U.S. international transactions, third quarter 1984.

DiLullo, Anthony J.

THE U.S. current-account deficit was a record $32.9 billion in the third quarter, compared with $24.7 billion in the second. The $8.2 billion increase was largely accounted for by an increase in the merchandise trade deficit from $25.8 billion to $33.1 billion. Imports surged after being nearly unchanged in the previous quarter; exports increased slightly. Net service receipts decreased $0.2 billion to $3.1 billion. A $1.7 billion increase in receipts of income on U.S. investment abroad was nearly offset by an increase in payments of income on foreign investment in the United States. Net travel and other transportation payments increased $0.4 billion. Net unilateral transfers increased $0.6 billion to $2.8 billion.

Among the private capital accounts, claims on foreigners reported by U.S. banks decreased $18.4 billion, in contrast to an increase of $20.6 billion in the second quarter. Liabilities to private foreigners and international financial institutions (excluding U.S. Treasury securities) reported by banks decreased $3.9 billion, in contrast to an increase of $20.8 billion. The shifts both in claims and liabilities reflected reversals of large second-quarter interbank flows. In addition, low demand for funds in industrial countries and a small reduction in claims on countries in Latin America contributed to the third-quarter decrease in claims, and a flattening of U.S. loan demand to the decrease in liabilities.

Net inflows on U.S. direct investment abroad were $1.1 billion, compared with $2.1 billion. Net inflows from Netherlands Antilles finance affiliates slowed as borrowing to finance U.S. mergers subsided. Net inflows for foreign direct investment in the United States slowed to $4.3 billion from $8.8 billion; the second-quarter total had been boosted by an unusually large purchase of additional equity in a U.S. company.

Net U.S. purchases of foreign securities increased $0.4 billion to $1.2 billion. Net foreign purchases of U.S. Treasury securities were $5.2 billion, following $6.5 billion in the second quarter. Net purchases of U.S. securities other than U.S. Treasury securities were $1.7 billion, compared with $0.6 billion. A significant decline in interest rates and a change in withholding tax regulations spurred the sale abroad of $1.9 billion in new bond issues by U.S. corporations.

The statistical discrepancy (errors and omissions in reported transactions) was a net inflow of $10.6 billion.

U.S. dollar in exchange markets

The U.S. dollar continued to appreciate in the third quarter; on a trade-weighted basis, the dollar posted the largest gains in four quarters against the currencies of industrial countries. Favorable rates of return on U.S. dollar assets compared with other assets and repeal of the 30-percent withholding tax on interest earned by nonresidents on U.S. investments more than offset the effects of the peaking of most U.S. short-term interest rates in July and August. Also contributing to the dollar's appreciation were indications during the quarter that U.S. inflation would not accelerate and that economic activity in key industrial countries was weaker than expected, partly the result of prolonged strikes in the United Kingdom and Germany earlier in the year. Intervention to slow the dollar's sharp advance against the German mark was conducted by German and, to a limited extent, United States authorities in September.

On a trade-weighted quarterly average basis, the U.S. dollar appreciated 7 percent and 5 percent against the currencies of 10 industrial and 22 OECD countries, respectively (chart 6, table C). The dollar appreciated 7 to 9 percent against the European Monetary System currencies, 9 percent against the Swiss franc, 8 percent against the British pound, and 6 percent against the Japanese yen. The dollar appreciated less than 2 percent against the Canadian dollar.

Merchandise trade

The merchandise trade deficit was a record $33.1 billion in the third quarter, compared with $25.8 billion in the second. Imports increased $8.2 billion to $88.6 billion, and exports increased $0.9 billion to $55.5 billion.

Nonpetroleum imports increased $8.7 billion, or 13 percent, to $74.2 billion. The increase was all in volume. All major end-use commodity categories increased substantially, led by increases of $2.8 billion, or 21 percent, in machinery; $1.9 billion, or 14 percent, in consumer goods; and $1.3 billion, or 8 percent, in nonpetroleum industrial supplies and materials. Only a small part of the increase may have been attributable to anticipation of restrictions on textile and steel imports later in the year. (A tightening of restrictions on textiles was announced by the U.S. Government in August, and plans to negotiate limits on certain categories of shipments from steel-exporting countries were announced in September.)

