U.S. international transactions, third quarter 1985.

Dilullo, Anthony J.

U.S. International Transactions, Third Quarter 1985

THE U.S. current-account deficit increased to $30.5 billion in the third quarter from $27.7 billion (revised) in the second. The merchandise trade deficit increased $4.6 billion, to a record $33.1 billion. Exports decreased $1.3 billion to $52.3 billion, and imports increased $3.2 billion to $85.5 billion. The increase in the merchandise trade deficit was partly offset by a $2.3 billion increase in net service receipts to $6.7 billion, primarily reflecting an increase in receipts of income on U.S. direct investment abroad due to capital gains from dollar depreciation. Unilateral transfers increased $0.5 billion to $4.0 billion, as disbursements to several Middle East countries rose sharply.

In the capital accounts, the increase in claims reported by U.S. banks was small, as demand for U.S. bank credit in industrial countries remained limited and substitute bond market borrowings were strong. Substantial net U.S. purchases of foreign securities continued to reflect favorable bond yields, advancing stock prices, and anticipation of gains from further dollar depreciation. Outflows for U.S. direct investment abroad increased; the increase was more than accounted for by a shift to net intercompany debt outflows.

Liabilities to private foreigners and international financial institutions reported by U.S. banks, excluding U.S. Treasury securities, increased moderately as U.S. banks' requirements for short-term funding from abroad remained limited. Increased purchases of U.S. Treasury securities by private foreigners reflected continued large purchases by Japanese investors. Purchases of U.S. securities other than U.S. Treasury issues reached record levels, as new foreign bond issues of U.S. corporations surged. Inflows for foreign direct investment in the United States slowed, reflecting a decrease in intercompany debt inflows from Western Europe.

The statistical discrepancy (errors and omissions in reported transactions) was an inflow of $6.5 billion.

U.S. dollar in exchange markets

The dollar depreciated 7 percent and 5 percent on a trade-weighted average basis against the currencies of 10 industrial and 22 OECD countries, respectively, in the third quarter (chart 9 table C). Reports of continued slow U.S. economic growth early in the quarter and the likelihood that Federal Reserve policies would not lead to an increase in U.S. interest rates contributed to the depreciation. Depreciation slowed somewhat in August and into September as U.S. short-term interest rates increased slightly (chart 10). However, because U.S. rates remained below or only marginally higher than rates in several countries, investments in assets denominated in other currencies, especially the British pound, became increasingly attractive. In late September, the Group of Five (France, Germany, Japan, United Kingdom, and United States) announced that further orderly appreciation of major currencies against the dollar was desirable in view of recent shifts in fundamental economic conditions. The announcement, together with subsequent intervention in exchange markets by several members of the Group of Five, led to an acceleration in the dollar's depreciation at the end of the quarter.

Among the key currencies, the dollar depreciated 9 percent against the British pound and the Swiss franc, 8 percent against the German mark, and 5 percent against the Japanese yen. Large capital outflows from Japan limited appreciation of the yen against the dollar. The realignment of currencies within the European Monetary System in July--involving an 8-percent depreciation of the Italian lira--had little impact on the dollar exchange rate.

The dollar appreciated sharply against the Mexican peso as measured by the "controlled" rate and the "superfree" market rate. The Mexican Government devalued the "controlled" exchange rate by 17 percent in late July after a large drop in the "superfree" market rate and introduced a "regulated float" to replace the earlier system for gradually depreciating the "controlled" rate.

Merchandise trade

The merchandise trade deficit increased $4.6 billion to a record $33.1 billion in the third quarter. Exports decreased $1.3 billion to $52.3 billion, the lowest level in 2 years. Both agricultural and nonagricultural exports decreased. Moderate economic expansion abroad, the still high value of the dollar, and import restrictions in some developing countries continued to depress U.S. exports. In addition, weakening commodity prices and ample agricultural supplies in other exporting countries contributed to the drop in agricultural exports to the lowest level since the first quarter of 1979. Imports increased $3.2 billion to $85.5 billion. A large increase in non-petroleum imports was partly offset by a decrease in petroleum imports.

Nonagricultural exports decreased $0.7 billion to $45.8 billion. A decrease of $0.6 billion in machinery exports was evenly distributed among computers and electrical, construction, and industrial machinery. Consumer goods, low-value shipments, and other miscellaneous exports together decreased $0.8 billion. The decreases were largely offset by a $0.5 billion increase in aircraft exports, mainly to Saudi Arabia, and a $0.2 billion increase in exports of automotive products to Canada.

