U.S. international transactions, second quarter 1988.

Dilullo, Anthony J.

THE U.S. current-account deficit decreased to $33.3 billion in the second quarter from $36.9 billion (revised) in the first.' The decrease was more than accounted for by a reduction in the merchandise trade deficit to $29.9 billion from $35.2 billion. Merchandise exports increased to a record level, and imports decreased slightly. The services balance shifted to net payments of $0.5 billion &om net receipts of $1.4 billion. The shift reflected a decrease in receipts of income on U.S. direct investment abroad that was more than accounted for by a shift to capital (currency translation) losses associated with appreciation of the dollar. Receipts of income on other private assets and U.S. Government assets also decreased. A decrease in payments of income on foreign direct investment in the United States was partly offset by an increase in other private income payments. Net receipts for other services increased. Net unilateral transfers decreased $0.2 billion to $2.9 billion.

In the private capital accounts, liabilities reported by U.S. banks increased strongly. Funds were drawn to the United States by an increase in loan demand and favorable shortterm interest rate differentials. Claims reported by banks increased, reflecting both a pickup in economic activity abroad and interbank lending related to the increase in bank liabilities.

In securities transactions, U.S. corporations stepped up new issues abroad, and foreign investors' transactions in both outstanding U.S. bonds and U.S. stocks shifted to net purchases. In U.S. transactions in foreign securities, both foreign stocks and foreign bonds shifted to net sales.

Net inflows for foreign direct investment in the United States increased sharply, mostly for acquisitions. Net outflows for U.S. direct investment abroad decreased, as intercompany debt shifted to inflows and equity inflows related to the sale of foreign affiliates increased.

The statistical discrepancy (errors and omissions in reported transactions) was an outflow of $15.7 billion in the second- quarter, in contrast to an inflow of $4.3 billion in the first.

U.S. dollar in exchange markets

In the second quarter, the dollar appreciated less than 1 percent on a trade-weighted quarterly average basis against the currencies of 10 industrial countries and 6 percent against the currencies of 22 OECD countries (chart 3, table C). After the dollar depreciated in early April, intervention by U.S. and foreign monetary authorities was undertaken, as the dollar continued to depreciate against many European currencies (chart 4). Subsequently, the dollar stabilized through early June, and then it appreciated strongly against most currencies. The more rapid rise in U.S. interest rates than in foreign rates, due to both strong U.S. economic activity and some tightening in reserve conditions by the Federal Reserve, and the reductions in U.S. trade deficits for March and April contributed to the appreciation. By the end of the second quarter, the dollar had reached its highest level since September 1987 against many currencies, and U.S. and foreign monetary authorities intervened to restrain further appreciation.

From the end of March to the end of June, the dollar appreciated 5 percent against the German mark and 3 percent against the British pound. The dollar was stable against the Japanese yen until late June, when it appreciated sharply. The dollar depreciated 3 percent against the Canadian dollar as interest rate differentials continued to favor the Canadian dollar.

Merchandise trade

The merchandise trade deficit decreased to $29.9 billion in the second quarter from $35.2 billion in the first. Exports rose to a record level, and imports decreased.

Exports. -Exports increased $4.4 billion to $79.7 billion in the second quarter. Both nonagricultural and agricultural exports increased.

Nonagricultural exports increased $3.7 billion to $70.0 billion (chart 5). The increase was mainly in industrial supplies and materials and in capital goods-each up $1.1 billion-and in consumer goods--up $0.5 billion . Among industrial supplies and materials, the increase was largely in ferrous and nonferrous metals, building materials (mainly lumber to Japan), and coal. Some of the increase in nonferrous metals reflected a substantial price increase in aluminum. Precious metals, which had more than doubled in the first quarter, decreased slightly. The increase in capital goods reflected a step-up in aircraft deliveries. Exports of computers, peripherals, and parts decreased slightly but remained well above quarterly averages for 1987.

Exports of automotive vehicles and parts increased $0.1 billion. A decrease in exports to Canada was more than offset by increases in exports of passenger cars to areas other than Canada, mainly Western Europe, and of parts to Mexico. The latter increase partly reflected the startup of assembly operations there by a U.S. company.

