U.S. international transactions, third quarter 1987.

Dilullo, Anthony J.

U.S. International Transactions, Third Quarter 1987

THE U.S. current-account deficit increased to $43.4 billion in the third quarter from $41.2 billion in the second.1 The increase reflected a shift in service transactions to net payments from net receipts, as payments of income on foreign investment in the United States increased sharply and transfers under military sales contracts decreased. The merchandise trade deficit increased slightly. Net unilateral transfers decreased.

1. Quarterly estimates for U.S. current- and capital-account components are seasonally adjusted when statistically significant seasonal patterns are present.

In the private capital accounts, liabilities reported by U.S. banks increased strongly. Funds were drawn to the United States by favorable short-term interest rate differentials and investor preferences for short-term assets. Claims reported by U.S. banks increased, partly because of demand in the interbank market at the end of the quarter.

In securities transactions, net foreign purchases of U.S. stocks decreased. Net foreign purchases of U.S. bonds newly issued abroad by U.S. corporations increased but remained well below levels of recent quarters. Net foreign sales of U.S. Treasury securities increased. Among U.S. transactions in foreign securities, there were shifts to net U.S. sales of foreign stocks and to net U.S. purchases of foreign bonds.

Net inflows for foreign direct investment in the United States decreased, but remained strong due to a few large acquisitions. Net outflows for U.S. direct investment abroad increased, as equity flows shifted to net outflows.

Foreign official assets in the United States increased slightly. Intervention sales and purchases of dollars in exchange markets by monetary authorities of industrial countries were mostly offsetting. Assets of other countries increased.

The statistical discrepancy (errors and omissions in reported transactions) was an inflow of $4.6 billion compared with an inflow of $6.5 billion in the second quarter.

U.S. dollar in exchange markets

The dollar appreciated 2 percent against the currencies of 10 industrial countries and 4 percent against the currencies of 22 OECD countries in the third quarter on a trade-weighted quarterly average basis (table C, chart 2).

From the beginning of the quarter through mid-August, the dollar appreciated 3 percent against the currencies of 10 industrial countries. Appreciation was 3 percent against the Japanese yen and 2 percent against the German mark. Short-term interest rate differentials favoring the dollar, although slightly smaller than in the second quarter, were still larger than in early 1987. Increased political tensions in the Middle East also may have contributed to dollar appreciation.

In mid-August, following intervention sales of dollars by U.S. and foreign monetary authorities and release of the unfavorable U.S. merchandise trade statistics for June, the dollar began to weaken. Between mid-August and the end of the quarter, the dollar depreciated 2-3 percent against most major currencies and 4 percent against the Japanese yen. The depreciation was cushioned by intervention purchases of dollars by U.S. and foreign monetary authorities in late August and early September and by a one-half point increase in the U.S. discount rate in early September. Subsequent increases in short-term interest rates and the Group of Seven communique restating major industrial countries' commitments to foster relative stability of exchange rates helped support the dollar near the end of the quarter.

Merchandise trade

The merchandise trade deficit was $39.8 billion in the third quarter compared with $39.6 billion in the second. Exports increased $5.2 billion, or 9 percent, to $65.3 billion, and imports increased $5.4 billion, or 5 percent, to $105.1 billion (table E).

Imports.--Nonpetroleum imports increased $2.8 billion, or 3 percent, to $92.5 billion; volume increased 2 percent. Dollar depreciation and larger increases in import prices than in domestic prices of some products have contributed to a slowing in year-to-year increases in nonpetroleum imports since mid-1986 (chart 3).

Imports of nonpetroleum industrial supplies increased $1.1 billion in the third quarter, as prices in world commodity markets rose strongly. Prices of metals rose 11 percent; wool, 7 percent; crude rubber, 6 percent; and nonmonetary gold, 4 percent. More than one-half of the increase in value in industrial supplies was accounted for by nonferrous metals. Among other major commodity categories, capital goods increased $1.0 billion to $22.3 billion, largely in business machines. Automotive products increased $0.2 billion to $21.3 billion. Passenger cars from countries other than Canada increased $0.9 billion. The increase was more than accounted for by a 23-percent increase in imports from Japan. U.S. sales of cars from Japan increased 21 percent, and inventories increased 3 percent. Cars from South Korea--now the second largest overseas supplier of cars to the United States--were up 10 percent. The increase was smaller than in many recent quarters because of workers' strikes in South Korea in July and August. Passenger cars from Canada decreased $0.2 billion and automotive parts from all areas decreased $0.6 billion, as domestic auto manufacturers cut production to reduce inventories. Consumer goods increased $0.1 billion to $22.0 billion. A $0.3 billion decrease in household appliances was more than offset by an increase in nondurable goods. Other nonpetroleum imports increased $0.2 billion.

