing affiliates increased. In the United Kingdom, earnings of financial affiliates were up. In Canada, earnings of automotive affiliates were raised by the strong pickup in passenger car exports to the United States. These increases were partly offset by a decrease in earnings of Latin American affiliates, mainly in Brazil. The decrease was in earnings of manufacturing and banking affiliates, whose earnings may have been dampened by substantial interest rate increases in Brazil. In Asia, earnings of affiliates stabilized in the first quarter after dropping in the fourth. Earnings of Japanese affiliates were up, and affiliates in the Republic of Korea reported small profits following losses. Changes in affiliated earnings in other Asian countries were small and offsetting.

Payments of income on foreign direct investment in the United States decreased $0.9 billion, to $10.7 billion. The decrease was more than accounted for by a decrease in earnings of U.S. branches of Japanese banks and of U.S. manufacturing and petroleum affiliates.

"Other" private and U.S. Government income.--"Other" private income receipts increased $0.4 billion, to $34.5 billion, in the first quarter, reflecting increases in U.S. holdings of foreign securities and in outstanding nonbank claims. "Other" private income payments increased $1.0 billion, to $31.4 billion, as foreign holdings of U.S. securities and outstanding bank liabilities increased. U.S. Government income payments decreased $0.2 billion, to $22.5 billion.

Unilateral transfers

Net unilateral transfers decreased $3.1 billion, to $9.2 billion, in the first quarter. Almost all of the decrease was in U.S. Government grants, which had been boosted by an increase in grants to Israel in the fourth quarter.

Capital Account

Net recorded capital inflows--the difference between changes in net U.S. assets abroad and changes in net foreign assets in the United States--were $46.1 billion in the first quarter, compared with $97.1 billion in the fourth. Recorded capital outflows and inflows both decreased sharply; however, the drop in net inflows for foreign assets in the United States was substantially larger than the drop in net outflows for U.S. assets abroad.

U.S. assets abroad

U.S. assets abroad increased $44.7 billion in the first quarter, compared with an increase of $123.4 billion in the fourth. The slowdown largely reflected a shift to a decrease in bank-reported claims.

U.S. official reserve assets.--U.S. official reserve assets increased $0.4 billion in the first quarter, compared with an increase of $4.5 billion in the fourth (table D).

[TABULAR DATA D NOT REPRODUCIBLE IN ASCII]

Claims reported by U.S. banks.--U.S. claims on foreigners reported by U.S. banks shifted to net inflows of $12.9 billion in the first quarter from net outflows of $27.5 billion in the fourth. The huge expansion in interbank activity in the fourth quarter, when financial problems in Asia intensified, was largely reversed in the first quarter, when many of the problems appeared to subside. The reversal was more than accounted for by a shift to decreases in U.S.-owned banks' claims on their own foreign offices and, to a lesser extent, in foreign-owned banks' claims on their own foreign offices. The reversal reflected the repayment by foreign banks of large amounts of funds they had borrowed in the fourth quarter to meet heavy demand for credit in the Eurodollar market. The reduction in claims was concentrated in banks' own foreign offices in Western Europe, particularly the United Kingdom, and in the Caribbean. Bank claims on Japan also shifted to a decrease, and claims on other Asian countries continued to decline. In contrast, claims on unaffiliated foreigners in Western Europe increased, and foreign dollar deposits of U.S. banks' domestic customers shifted sharply to an increase.

Foreign securities.--Net U.S. purchases of foreign securities decreased to $5.2 billion in the first quarter from $8.0 billion in the fourth.

U.S. transactions in foreign stocks shifted to net purchases of $2.3 billion from net sales of $0.1 billion. Net purchases were small as U.S. investors remained cautious and were slow to reenter foreign markets after the intensification of Asian financial problems in the fourth quarter. In Europe, U.S. investors made small net purchases in some of the major markets and were net sellers in the United Kingdom and the Netherlands, even though strong stock price gains in many markets substantially exceeded those in U.S. markets. Net purchases were modest in Asia, where many stock markets recovered strongly in the first quarter--particularly in the Republic of Korea, Thailand, and the Phillippines. Transactions with Japan, where stock prices also increased, shifted to net purchases.