The recent increases in nonagricultural exports reflected, in addition to dollar depreciation, a pickup in economic activity in several key industrial countries since the second quarter of 1987 (chart 6). The average quarterly increase in nonagricultural exports from the first quarter of 1986 to the first quarter of 1987 was 1.8 percent. From the second quarter of 1987 to the second quarter of 1988, the increase was 6.9 percent. In constant (1982) dollars, the corresponding average percentage increases were 2.1 percent and 6.6 percent.

Agricultural exports increased $0.7 billion to $9.7 billion. An increase in the competitiveness of U.S. agricultural products resulting from dollar depreciation since early 1985, extensive use of the Export Enhancement Program, and reduced export supplies in some competing countries were largely responsible for boosting U.S. agricultural exports to their highest level since the second quarter of 1984. Corn increased $0.3 billion, reflecting increases to the Soviet Union and Mexico. Wheat increased $0.1 billion. Meat products and poultry increased $0.1 billion. Soybeans decreased $0.1 billion. The average price of both soybeans and wheat increased 13 percent, and that of corn, 7 percent.

Over the past 6 quarters, grain exports-the major U.S. agricultural export-increased 10 percent at an average quarterly rate. In addition, other agricultural commodities, such as oilseeds and food oils, increased 16 percent; cotton, 13 percent; tobacco, 10 percent; soybeans, 9 percent; meat and poultry, 6 percent; and other foods and beverages, 3 percent.

Imports.-Merchandise imports decreased $0.9 billion to $109.6 billion in the second quarter. A decrease in nonpetroleum imports was partly offset by an increase in petroleum imports.

Nonpetroleum imports decreased $1.1 billion to $99.4 billion (chart 7). Among the major end-use categories, automotive vehicles and parts decreased $0.7 billion; foods, feeds, and beverages, $0.6 billion; industrial supplies and materials, $0.5 billion; and consumer goods, $0.4 billion. The decrease in automotive vehicles and parts was largely accounted for by a decrease in passenger cars, mostly from West Germany and South Korea; the decrease partly reflected a deceleration in U.S. sales. The average price of cars from West Germany increased 21 percent; that of cars from South Korea and Japan, 3 percent each. Partly offsetting the decrease in passenger cars was an increase in trucks and buses and automotive parts and accessories from Canada. Most commodities in the foods, feeds, and beverages and in the consumer goods categories decreased. Most of the decrease in industrial supplies and materials was in steelmaking materials, iron and steel products, and nonmonetary gold. Capital goods increased $1.0 billion, reflecting increases in commercial aircraft from Western Europe and in computers and semiconductors from Japan and the newly industrialized countries in Asia (Hong Kong, South Korea, Taiwan, and Singapore).

The average quarterly rate of increase in nonpetroleum imports from the first quarter of 1986 to the second quarter of 1988 was 2.8 percent. Although the rate of increase slowed during the period, partly because of the higher cost of imports resulting from dollar depreciation, the increase persisted because of strength in U.S. economic activity (chart 8). A similar pattern occurred in constant (1982) dollar nonpetroleum imports. The corresponding average percentage increase for the period was 1.7 percent.

Petroleum imports increased $0.3 billion to $10.2 billion in the second quarter. The average number of barrels imported daily increased to 7.38 million from 7.14 million. The average price per barrel decreased to $15.14 from $15.23.

Balances by area.-The merchandise trade deficit with industrial countries decreased $1.7 billion to $19.0 billion in the second quarter. The deficits with Western Europe and Japan decreased $0.9 billion and $1.1 billion, respectively. With Western Europe, exports changed little, as increases in nonagricultural exports to most countries were offset by decreases in agricultural exports; imports from most of these countries decreased. Exports to Japan increased; imports decreased. A faster increase in imports than in exports accounted for a $0.5 billion increase in the deficit with Canada.

The deficit with the newly industrialized countries in Asia decreased $0.7 billion. Exports increased $0.7 billion; imports were unchanged. A large part of the decrease in the deficit was with Taiwan.

The deficit with developing countries, excluding the newly industrialized countries in Asia, decreased $2.8 billion. One-half of the decrease was with Latin America, mainly reflecting an increase in exports, largely agricultural products and automotive parts for assembly, to Mexico.

Service transactions

The services balance shifted to net payments of $0.5 billion in the second quarter from net receipts of $1.4 billion in the first quarter. Receipts decreased $2.2 billion to $43.6 billion, and payments decreased $0.3 billion to $44.1 billion. Investment income receipts and payments both decreased. Receipts for other services were boosted by increases in travel and passenger fares, other transportation, and transfers under military sales contracts. Payments decreased slightly; payments for most services were virtually unchanged, and payments for other transportation decreased.