Petroleum imports increased $2.7 billion, or 27 percent, to $12.6 billion, as domestic production decreased and consumption and inventories increased. Nearly all of the increase in imports was from members of OPEC. The average number of barrels imported daily increased to 7.67 million from 6.31 million; the average price per barrel increased to $18.05 from $17.32. Price increases in imports in the third quarter were moderated by a decline in September, following production increases and price discounting by some members of OPEC in August.

Exports.--Nonagricultural exports increased $4.0 billion, or 7 percent, to $56.8 billion; volume increased 7 percent. Increased civilian aircraft deliveries, mainly to Japan and Brazil, accounted for more than one-third of the increases in value and volume. Gains in other nonagricultural exports reflected some pickup in demand in many major world areas. The main exception was Western Europe, where demand was restrained by generally slow economic growth. Among other capital goods, machinery exports increased $1.0 billion, reflecting increases of $0.4 billion in business machines; $0.3 billion in broadcast, communication, and telephonic equipment; and $0.1 billion each in construction, textile, and other industrial machinery. Engines and parts for aircraft increased $0.3 billion.

Among other major nonagricultural commodity categories, industrial supplies and materials increased $0.7 billion, mainly of lumber, petroleum products, and paper base products to Japan. Consumer goods increased $0.3 billion. Automotive products were unchanged; a $0.2 billion increase in parts to countries other than Canada was offset by a decrease in completed passenger cars. Other nonagricultural exports increased $0.1 billion.

Agricultural exports increased $1.2 billion, or 17 percent, to $8.4 billion, the highest level in almost 3 years; volume increased 18 percent. Although the volume of agricultural exports has increased since implementation last year of the U.S. Export Enhancement Program, depressed prices for some commodities have reduced the impact of larger export volumes on the value of agricultural exports. Exports in the third quarter were boosted by a $0.9 billion increase in soybeans, partly as a result of reduced supplies from Latin America, mainly Brazil. Wheat and cotton exports increased $0.1 billion each. Wheat exports to the Soviet Union were strong for the second consecutive quarter as a result of U.S. export promotion programs. Average export prices of wheat were unchanged. The increase in cotton exports, mostly to South Korea and Taiwan, reflected tighter world supplies from increased demand and lower worldwide production in the current crop year. Average export prices of cotton increased 15 percent.

Balances by area.--The merchandise trade deficit with most industrial countries decreased. The deficit with Western Europe decreased $0.5 billion. Exports to most Western European countries were boosted by an increase in agricultural exports, the first in several quarters. A decrease in imports was more than accounted for by Germany. The deficit with Japan decreased $0.8 billion, as nonagricultural exports increased twice as much as imports. The deficit with Canada decreased $0.2 billion; both exports and imports decreased, partly because of a slowdown in trade in automotive products.

Among other areas, the deficit with Latin America decreased $1.1 billion, largely because of increases in exports to Brazil and Mexico. The deficit with the newly industrialized countries in Asia (Hong Kong, South Korea, Singapore, and Taiwan) increased $1.2 billion. An increase in imports was partly offset by increased exports. The deficit with members of OPEC increased $1.7 billion.

Service transactions

Service transactions shifted to net payments of $0.6 billion in the third quarter--the first deficit in almost 30 years--from net receipts of $1.5 billion in the second. The shift was largely accounted for by an increase in payments of income on foreign direct investment in the United States and a decrease in receipts from transfers under military sales contracts. Net service receipts have gradually diminished from a peak in the fourth quarter of 1981.

Receipts of income on U.S. direct investment abroad increased $0.2 billion to $9.9 billion. Earnings of nonpetroleum affiliates, excluding capital gains and losses, were up $0.7 billion and were partly offset by a $0.2 billion decrease in earnings of petroleum affiliates. Earnings of European refining affiliates were reduced because competitive pressures did not permit product prices to increase in step with crude petroleum prices. Capital gains decreased $0.3 billion to $0.6 billion. The decrease partly reflected appreciation of the dollar until mid-August.

Payments of income on foreign direct investment in the United States increased $1.6 billion to $4.5 billion. Earnings, excluding capital gains and losses, increased $0.8 billion, largely because of a $0.6 billion shift to positive earnings from losses by bank affiliates. Also, earnings of Japanese-owned wholesale trade of filiates increased $0.3 billion. Capital gains, mostly of insurance affiliates, increased $0.5 billion.

Receipts of income on other private investment abroad decreased $0.1 billion to $11.3 billion. Payments of income on other private investment in the United States increased $0.4 billion to $12.3 billion. Payments have increased sharply in recent quarters --exceeding receipts in the second and third quarters--as a result of continued large increases in bank liabilities and net purchases of U.S. securities (especially bonds), in combination with higher interest rates.