Cumulative dollar appreciation continued to be a major factor in the growth of nonpetroleum imports. By the third quarter, the dollar cost of imports of manufactured goods had increased only 6 percent over its 1980 quarterly average (chart 7). In contrast, the average producer price index of manufactured goods in OECD countries, excluding the United States, had increased more than 30 percent. In the United States, the producer price index had increased 20 percent.

Petroleum imports decreased $0.4 billion, or 3 percent, to $14.5 billion. The average number of barrels imported daily decreased to 5.67 million from 5.76 million; the average price per barrel was nearly unchanged at $27.91.

Nonagricultural exports increased $1.2 billion, or 3 percent, to $46.5 billion; volume increased 4 percent. A $0.6 billion increase in exports of automotive products to Canada was largely related to strong sales in the United States of large-size automobiles, many of which are assembled in Canada. Most other major end-use commodity categories increased slightly. Nonagricultural exports continued to be restrained by the dollar's cumulative appreciation. Although the unit-value index of U.S. exports of manufactured goods increased 21 percent from 1980 to the third quarter, the foreign currency cost almost doubled (chart 7).

Agricultural exports decreased $0.2 billion, or 3 percent, to $9.0 billion; volume increased 1 percent. The decrease, mostly to Western Europe, partly reflected price decreases in soybeans, wheat, and corn. Supplies from other exporting countries were ample, and harvests in some importing countries were better than expected.

Increases in imports from Western Europe, Japan, and newly industrialized countries in Asia more than accounted for the $7.3 billion increase in the trade deficit. Imports from those areas increased $2.5 billion, $2.8 billion, and $3.1 billion, respectively; exports to them were nearly unchanged. Imports from Canada decreased $0.7 billion, and imports from other areas increased $0.5 billion. Exports to Canada decreased $0.9 billion, and exports to other areas, largely to Latin America, increased $1.5 billion.

Service transactions

Net service receipts were $3.1 billion, a decrease of $0.2 billion from the second quarter. Receipts increased $1.8 billion to $36.2 billion. Payments increased $2.1 billion to $33.1 billion. Increases both in receipts and in payments of income on investments accounted for most of the changes.

Receipts of income on U.S. direct investment abroad increased $0.8 billion to $5.4 billion. Capital losses (largely currency-related) remained large at $2.5 billion, but were $0.5 billion less than in the second quarter; second-quarter losses had included a large nonrecurring writeoff of an affiliate of a U.S. petroleum company. Weak expansion in key European countries and weak worldwide petroleum demand continued to restrain growth in operating earnings of foreign affiliates. Earnings of nonpetroleum affiliates increased $0.5 billion, and earnings of petroleum affiliates increased $0.4 billion. Payments of income on foreign direct investment in the United States increased $0.3 billion to $3.0 billion.

Receipts on income on other private investment increased $1.0 billion to $15.7 billion, largely the result of higher average interest rates for the quarter. (Some interest arrears on nonaccruing loans continued and are reflected in the estimates.) Payments on income increased $0.9 billion to $10.7 billion, also due to higher average rates.

Receipts of income on U.S. Government assets decreased $0.1 billion to $1.3 billion. Payments of income increased $0.3 billion to $5.1 billion.

Net travel payments increased $0.2 billion. Payments increased $0.1 billion to $4.1 billion. Further dollar appreciation continued to encourage U.S. travel overseas, although the rate of increase in the number of travelers slowed from the second quarter. Payments to Canada and Mexico were nearly unchanged. Receipts decrease $0.1 billion to $2.8 billion. A decrease of $0.2 billion from overseas and Canada was partly offset by a $0.1 billion increase from Mexico for travel in the border area and in the U.S. interior. Passenger fare payments were unchanged at $1.7 billion, and receipts decreased $0.2 billion to $0.7 billion. Other transportation payments increased $0.4 billion to $3.9 billion, largely the result of increased freight payments for merchandise imports. Other transportation receipts increased $0.2 billion to $3.6 billion, reflecting increased earnings from port services.