A decrease of $2.3 billion to $10.2 billion in receipts of income on U.S. direct investment abroad was more than accounted for by a shift to capital (currency translation) losses, reflecting the effects of dollar appreciation in the second quarter. Before capital gains and losses, income increased $0.7 billion to $12.2 billion. Earnings of both nonpetroleum and petroleum affiliates increased, reflecting strength in foreign economic activity.

Payments of income on foreign direct investment decreased $0.8 billion to $4.5 billion. Capital gains decreased $0.4 billion. The U.S. affiliates of some Canadian and European insurance companies experienced capital losses, as the drop in U.S. securities prices in the second quarter reduced the value of those companies' investment portfolios. Income before capital gains decreased $0.4 billion.

Receipts of income on other private investment abroad decreased $0.1 billion to $11.9 billion. Receipts of income on U.S. Government assets, which were boosted in the first quarter by the rescheduling of interest receipts from Egypt, decreased $0.8 billion to $1.3 billion.

Payments of income on other private investment in the United States increased $0.5 billion to $14.0 billion, and U.S. Government income payments increased $0.1 billion to $6.7 billion. Both these developments reflected increases in outstanding liabilities and in U.S. interest rates.

Among other services, net travel and passenger fare payments decreased $0.3 billion to $1.5 billion. Travel receipts increased $0.3 billion to $4.5 billion, as the number of Canadian and overseas visitors increased. Receipts from Mexico in the border area also increased, partly as a result of the stability of the Mexican peso against the dollar since the beginning of the year. Passenger fare receipts increased $0.1 billion to $1.8 billion. Travel and passenger fare payments were nearly unchanged at $7.9 billion. An increase in overseas travel payments was offset by decreases in payments to Canada and Mexico.

Other transportation receipts increased $0.2 billion to $4.9 billion, reflecting an increase in freight earnings on U.S. exports. Payments decreased $0.2 billion to $4.7 billion, reflecting lower import freight charges.

Transfers under U.S. military sales contracts increased $0.2 billion to $2.7 billion. Deliveries of aircraft to Israel and a few countries in the Far East accounted for a large part of the increase. Direct defense expenditures were unchanged at $3.5 billion.

Unilateral transfers

Net unilateral transfers decreased $0.2 billion to $2.9 billion in the second quarter. U.S. Government grants and net private remittances each decreased $0.1 billion.

U.S. assets abroad

U.S. assets abroad increased $13.3 billion in the second quarter, in contrast to a decrease of $6.6 billion in the first; the increase mainly reflected a shift to an increase in claims reported by U.S. banks.

U.S. official reserve assets. -U.S. official reserve assets were virtually unchanged in the second quarter, after decreasing $1.5 billion in the first. A small increase in foreign currency holdings was offset by decreases in special drawing rights and in the U.S. reserve position in the International Monetary Fund.

Claims reported by banks.-U.S. claims on foreigners reported by U.S. banks increased $14.0 billion in the second quarter, following a decrease of $17.1 billion in the first. Claims increased strongly on Japan, Western Europe, and Canada, areas in which loan demand was buoyed partly by a pickup in economic growth; over three-fifths of this increase was on Japan. Much of the increase was accounted for by foreign-owned U.S. banks. Some of the increase also reflected lending by U.S. bank holding companies to foreign offices that returned the funds to U.S. banks. Claims on Caribbean offices decreased.

Foreign securities.-U.S. transactions in foreign securities shifted to net sales of $1.6 billion in the second quarter from net purchases of $4.5 billion in the first.

Net sales of foreign stocks were $1.4 billion, in contrast to net purchases of $0.7 billion, The selloff, which was concentrated in British and Japanese stocks, partly reflected dampened U.S. investor interest in stocks, as U.S. short-term interest rates increased and as average increases in British and Japanese stock prices slowed.

Net transactions in foreign bonds shifted to net sales of $0.2 billion from net purchases of $3.8 billion. New foreign bonds issued in the United States decreased to $1.0 billion from $2.1 billion because of a slowdown in new Canadian issues, which was probably associated with continued wide differentials between U.S. and Canadian interest rates. Net purchases of outstanding bonds were $0.6 billion, compared with $2.7 billion in the first quarter; purchases of British gilt-edge bonds fell along with British yields. Purchases picked up in June, as yields rebounded following tightening by British monetary authorities. Redemptions increased to $1.8 billion from $1.0 billion. Redemptions of Western European issues were $1.2 billion.