Agricultural exports decreased $0.6 billion to $6.5 billion. Decreases in grain and soybean exports, which more than accounted for the total decrease, reflected substantial drops in commodity prices. The average price of wheat exports decreased 9 percent, and average corn and soybean prices decreased 8 percent each. Although most of the third-quarter decrease was in exports to Eastern Europe, the depressed level of U.S. agricultural exports for the past eight quarters largely reflected a decrease of nearly 50 percent in exports to Western Europe, as abundant worldwide supplies and increased agricultural production in the Economic Communities displaced U.S. exports. Agricultural exports to other major U.S. markets--Japan, Latin America, Asia, and Africa--decreased by smaller amounts.

Imports increased $3.2 billion to $85.5 billion. Nonpetroleum imports increased $3.8 billion to $72.9 billion; most of the increase was in volume. The depreciation of the dollar since late February apparently has had little impact on imports so far. Among the major end-use categories, the combined increase of $3.5 billion in automotive products, capital goods, and consumer goods, mostly from Japan and the newly industrialized countries in Asia, accounted for most of the increase in nonpetroleum imports. Nonpetroleum industrial supplies increased $0.3 billion, and food products increased $0.1 billion. The pattern of increases in the third quarter was consistent with the pattern that has prevailed in the current U.S. upswing. Since the first quarter of 1983, the average quarterly increase in capital goods and automotive products was 7.0 percent each; in consumer goods, 5.0 percent; and in industrial supplies and materials, excluding petroleum, 3.0 percent.

In the third quarter, imports of automotive products from Canada and Japan were boosted $1.0 billion by record U.S. sales of new cars and trucks in late August and September in response to attractive financing packages and rebates offered by U.S. and some foreign manufacturers. Of the $1.2 billion increase in capital goods imports, the largest increases were in computers and in scientific, professional, and service industry equipment. Textile products, boosted by a large increase from mainland China, and electric appliances accounted for one-half of the $1.3 billion increase in consumer goods. Much of the increase in computers and electrical appliances was from Japan and the newly industrialized countries in Asia (Hong Kong, Korea, Singapore, and Taiwan).

Petroleum imports decreased $0.5 billion to $12.6 billion. The decrease reflected a drop in the average price per barrel to $25.78 from $27.01. The average number of barrels imported daily increased to 5.34 million from 5.30 million, resulting in a moderate increase in domestic petroleum stocks. Anticipation of further price decreases probably led some importers to delay purchases.

The increase in the merchandise trade deficit was largely attributable to increases in the deficits with Japan and the newly industrialized countries in Asia. The deficit with Japan increased $1.4 billion to $11.4 billion, and the deficit with the newly industrialized countries increased $2.2 billion to $6.6 billion. Imports from each of those countries increased substantially. Exports to Japan increased far less than imports; and exports to the newly industrialized countries decreased. The deficit with Western Europe increased $0.8 billion to $6.1 billion; exports decreased $0.4 billion and imports increased $0.4 billion. The deficit with Eastern Europe increased $0.4 billion due to decreased exports of agricultural products. A larger decrease in imports than in exports reduced the deficit with Canada $0.2 billion to $3.6 billion. The deficit with Latin America was virtually unchanged at $3.7 billion. Increases in the deficits with Brazil and Venezuela were offset by decreases with other countries, mainly Mexico.

Service transactions

Net service receipts increased $2.3 billion to $6.7 billion in the third quarter. Higher net investment income receipts accounted for most of the increase.

Receipts of income on U.S. direct investment abroad increased $1.6 billion to $10.2 billion; the increase was more than accounted for by the effect of dollar depreciation on capital gains, which increased $2.1 billion to $3.1 billion. Earnings before capital gains and losses decreased $0.5 billion to $8.2 billion. The decrease was concentrated among petroleum affiliates in the United Kingdom. Net interest payments, largely to Netherlands Antilles finance affiliates, were unchanged at $1.1 billion (table D). Payments of income on foreign direct investment in the United States decreased $0.4 billion to $2.4 billion. Capital gains were $0.1 billion compared with $0.4 billion. The previous quarter included large capital gains of insurance affiliates. Earnings before capital gains and losses decreased $0.2 billion to $1.4 billion.