Both receipts of income on U.S. Government assets and payments of income on U.S. Government liabilities were virtually unchanged at $1.4 billion and $6.0 billion, repectively. Net foreign sales of U.S. Treasury securities increased, but the impact on income payments was offset by higher interest rates.

Travel receipts increased $0.2 billion to $4.0 billion. Most of the increase was in travel from overseas. Travelers from Western Europe and Japan continued to be attracted to the United States, as the lower value of the dollar reduced the foreign currency cost of travel in the United States. Travel receipts from Canada and Mexico were unchanged. Travel payments increased $0.2 billion to $5.4 billion. The increase was evenly divided between overseas destinations and Mexico. Overseas travel was encouraged by the greater availability of low-priced fares, particularly on U.S. air carriers. Most of the increase in payments to Mexico was for travel to interior destinations, as depreciation of the peso continued to attract increasing numbers of U.S. travelers. Travel payments in the border area were unchanged.

Passenger fare receipts were unchanged at $1.2 billion; payments increased $0.1 billion to $2.1 billion.

Other transportation receipts increased $0.2 billion to $4.3 billion. Freight receipts were boosted by an increase in export volume. An increase in receipts for port services partly reflected higher fuel prices. Payments increased $0.3 billion to $5.0 billion, reflecting larger freight payments for petroleum imports and higher payments for port services abroad.

Transfers under military sales contracts decreased $0.6 billion to $2.9 billion. The decrease reflected completion of scheduled deliveries of aircraft and other major items in the first half of the year. Direct defense expenditures were virtually unchanged at $3.4 billion.

Net unilateral transfers

Net unilateral transfers decreased $0.2 billion to $2.9 billion due to a decrease in U.S. Government grants.

U.S. assets abroad

U.S. official reserve assets were unchanged in the third quarter compared with a decrease of $3.4 billion in the second. A decrease in the U.S. reserve position in the International Monetary Fund was offset by increases in holdings of special drawing rights and foreign currencies.

Claims on foreigners reported by U.S. banks increased $21.2 billion compared with an increase of $15.7 billion. Most of the increase was in claims on banks' own foreign offices in Caribbean banking centers and was related to end-of-quarter demand in the interbank market. Claims on own foreign offices in the United Kingdom and other Western European countries decreased. Claims on Japan continued to increase strongly.

Net U.S. purchases of foreign securities were $0.9 billion compared with net sales of $0.4 billion. Transactions in foreign stocks shifted to net sales of $0.4 billion from net purchases of $0.5 billion (chart 4). The shift occurred partly because prices in many leading markets leveled off after substantial advances in the first half of the year. New issues in the United States decreased $0.6 billion to $0.8 billion, and net sales of outstanding foreign stocks increased $0.2 billion to $1.2 billion. Net purchases of outstanding Western European and Canadian stocks slowed $0.3 billion each to $0.3 billion and $0.2 billion, respectively. Net sales of Japanese stocks decreased $0.6 billion to $1.5 billion. The United States has been a net seller of Japanese stocks for five consecutive quarters, partly reflecting concern about the rise in long-term Japanese interest rates and the impact of the stronger yen on Japanese corporate earnings.

U.S. transactions in foreign bonds shifted to net purchases of $1.3 billion from net sales of $0.9 billion. New foreign bonds issued in the United States decreased to $0.4 billion from $1.0 billion, as U.S. interest rates in creased 50 basis points in the third quarter following a 75 basis-point increase in the second. Redemptions decreased $0.2 billion to $0.6 billion. Net transactions in outstanding foreign bonds shifted to net purchases of $1.5 billion from net sales of $1.1 billion, mainly due to a $1.8 billion slowdown in net sales of Japanese bonds. Net purchases of British gilt-edged bonds slowed to $2.3 billion from $3.5 billion, partly because rates on U.S. Government long-term bonds increased substantially, eliminating much of the differential in favor of British bonds. In contrast, net purchases of Canadian bonds increased $1.0 billion.

Net outflows for U.S. direct investment abroad increased $1.8 billion to $7.3 billion. Most of the increase was accounted for by a $1.4 billion shift in equity flows to an outflow of $0.6 billion. Increased equity contributions to affiliates in many areas, particularly the United Kingdom and Canada, were partly offset by inflows from Japan resulting from the sale of an affiliate. Intercompany debt outflows increased $0.1 billion to $1.2 billion. Reinvested earnings increased $0.3 billion to $5.5 billion.