Direct investment.-Net outflows for U.S. direct investment abroad were $0.1 billion in the second quarter, compared with $6.4 billion in the first. Net intercompany debt shifted to net inflows of $0.3 billion from net outflows of $3.8 billion. Lending to foreign affiliates decreased, and European affiliates repaid several large loans. Equity capital inflows were $1.9 billion, compared with $0.9 billion. More than one-half of the second-quarter inflows was from the sale of a West German petroleum refining and marketing affiliate. The sale of an interest in a Swiss bank affiliate and the pullout from a joint venture in Japan also contributed to the net inflows. Reinvested earnings were $2.3 billion, compared with $3.6 billion.

Foreign assets in the United States

Foreign assets in the United States increased $62.3 billion in the second quarter, compared with $26.1 billion in the first. Much of the second- quarter increase was accounted for by increases in liabilities reported by U.S. banks and foreign direct investment inflows for acquisitions.

Foreign official assets. -Foreign official assets increased $5.8 billion in the second quarter, compared with $24.7 billion in the first. Assets of industrial countries increased $6.7 billion, assets of OPEC members decreased $1.8 billion, and assets of other countries increased $0.9 billion (table B).

Liabilities reported by banks.-Liabilities to private foreigners and international financial institutions reported by U.S. banks, excluding U.S. Treasury securities, increased $28.8 billion in the second quarter, in contrast to a $17.2 billion decrease in the first. U.S. banks borrowed heavily from their own foreign offices in the United Kingdom and Caribbean banking centers to fund strong loan demand in the United States and abroad. Widening of differentials between U.S. rates and overnight Eurodollar rates-as Eurodollar rates increased less than U.S. rates-encouraged this development. The inflow included relending to U.S. banks of funds borrowed by U.S. bank holding companies in U.S. markets and shifted to foreign branches during the quarter. Concur rently, larger increases in U.S. short-term (90-day) rates than in most key foreign rates (except British rates in June) and appreciation of the dollar favored placing foreign funds in dollar-denominated deposits (chart 9).

U.S. Treasury securities.-Net foreign purchases of U.S. Treasury securities by private foreigners and international financial institutions were $4.5 billion in the second quarter, compared with $6.9 billion in the first. International financial institutions accounted for most of the purchases. Purchases by private foreigners decreased.

U.S. securities.-Net foreign purchases of U.S. securities other than U.S. Treasury securities rebounded to $9.8 billion in the second quarter from $2.4 billion in the first. Most of the increase was due to net purchases of bonds. Transactions in stocks shifted to small net purchases.

Net foreign purchases of U.S. bonds were $9.1 billion, compared with $2.6 billion. Bonds newly issued abroad by U.S. corporations were $5.0 billion, compared with $2.6 billion; the increase partly reflected a slower rise in long-term rates abroad than in the United States and a step-up in corporate demand for funds. Although there was a pickup in foreign currency issues and in floating-rate and zero-coupon issues, most of the increase was in fixed-rate, dollar-denominated issues.

Transactions in outstanding U.S. corporate and other bonds shifted to net foreign purchases of $4.1 billion from small net sales. A strong rise in U.S. yields and appreciation of the dollar attracted funds from foreign investors, particularly Japanese, British, and German residents.

Net foreign purchases of U.S. stocks were $0.7 billion, in contrast to net sales of $0.2 billion. Continued large purchases by Japan offset sales by most other countries.

Direct investment.-Net inflows for foreign direct investme nt in the United States increased to $13.4 billion from $7.3 billion. Nearly all the net inflows were for acquisitions. Net equity capital inflows remained strong at $7.0 billion. The largest inflows were for the Japanese acquisition of a major U.S. tire manufacturer and for the French acquisition of several publishing affiliates and a manufacturing affiliate. The purchase of a major U.S. retailer by the United Kingdom also contributed to the inflows. Net intercompany debt inflows were $5.4 billion in the second quarter, in contrast to unusual net outnows of $3.1 billion in the first. The inflows were for several acquisitions by the United Kingdom, including the purchase of a large food service company through its U.S. affiliates. Reinvested earnings were $0.9 billion, compared with $3.3 billion.