Receipts of income on other private assets decreased $0.4 billion to $12.2 billion, due to the lagged impact of declining interest rates and the drop in bank-reported claims on foreigners that occurred earlier this year. The decrease was partly offset by a payment of interest arrears by Argentina. No new major interest arrears occurred in the third quarter. Payments decreased $0.1 billion to $8.7 billion. An increase in interest payments on U.S. corporate bonds due to large-scale borrowing this year was more than offset by a decrease in interest payments by banks. Receipts of income on U.S. Government assets increased $0.4 billion to $1.7 billion. Some interest receipts scheduled for collection earlier in the year were received in the third quarter. Payments increased $0.1 billion to $5.4 billion. Large purchases of U.S. Treasury securities contributed to the increase, partly offset by a decline in interest rates.

Travel receipts and payments were unchanged at $2.9 billion and $4.2 billion, respectively. Receipts from Canadian visitors increased slightly, and receipts from overseas visitors were unchanged. A drop in receipts from Mexico in the border area was offset by a large increase in receipts from Mexican visitors to the U.S. interior. A small increase in payments for travel overseas and to Canada was offset by a decrease in payments to Mexico. Passenger fare receipts decreased $0.1 billion to $0.7 billion, as fewer overseas visitors traveled to the United States. Payments were unchanged. Other transportation receipts were up $0.1 billion to $3.6 billion, and payments were unchanged at $4.1 billion.

Transfers under U.S. military agency sales contracts were $2.4 billion, an increase of $0.2 billion. The increase was mainly in deliveries of aircraft. Direct defense expenditures were unchanged at $2.8 billion.

Net unilateral transfers were $4.0 billion, up $0.5 billion due to an increase in disbursements to several countries in the Middle East following an additional appropriation of funds by Congress.

U.S. assets abroad

U.S. official reserve assets increased $0.1 billion compared with an increase of $0.4 billion in the second quarter. A $0.3 billion increase in holdings of special drawing rights (SDR's) was more than offest by a $0.4 billion decline in the U.S. reserve position at the International Monetary Fund (IMF) as the IMF sold SDR's for dollars. U.S. holdings of foreign currencies increased $0.2 billion. Holdings of Japanese yen and German marks increased $0.4 billion partly as a result of exchange market intervention by U.S. monetary authorities following the meeting of the Group of Five in late September. The increase also included income earned on foreign currency assets. Holdings of Argentine currency decreased as Argentina repaid a bridge loan following disbursement of proceeds of an IMF loan.

U.S. claims on foreigners reported by U.S. banks increased $1.4 billion, compared with a decreased of $4.1 billion. A $5.0 billion increase in claims of banks' domestic customers and claims denominated in foreign currencies more than offset a $3.5 billion decrease in banks' claims on their own foreign offices. Claims denominated in foreign currencies increased strongly for the fourth consecutive quarter, partly coinciding with the dollar's depreciation. Domestic customers' claims increased $4.1 billion.

In other categories, bank claims remained weak or decreased due to the same factors that have been operative for some time: moderate economic expansion in industrial countries; concentration of growth in credit demands in the Euronote and bond markets; and little or no new net lending to public borrowers in some developing countries, particularly those in Latin America. Interbank claims on financial centers in the Caribbean dropped sharply; claims on offices in the United Kingdom increased, apparently to meet those offices' funding needs.

Net U.S. purchases of foreign securities were $1.8 billion compared with $2.2 billion. Net purchases of foreign stocks were $1.0 billion compared with $0.2 billion, reflecting a shift from net sales of $0.4 billion to net purchases of $0.1 billion of Japanese stocks and an increase of $0.3 billion in net purchases of Canadian and Hong Kong stocks combined. Advances in foreign stock prices and anticipation of gains from further dollar depreciation encouraged U.S. investors, mainly institutions, to increase their purchases of foreign stocks.

New foreign bond issues were $1.2 billion compared with $1.6 billion; Canadian Government issues of $0.9 billion accounted for most of the new issues.

Net purchases of outstanding bonds were $0.1 billion, down from $0.9 billion. U.S. investors continued their large acquisitions of U.K. gilt-edge bonds--$1.6 billion--in response to favorable British interest rates and dollar depreciation. Other net purchases were concentrated in Japanese and German bonds. Offsetting those purchases were net sales of $0.7 billion to Hong Kong and smaller amounts to Canada, France, the Netherlands, and the Caribbean area. Redemptions were unchanged at $0.5 billion.

U.S. direct investment outflows increased to $6.3 billion from $5.0 billion. Intercompany debt shifted to net outflows of $1.2 billion from net inflows of $2.3 billion, as U.S. parent companies resumed or accelerated repayment of long-term debt to their foreign affiliates. Equity capital shifted to a net inflow of $1.6 billion from a net outflow of $0.6 billion, largely reflecting the sale of Canadian and Latin American affiliates by U.S. petroleum companies. The shift was partly offset by the acquisition of a British affiliate by a U.S. insurance company. Reinvested earnings were unchanged at $6.7 billion.