Transfers under U.S. military sales contracts were $2.7 billion, an increase of $0.2 billion. Increased deliveries to a number of countries were partly offset by a decrease in deliveries to the Middle East. Direct defense expenditures were unchanged at $3.0 billion.

Net unilateral transfers increased to $2.8 billion from $2.2 billion, largely reflecting revisions in U.S. Government procedures under which appropriated grant funds are made available to foreign military sales customers.

U.S. assets abroad

U.S. reserve assets increased $0.8 billion in the third quarter, compared with an increase of $0.6 billion in the second. Foreign currency holdings increased $0.2 billion as the result of limited intervention purchases of German marks in September. The U.S. reserve position in the International Monetary Fund and U.S. holdings of special drawing rights each increased $0.3 billion.

Claims on foreigners reported by U.S. banks decreased $18.4 billion, compared with an increase of $20.6 billion. The shift reflected a reversal of large second-quarter interbank transactions. In addition, low demand for funds in many industrial countries and some further small reduction in U.S. banks' loan exposure abroad, particularly in some developing countries, were contributing factors. Claims on U.S. banks' own foreign offices and on unaffiliated foreign banks each decreased almost equally; together, they accounted for nearly all of the decrease in bank-reported claims. Partly offsetting was a slight increase in claims on foreign public borrowers. The increase, largely in claims on Latin America, was partly related to an agreement between Argentina and the International Monetary Fund on a proposed austerity program and to a rescheduling of some external public debt of Mexico and Venezuela.

The reversal of second-quarter transactions dominated third-quarter interbank developments. In the second quarter, large withdrawals from foreign banks, particularly from foreign offices of U.S. banks, reflected concerns over actual and potential losses from substandard loans by a few large U.S. banks. To offset those withdrawals, unaffiliated foreign banks borrowed heavily from U.S. banks, and U.S. parent banks deposited funds in their foreign offices. In the third quarter, as those concerns abated, unaffiliated foreign banks repaid some of the funds borrowed from U.S. banks, and U.S. parent banks withdrew some deposits from foreign offices. In addition, large credits to foreign banks dropped sharply, as merger-related corporate borrowing subsided and other U.S. loan demand flattened.

Net U.S. purchases of foreign securities were $1.2 billion, compared with $0.8 billion in the second quarter. The increase was more than accounted for by a $0.7 billion increase in net purchases of stocks, mainly in the United Kingdom, the Netherlands, and Hong Kong, where prices advanced sharply. Net U.S. purchases of foreign bonds were $0.5 billion, down from $0.8 billion. Foreign new issues in the United States were only $0.9 billion--from Canada, France, Finland, and the Inter-American Development Bank--following extraordinarily large new issues from Sweden in the previous quarter. Redemptions were nearly unchanged at $0.7 billion, and transactions in outstanding bonds shifted to small net purchases of $0.3 billion from net sales of $0.7 billion.

Net inflows on U.S. direct investment abroad were $1.1 billion, compared with $2.1 billion. Net intercompany debt inflows were $3.6 billion, down from $5.1 billion. Inflows from Netherlands Antilles finance affiliates decreased $2.0 billion to $1.5 billion--about the same level of borrowing that prevailed prior to the merger-dominated borrowing of the second quarter (table D). Also, the repeal in July of the 30-percent withholding tax on interest earned by nonresidents on U.S. investments may have led some U.S. companies to issue Eurobonds directly to supplement or substitute for borrowing through their finance affiliates (chart 8). Intercompany debt inflows from Western European affiliates increased $1.5 billion from less than $0.1 billion. Most of the increase reflected a shift to inflows from trading company affiliates in Switzerland. Equity capital outflows decreased $1.0 billion to less than $0.1 billion. Outflows to most areas decreased; a net inflow from Japan was largely due to the sale of a petroleum affiliate. Reinvested earnings were $2.5 billion, compared with $2.0 billion.

