Monday, December 18, 2006

Have we reached the summit?

The third quarter US current account figures are out today, and -- you guessed it -- we hit (another) all-time record deficit: $225.6bn.

This is a bit deceptive in that the CA deficit in real terms was actually higher in 2005Q4 (in constant 2000 dollars per the GDP deflator, the CA deficit was $195.6bn in 2005Q4 while $193.7bn in 2006Q3), but who wants to quibble over a couple billion? The damned thing is big and, unfortunately, for the last two quarters getting bigger.

Surprising to me was the fact that the AP actually included this important tidbit of information:
The Commerce Department reported Monday that the current account trade deficit increased 3.9 percent to a record $225.6 billion in the July-September quarter. That represented 6.8 percent of the total economy, up from 6.6 percent of the gross domestic product in the spring quarter.
A remarkably useful piece of information, which means it rarely appears in reporting on this issue. The CA deficit was again larger in relative terms in 2005Q4 (7.0% of GDP), but that record setter was due largely to two things which I want to highlight today, one ephemeral and one an apparent (and long forecast) new trend.

In 2005Q4 there was an enormous turnaround in net unilateral current transfers, from -$9.5bn the quarter before to a whopping -$26.2bn. Transfers of that size -- and particularly a shift of that size -- have proved fleeting, settling since then into the normal $19-21bn quarterly deficits of long standing.

The new trend which first appeared in 2005Q4, however, has only been reinforced in the quarters since, and especially so in the data from 2006Q3. In 2005Q4 the US balance on income -- that is, the income from financial assets made by Americans on their foreign holdings minus that made by foreigners on their American holdings -- turned consistently negative for the first time in post-war US history.

What do I mean by "consistently"? Well, the most convenient definition for my argument of course, which is three or more consecutive quarters. The US had a negative income balance for 1998Q3-4, 2001Q3 and 2002Q2, but we're now at four consecutive quarters in a row and the beast is growing.

So much for all that delicious dark matter we started hearing of, oh, just about a year ago. Strangely enough, just after the last quarter of positive balance on income. Hmm.

Thus what we have is an apparently long-term force now operating strongly against the return of the US current account toward (not "to") balance. In 2005Q4, the US required an extra $2.2bn in exports to compensate for its negative net income balance. By 2006Q3 that grew to $3.8bn. After nine years of gargantuan current account deficits, this was bound to catch up with the US and promises to eat more and more into exports' contribution to resolving the deficit. A falling dollar should help slow the leakage somewhat, but that will of course dissuade investors from plugging new money into the hole in the dike. And note in the chart above that when the dollar slid precipitously in 1985 and 1986, the US income suprlus nearly vanished as well.

From here on out it looks like the US is set to run the Red Queen's Race. Happy jogging!


At 5:35 PM, Blogger john c. halasz said...

Why exactly would the balance on income payments go more negative with a decline in the value of the $? Earnings from foreign assets would increase in $ terms, even as foreigners' earnings on U.S. assets would diminish in terms of their domestic currencies, just as, similarly, the value of U.S. foreign assets would increase and foreign U.S. assets would diminish, lowering thereby in some measure the net external debt. Is it entirely due to the rise in interest costs on the rollover of outstanding external debt, as well as, any additions to that debt?

At 9:41 PM, Anonymous Anonymous said...

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At 4:41 PM, Anonymous Tom Marney said...

Do we know whether or not this is happening due to a relative deterioration in the rate of return on American investments abroad? Or is it a matter of foreign investments in the US growing faster than US investments overseas? Or maybe a bit of both?

At 4:39 AM, Blogger Mark said...

Surely the low value of the dollar and poor housing prices must be slowing spending now and increasing exports.


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