Foreign assets in the United States

Foreign official assets in the United States increased $2.4 billion compared with an increase of $8.5 billion in the second quarter (table B). Industrial countries continued to acquire dollar assets early in the quarter. These acquisitions were partly offset by intervention sales of dollars assets by some members of the Group of Five following their meeting in late September. For the quarter, dollar assets of industrial countries increased $2.8 billion. Assets of non-OPEC developing countries increased $1.6 billion; several Asian countries with favorable merchandise trade balances accumulated dollar assets. Foreign official assets of OPEC members decreased further by $2.0 billion.

Purchases of U.S. Treasury securities by private foreigners reported by U.S. banks increased to $7.8 billion, compared with $5.1 billion in the second quarter (chart 11). Japanese investors accounted for purchases of $6.6 billion, compared with $4.8 billion. Liberalization of investment regulations on Japanese life insurance companies and pension funds was partly responsible for the increased Japanese purchases, as were U.S. interest rates, which averaged 430 basis points higher than Japanese rates. Also contributing to the increase were a mid-June decision by the Japanese Government to permit Japanese investors to buy U.S. Treasury zero coupon bonds and proposed changes in Japanese tax law that would tax returns on principal on those securities as capital gains rather than ordinary income.

Liabilities to private foreigners and international financial institutions reported by U.S. banks, excluding U.S. Treasury securities, increased $6.5 billion compared with a $0.2 billion increase. The increase in banks' own liabilities continued to be restrained as U.S. banks' requirements for short-term funding from abroad remained limited. The limited placement of funds in the United States coincided with U.S. interest rates that were below or only marginally higher than several key foreign rates. More than offsetting a $4.8 billion decrease in liabilities to own foreign offices in the United Kingdom and Caribbean was a $7.2 billion increase in liabilities to own foreign offices and unaffiliated banks in other countries, of which a $3.4 billion increase to Japan may have been related to the easing of capital controls in that country. In addition, dollar depreciation in the quarter led to a rise in foreign currency-denominated liabilities that accounted for nearly one-third of the total increase in U.S. bank-reported liabilities.

Net foreign purchases of U.S. securities other than U.S. Treasury issues increased to a record $11.6 billion from $7.1 billion. New foreign bond issues of U.S. corporations surged to a record $10.2 billion from $5.3 billion, and net foreign purchases of U.S. stocks increased to $1.4 billion from $0.4 billion. The large volume of new bond issues abroad partly reflected a strong increase in demand for longterm financing by prime U.S. corporations. The increase was partly to replace relatively high-cost short-term bank financing used in large-scale mergers and acquisitions and partly to take advantage of yields on Eurobonds that were more than 2 percentage points below a year earlier. A number of developments served to reduce or eliminate exchange rate losses to foreign purchasers from a depreciating dollar: a step-up in bonds denominated in Japanese yen, interest rate and foreign currency swap features, and dual-currency issues with interest payments and redemption of principal in foreign currencies. Floating-rate notes, especially those issued by U.S. bank holding companies, remained strong, as banks attempted to bolster capital-asset ratios in response to U.S. bank supervisory pressures.

The increase in net foreign purchases of U.S. stocks was concentrated early in the quarter when U.S. stock prices advanced. Dollar depreciation, which made U.S. stock prices cheaper to foreign investors, contributed to the increase. Investors in the United Kingdom and Germany, who had been net sellers of stocks since the second quarter of 1984, accounted for $0.7 billion and $0.2 billion of net purchases, respectively. Investors in Canada, the Caribbean, and Hong Kong accounted for most remaining purchases.

Inflows for foreign direct investment in the United States were $5.6 billion compared with $6.7 billion. The decrease reflected reduced intercompany transactions. Equity capital inflows were virtually unchanged; about one-half of the third-quarter inflows were from the United Kingdom and Bermuda, and they included the British acquisitions of a U.S. insurance affiliate directly and a paper manufacturing company through a Bermuda holding company. A shift from net inflows to outflows to Canada was partly due to a U.S. affiliate's purchase of its own stock from its Canadian parent. Intercompany debt inflows were $2.3 billion, down from $3.2 billion; in the second quarter, a British company had completed financial arrangements for an earlier purchase of a U.S. company. Reinvested earnings were $0.9 billion compared with $1.1 billion.