Foreign assets in the United States

Foreign official assets in the United States decreased $1.0 billion in the third quarter, compared with a decrease of $0.3 billion in the second (table B). Assets of industrial countries decreased $2.7 billion, in contrast to an increase of $0.9 billion. Decreases largely reflected intervention to support a few key currencies in exchange markets, as the dollar reached record highs against many European currencies in September. Assets of OPEC members decreased $0.6 billion. Although considerably less than the previous quarter's $2.2 billion decrease, the third-quarter decrease was the eighth consecutive quarterly decrease and reflected continued weakness in world petroleum markets. Assets of other countries, particularly several newly industrialized countries in Asia, increased $2.3 billion, compared with a $0.9 billion increase.

U.S. liabilities to private foreigners and international financial institutions reported by banks (excluding U.S. Treasury securities) decreased $3.9 billion, compared with an increase of $20.8 billion. The shift reflected a reversal of large second-quarter inflows from U.S. banks' foreign offices, mainly in the United Kingdom and Caribbean, and a flattening of domestic loan demand. In addition, financing needs for large-scale mergers diminished. Partly offsetting the decrease was an increase in liabilities to unaffiliated foreign banks and other private foreigners. Those inflows remained relatively strong, despite the significant decline in U.S. short-term rates by the end of the quarter and despite the attractiveness of alternative long-term investments in the United States.

Net foreign purchases of U.S. Treasury securities were $5.2 billion, following record second-quarter purchases of $6.5 billion. Those purchases partly reflected the continued preference of many foreign investors for U.S. Treasury securities, although concern about risks associated with certificates of deposit as alternative investments lessened.

Net foreign purchases of U.S. securities other than U.S. Treasury securities were $1.7 billion, compared with $0.6 billion. Much of the increase was due to the $1.9 billion in new bond issues sold abroad by U.S. corporations--the first sizable amounts issued directly in the Eurobond market in 10 years (chart 8). A large decline in long-term rates in the Eurobond market spurred U.S. corporations to raise capital, partly to replace relatively expensive short-term bank debt that had been incurred in the first half of the year. Also, repeal of the 30-percent withholding tax on interest earned by nonresidents on U.S. investments permitted U.S. corporations to raise funds directly in Eurobond markets at the same, lower cost as funds raised through Netherlands Antilles finance affiliates. (Net funds raised by Netherlands Antilles finance affiliates were about the same in the third quarter as in the second, after allowance is made for several large merger-related transactions.) Net foreign purchases of outstanding corporate bonds and U.S. agency bonds were $0.8 billion, compared with $0.5 billion. Record net sales of stocks of $1.0 billion by foreigners were largely from Swiss accounts.

Inflows for foreign direct investment in the United States were $4.3 billion, compared with $8.8 billion. Intercompany debt inflows were $1.3 billion, compared with $4.4 billion; the second-quarter inflow had been boosted by a large loan to a U.S. subsidiary to purchase additional equity in a U.S. company. Equity capital inflows were $1.8 billion, compared with $3.3 billion. An inflow of $0.7 billion from Canada was mainly for acquisitions, as were inflows of $0.4 billion from Japan. There were no net inflows from Australia, after a $1.5 billion inflow in the previous quarter. Inflows from Western Europe were $0.6 billion, compared with $0.8 billion. Reinvested earnings were unchanged at $1.2 billion.

Reconciliation of U.S.-Canadian current-account statistics

Reconciliation of the 1983 bilateral current-account statistics of the United States and Canada and revision of the 1982 current-account reconciliation were completed in November 1984 (table E). The 1982 United States and Canadian statistics were fully reconciled. Full reconciliation of the 1983 statistics was not possible because of differences in investment income transactions that could not be satisfactorily resolved at this time.

Revisions in the U.S. international transactions data based on the reconciliations with Canada will be incorporated in the published data in June 1985 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 1970-81 appear in the June 1975, September 1976, September 1977, December 1979, June 1981, December 1981, December 1982, and December 1983 issues of the SURVEY OF CURRENT BUSINESS.