Friday, June 17, 2005


Back around the turn of the century, smart economists like Catherine Mann were saying that a US current account deficit above 5.0% of GDP would spur natural counter-balancing mechanisms to bring the US accounts back toward balance. In our brave new world, however, CA deficits of even 6% of GDP are clearly no match for the greatest consumer engine on earth.

How do we know? Because the BEA reports today that the US current account deficit in 2005:I hit yet another record, both in absolute and relative terms. In absolute terms the CA deficit was $195.1bn, up from 2004:IV's $188.4bn. In relative terms the CA deficit was 6.40% of GDP, up from 2004:IV's 6.28%. Since the revised deficits have all been trending larger than the preliminary data over the last three quarters, one wonders if we won't be edging toward a deficit nearer 6.5% of GDP before all is said and done.

It is interesting how the US financial income flows continue to stay stubbornly positive despite the country's ever-growing net investment deficit. The balance on income for 2005:I was $3.8bn, nearly the same as 2004:IV's $3.2bn. One wonders how much of this can be chalked up to the weak dollar during the first three months of this year, and suspects that with the stronger dollar of 2005:II this number may finally turn negative.

A second interesting tale told by this report is the big surge in unilateral current transfers, whose deficit jumped to $27.1bn from $22.4bn in 2004:IV. Of that extra $4.7bn of outflow, only $1.4bn was growth in private remittances while $3.3bn of it was growth in US government grants which, as the BEA itself notes, "includes transfers of goods and services under U.S. military grant programs".

So let's track the relative growth in the US CA deficit over the last 8 quarters:
2003:II . . . 4.73%
2003:III . . 4.64%
2003:IV . . . 4.44%
2004:I . . . . 5.09%
2004:II . . . 5.72%
2004:III . . . 5.65%
2004:IV . . . 6.28%
2005:I . . . . 6.40%
As Brad Setser pointed out on Wednesday, foreign interest in long-term US securities is slackening, with both March and April flows looking particularly weak. In addition, foreign capital investment into the United States in 2005:I was at its lowest level in a year. It's always dangerous to predict the end of a tide that thus far seems bound and determined to rise. But will the rest of the world simply shrug off a CA deficit of 7% of GDP, too?


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