Reconciliation of United States-Canadian

current-account statistics

Reconciliation of the 1984 bilateral current-account statistics of the United States and Canada and revision of the 1983 current-account reconciliation were completed in November 1985 (table E). The United States and Canadian statistics were fully reconciled for 1983. Full reconciliation of the 1984 statistics was not possible because of differences in investment income transactions that could not be satisfactorily resolved at that time.

Revisions in the U.S. international transactions data based on the reconciliations with Canada will be incorporated in the published data in June 1986 as far as possible. Full substitution of the reconciled data for the previously published data is not possible because U.S. transactions with other areas would be affected.

Current-account reconciliations for the years 1970-82 appear in the June 1975, September 1976, September 1977, December 1979, June 1981 and December 1981-84 issues of the SURVEY OF CURRENT BUSINESS.

Technical Note

BEA has revised its merchandise exports and imports series for the first quarter of 1983 through the second quarter of 1985. The revision was necessary because the Census Bureau data, upon which the BEA estimates are based, have been recalculated to reflect more accurately the actual movement of merchandise. For BEA's estimates, for 1983 and 1984, imports are now recorded in the month in which they were actually released from Customs; exports are now recorded in the actual month of shipment. Previously, both imports and exports were recorded on the basis of the "statistical month"--that is, the month in which documents were processed by the Census Bureau.

Complete source data are not yet available for the first three quarters of 1985. Therefore, estimates are prepared on an interim, or "revised statistical month" basis, which more closely approximates the actual month of release from Customs or of shipment than does the "statistical month" basis. On the "revised statistical month" basis, all documents carried over from previous months will be allocated to the immediately preceding month. For example, documents processed by Census for the statistical month of October that do not have an October date of shipment for exports will be allocated to September. When complete source data become available, all documents will be allocated to the proper month.

Revised estimates, both adjusted and unadjusted for seasonal variation, are presented in table 3.

Complete source data will normally become available after the close of the calendar year. Estimates on the "actual" basis will be completed in the second quarter of the following calendar year. These estimates, to be published in the June SURVEY, will replace the previously published "revised statistical month" estimates. Seasonal factors will be recalculated in the spring of each year and applied to the "actual month" estimates published in the June SURVEY.

Source data are not available for BEA to construct revised estimates prior to January 1983, although the same timing problem may have existed earlier. Thus, there is a break in series beginning in January 1983. Another break in series occurs in February 1983, when the Census Bureau changed the date for tabulating import data from a date of importation basis to a date of release basis. The date of importation is the date that a vessel enters the Customs area; the date of release is the date that merchandise is released to the importer. The date of importation can precede the date of release by as much as 20 days. When the import data for January 1983 were retabulated, a discontinuity--probably due to the change in date for tabulating--became apparent. The value of documents allocated to 1982 was twice as large as the value of documents in subsequent months that were added to January. This discontinuity was corrected by a special adjustment which added $3.4 billion in January. This figure was based on information provided by the Census Bureau, and has been distributed by area and commodity in sections B and C of table 3.

Lines 1 and 9 of Section A of table 3 now represent BEA's estimates of transactions on the f.a.s-Customs valuation basis, based upon information supplied by the Census Bureau. Previously, published Census estimates were shown, but Census no longer publishes the data on the timing basis required by BEA. Consequently, the line showing the difference between seasonally adjusted estimates prepared by Census and BEA is no longer necessary and has been dropped from the table.

The accompanying table compares previous and revised estimates. Revisions to quarterly estimates were substantial in some instances, while revisions over longer periods of time were small. For exports, the revisions were 0.5 percent and 0.2 percent of total transactions in 1983 and 1984, respectively. For imports, the revisions were 2.3 percent and 1.6 percent. The average quarterly difference, without respect to sign, was 0.9 percent in 1983 and 0.3 percent in 1984 for exports, and 2.6 percent and 4.4 percent for imports.

The larger revisions for imports than for exports may be due to the different procedures used to process the two sets of documents. Export declarations for shipments are normally transmitted to the Customs Service along with the ship's manifest at the time the vessel departs. Customs then transmits copies of these declarations to the Census Bureau for verification and tabulation. Import documents, on the other hand, are processed separately by Customs for each shipment. Processing of import documents is often more time consuming and, therefore, leads to more delays in their transmission to Census. In addition, there has been a more rapid increase in the number of import documents. In 1983, Census processed an average of 465,500 import documents monthly, 567,000 in 1984, and 570,000 to date in 1985, while export documents processed increased from an average of 667,000 in 1983 to 717,000 in 1984 and to 675,000 to date in 1985.