Foreign assets in the United States

Foreign official assets in the United States increased $0.4 billion in the third quarter compared with $10.1 billion in the second (table B). Assets of industrial countries decreased $1.1 billion in contrast to large increases in the first and second quarters; the small third-quarter change largely reflected nearly offsetting intervention sales and purchases of dollars in exchange markets during the quarter. Assets of OPEC members continued to decline. The increase in assets of other countries was mostly accounted for by the newly industrialized countries in Asia.

Liabilities to private foreigners and international financial institutions reported by U.S. banks, excluding U.S. Treasury securities, increased $48.9 billion compared with $14.8 billion. Interest rate differentials in favor of U.S. dollar-denominated assets, although slightly slightly smaller than in the second quarter, continued to provide an incentive to investors who preferred short-term assets. Preferences for those types of assets also reflected uncertainties about foreign exchange markets and about U.S. and foreign securities prices. Inflows accelerated sharply in mid-September when the Federal Reserve reduced the availability of bank reserves and U.S. interest rates rose much faster than Eurodollar rates. Most of these funds were channeled to the United States through banking offices in the Caribbean.

Net foreign sales of U.S. Treasury securities increased $0.6 billion to $2.8 billion. Foreigners were net purchasers in July when the dollar appreciated against major foreign currencies. Subsequently, transactions shifted to net sales, largely of long-term bonds and notes, as the decrease in bond prices accelerated in the second half of the quarter and the dollar began to depreciate.

Net foreign purchases of U.S. securities other than U.S. Treasury issues were $12.7 billion compared with $15.9 billion. Net foreign purchases of U.S. stocks decreased to $5.0 billion from $8.4 billion. Gross sales increased sharply in July and August as foreign investors sold U.S. stocks to realize substantial gains from price advances and dollar appreciation since mid-May. Gross purchases slowed somewhat in September, concurrent with a drop in U.S. stock prices.

Net foreign purchases of U.S. corporate and other bonds were $7.7 billion compared with $7.5 billion. Bonds newly issued abroad by U.S. corporations increased to $6.3 billion from $5.9 billion, but remained well below quarterly averages for 1985-86, largely due to the 150 basis-point rise in Eurobond rates since the beginning of 1987. As in the previous quarter, most new issues were fixed-rate bonds denominated in U.S. dollars.

Foreign direct investment inflows to the United States decreased $0.5 billion to $8.9 billion, but remained strong due to a few large acquisitions. A $0.4 billion increase, to $4.2 billion, in equity inflows was more than offset by a $2.2 billion decrease, to $2.6 billion, in intercompany debt inflows. An increase in equity inflows from the United Kingdom for the acquisition of an affiliate in the services industry was mostly offset by a slow-down in inflows from other countries. An increase in intercompany debt inflows from the United Kingdom for the completion of the acquisition of a petroleum affiliate was more than offset by a shift to outflows in several other areas. Reinvested earnings increased $1.2 billion to $2.2 billion.

Reconciliation of United States-Canadian current-account statistics

Reconciliation of the 1986 bilateral current-account statistics of the United States and Canada and revision of the 1985 current-account reconciliation were completed in November 1987 (table F). Revisions in the U.S. international transactions data based on the reconciliations with Canada will be incorporated into the published data in June 1988 in so far as possible. Full substitution of the reconciled data for the previously published data is not possible because transactions with other areas would be affected.

Current-account reconciliations for the years 1970-84 appear in the June 1975, September 1976, September 1977, December 1979, June 1981, and December 1981-86 issues of the SURVEY OF CURRENT BUSINESS.

Table: A.--Summary of U.S. International Transactions

Table: B.--Selected Transactions with Official Agencies

Table: C.--Indexes of Foreign Currency Price of the U.S. Dollar

Table: CHART 2 Indexes of Foreign Currency Price of the U.S. Dollar (1977 = 100)

Table: D.--Selected Direct Investment Transactions With Netherlands Antilles Finance Affiliates

Table: E.--U.S. Merchandise Trade, Current and Constant (1982) Dollars

Table: CHART 3 U.S. Merchandise Trade

Table: CHART 4 Net Private Transactions in Securities

Table: F.--United States-Canadian Balance on Current Account

Table: 1-2.--U.S. International Transactions

Table: 3.--U.S. Merchandise Trade

Table: 4.--Selected U.S. Government Transactions

Table: 5.--Direct Investment: Income, Capital, Royalties and License Fees, and Other Private Services

Table: 6.--Securities Transactions

Table: 7.--Claims on and Liabilities to Unaffiliated Foreigners Reported by U.S. Nonbanking Concerns

Table: 8.--Claims on Foreigners Reported by U.S. Banks

Table: 9.--Foreign Official Assets and Other Foreign Assets in the United States Reported by U.S. Banks

Table: 10.--U.S. International Transactions, by Area