Net U.S. purchases of foreign bonds decreased to $2.9 billion from $8.1 billion, as corporate new issues in the United States decreased sharply and as new issues by foreign governments changed little after dropping sharply in the fourth quarter. These developments partly reflected the downgrading of Asian debt by international credit rating agencies as a result of financial conditions in Asia. Although the risk premiums on new issues of most Asian countries narrowed in the first quarter, no new Asian issues, other than Japanese issues, were offered in the U.S. market; in contrast, quarterly issues had averaged almost $4.0 billion in 1997. Trading in outstanding bonds shifted to net U.S. sales in the first quarter.

Direct investment.--Net outflows for U.S. direct investment abroad decreased to $30.9 billion in the first, quarter from $35.5 billion in the fourth. Smaller net outflows for equity capital and for intercompany debt more than accounted for the decrease. Reinvested earnings were up slightly. Outflows of equity capital for acquisitions were substantial, though less than in the fourth quarter. Several large acquisitions were made in the manufacturing, telecommunications, and natural resources industries. In intercompany debt, net lending by U.S. parents to their foreign affiliates decreased sharply, and borrowing by U.S. parents shifted to repayments.

Foreign assets in the United States

Foreign assets in the United States increased $90.9 billion in the first quarter, compared with an increase of $220.5 billion in the fourth. The slowdown was more than accounted for by a shift to a decrease in liabilities to foreigners reported by U.S. banks. Net inflows for purchases of U.S. securities other than U.S. Treasury securities were a record high.

Foreign official assets.--Foreign official assets in the United States increased $10.2 billion in the first quarter, in contrast to a decrease of $27.0 billion in the fourth (table D). Assets of developing countries increased as some countries rebuilt reserve positions after reductions in the fourth quarter, while assets of industrial countries decreased a small amount.

Liabilities reported by U.S. banks.--U.S. liabilities reported by U.S. banks, excluding U.S. Treasury securities, decreased $41.2 billion in the first quarter, in contrast to an increase of $89.6 billion in the fourth. U.S. banks repaid funds that had been borrowed from foreign offices in the fourth quarter to fund strong interbank demand in the Eurodollar market related to the intensification of Asian financial problems. Japanese banks in the United States continued to rely on the unusually large amount of funds advanced to them by parent banks in Japan in the fourth quarter and repaid only a small part of the borrowing in the first. The availability of these funds permitted the Japanese banks in the United States to avoid some borrowing in interbank markets, where elevated risk premiums remained on Japanese bank borrowing, though at levels much below those in the fourth quarter.

Banks' custody liabilities increased sharply. Most of the inflows were from financial centers in the Caribbean and Western Europe.

U.S. securities other than U.S. Treasury securities. --Net foreign purchases of U.S. securities other than U.S. Treasury securities were $76.7 billion in the first quarter, more than twice as large as the net purchases of $36.8 billion in the fourth quarter (chart 4).

Net foreign purchases of U.S. stocks were a record $29.4 billion, compared with $9.9 billion in the fourth quarter. (The previous record was $23.2 billion, in the third quarter of 1997.) Net purchases from Western Europe and the Caribbean increased sharply, reflecting a rise of more than 10 percent in U.S. stock prices, a favorable outlook for stable interest rates, and positive prospects for continued economic growth. Hong Kong, Singapore, and other Asian countries continued to be net sellers of U.S. stocks. Transactions with Japan shifted to net sales from net purchases.

Net foreign purchases of U.S. bonds were a record $47.3 billion, compared with net purchases of $26.9 billion in the fourth quarter. (The previous record was $37.1 billion, in the third quarter of 1997.) Net foreign purchases of U.S. federally sponsored agency bonds increased sharply to a record $20.8 billion from $10.0 billion. The increase in U.S. agency bonds included a sharp increase in new issues abroad, reflecting U.S. agencies' increased demand for funds and some continuation of the increased preference for dollar-denominated assets. Net foreign purchases of outstanding bonds increased strongly to $12.8 billion from $5.0 billion. New issues sold abroad by U.S. corporations were $13.7 billion, compared with $11.8 billion; despite the pickup, new issues were at half the peak levels of the second and third quarters of 1997.

U.S. Treasury securities.--Foreign transactions in U.S. Treasury securities shifted to net sales of $1.4 billion in the first quarter from net purchases of $35.3 billion in the fourth. Net purchases by Western Europe were down but remained strong, and transactions with the Caribbean shifted to net sales.

U.S. currency.--U.S. currency shipments slowed to $0.7 billion in the first quarter from $9.9 billion in the fourth. Shipments slowed as foreign demand for U.S. banknotes subsided.

Direct investment.--Net inflows for foreign direct investment in the United States decreased to $25.0 billion in the first quarter from $28.5 billion in the fourth. A slowdown in net intercompany debt inflows accounted for most of the decrease. U.S. affiliates' receivables continued to be reduced, but at a sharply slower pace, and U.S. affiliates' payables decreased; payables had been boosted in the fourth quarter by inflows from foreign parents for acquisitions. Net inflows for equity decreased slightly as the pace of large acquisitions slowed, but they remained substantial--only 12 percent below the record quarterly inflows of the fourth quarter of 1997. In contrast to the fourth quarter, there were fewer large acquisitions. Among the largest were acquisitions in transportation, information services, and financial services.

Tables 1 through 10a follow.

(1.) Quarterly estimates of U.S. current- and capital-account components are seasonally adjusted when statistically significant seasonal patterns are present. The accompanying tables present both adjusted and unadjusted data. Percentage changes are at quarterly rates.

(2.) Affiliated receipts and payments comprise transactions between U.S. parents and their foreign affiliates and transactions between U.S. affiliates and their foreign parents.

RELATED ARTICLE: Data Availability

The current and historical estimates for tables 1-10A of the U.S. international transactions accounts are available on diskette from BEA as follows:

* U.S. International Transactions. The most recently released annual and quarterly estimates are available by a 1-year subscription (four installments); also included as part of the subscription is the diskette of the historical estimates (see below)--product number IDS-0001, price $80.00.

* U.S. International Transactions, First Quarter 1998. Annual estimates for 1995-97 and quarterly estimates for 1996:I-1998:I are available on a single diskette--product number IDN-0203, price $20.00

* U.S. International Transactions, Historical Series. The historical annual and quarterly estimates that begin with the earliest period available for individual tables are available on a single diskette--product number IDN-0204, price $20.00

To order using Visa or MasterCard, call the BEA Order Desk at 1-800-704-0415 (outside the United States, call 202-606--9666). To order by mail, send a check made payable to "Bureau of Economic Analysis, BE-53" to BEA Order Desk, BE-53, Bureau of Economic Analysis, U.S. Department of Commerce, Washington, Dc 20230.

In addition, this article is available on BEA's Web site at <http://www.bea.doc.gov>. It is also available through the Department of Commerce's STAT-USA on the Economic Bulletin Board and on the Web site at <http://www.stat-usa.gov>; for more information or to subscribe, call STAT-USA at 202-482-1986.

RELATED ARTICLE: Changes in Table Formats

As part of the annual revision of the international transactions accounts, the following changes have been made to the tables. In tables 1 and 20, net U.S. currency flows are shown separately in line 59; previously, they had been combined with private transactions in U.S. Treasury securities in line 58. In table 3, there will now be only two subcomponents of "other" transportation receipts and payments--freight services and port services. The third subcomponent--"other"--has been eliminated as a result of the reclassification of leasing of transportation equipment to the "other" private services accounts and the reclassification of the remaining "other" components to freight services. In table 7, three lines have been added: Line A6, "financial intermediaries accounts (claims)"; line B5, "financial intermediaries accounts (liabilities)"; and line A6, "other liabilities." In table 9, U.S. currency flows have been removed from line B2; that line now comprises only U.S. Treasury securities.