U.S. international transactions, third quarter 1990.

DiLullo, Anthony J.

THE U.S. current-account deficit increased to $25.6 billion in the third quarter of 1990 from $22.5 billion (revised) in the second.(1) This increase, the largest since the fourth quarter of 1988, was more than accounted for b;an increase in the merchandise trade deficit, which was spurred by higher prices for petroleum imports. The increase in the merchandise trade deficit was partly offset by a shift from a deficit to a surplus on investment income. The surplus on services and net unilateral transfers each changed by only small amounts.

In the capital account, transactions shifted to a net inflow of $26.0 billion in the third quarter from a net outflow of $6.2 billion in the second. U.S. private assets abroad increased $27.8 billion, compared with an increase of $31.3 billion. A large shift to net equity outflows boosted outflows for U.S. direct investment abroad to a record. Net U.S. purchases of foreign securities decreased sharply, mostly in the latter part of the quarter. U.S. claims on foreigners reported by U.S. banks increased less than in the previous quarter.

The annual ES-202 data are not incorporated into the annual and quarterly NIPA estimates until July. Therefore, the bias in the quarterly NIPA estimates of wages and salaries continues to affect the second State estimates even after the ES-202 data are incorporated into the State estimates. For this reason, the biases in the second-to-final revisions are negative for most of the regions and States. In none of the 19 States in which the bias is statistically different from zero is it also statistically different from the bias for the Nation. Preliminary annual estimates

Many applications of the State personal income estimates are based on the annual estimates. The initial annual estimates that can be used for such purposes-whether for a calendar year or a fiscal year-are derived as the sum of the quarterly estimates. Table 4 shows the measures of revisions between the preliminary annual estimates and the final annual estimates that were available when the study began.

For 1980-87, the relative revisions between the preliminary annual estimates and the final annual estimates are smaller than the relative revisions between the preliminary quarterly estimates and the final quarterly estimates shown in table 2. Only 3 States, all in the Plains region, have a relative dispersion in total personal income of 30 percent or more; 16 States have a relative dispersion of less than 10 percent. The revisions in the annual estimates are smaller for three main reasons: (1) State ES-202 wage and salary data for three quarters are incorporated into the preliminary annual estimates for most of the period, (2) State annual data on farm proprietors'income are incorporated into the preliminary annual estimates, and (3) annual estimates are not affected by seasonal adjustments.

Recent Developments

Beginning with the preliminary annual estimates for 1989 published in the April 1990 SURVEY, BEA stopped controlling the annual estimates for the most current year to the BLS based 790-U.S. totals for wages and salaries in the NIPA'S. The U.S. totals for wages and salaries now used for the preliminary annual State estimates are based on ES-202 data for three quarters. This methodological change is expected to reduce the revisions between the preliminary and final annual estimates of total personal income.

In addition, new procedures to deal with changes in seasonal payment patterns were used in the April 1990 estimates of wages and salaries for the service industry and in the October 1990 estimates for the finance, insurance, and real estate industries. In recent years, lump-sum payments in these industries have been unusual both in size and in timing; these payments, by significantly affecting the quarterly seasonal pattern of the wage and salary estimates, have made the existing seasonal factors less reliable. In the service industry, the size and the timing of lump-sum payments paid by personal service corporations to their owner-employees has changed in recent years, reflecting provisions of the Tax Reform Act of 1986 and the Revenue Act of 1987. In the finance, insurance, and real estate industries, the amount of lump-sum payments to security and commodity brokers has also changed, for a variety of reasons: The slowdown in brokerage business after the stock market crash of October 1987, the reduction in the number of mergers and acquisitions of companies, and the reduction in demand for new issues of high-yield bonds. As a result of these developments, the revisions to the 1988 and 1989 preliminary and second estimates were larger than normal. If the size and timing of lump-sum payments stabilize, the size f revisions for years after 1989 can e expected to be similar to those for 984-87.

Foreign private assets in the United States increased $38.8 billion in the third quarter, compared with a $20.0 billion increase in the second. U.S. liabilities to foreigners reported by U.S. banks increased substantially more than in the previous quarter. Net foreign transactions in other U.S. securities shifted to net sales from net purchases, and net foreign purchases of U.S. Treasury securities decreased. Net inflows for foreign direct investment were somewhat higher.

The statistical discrepancy (errors and omissions in recorded transactions) shifted to an outflow of $0.4 billion in the third quarter from an inflow of $28.7 billion in the second. U.S. dollar in exchange markets

On a trade-weighted quarterly average basis, the U.S. dollar depreciated 6 percent against the currencies of 10 industrial countries and 5 percent against the currencies of 22 OECD countries and 4 newly industrialized countries in the Far East in the third quarter (table C, chart 5). The dollar reached a record low against the German mark and near-record lows against the British pound and the Japanese yen, as U.S. economic growth slowed and short-term interest-rate differentials moved further against the United States. The sharp increase in crude petroleum prices that followed the Iraqi military invasion of Kuwait in early August initially boosted the U.S. dollar, but it had an adverse effect on the dollar later in the quarter. The cost of the buildup of U.S. military forces in the Middle East brought additional pressure on the dollar because of the potential impact on the U.S. budget deficit.

Among the major currencies, the U.S. dollar depreciated 10 percent against the British pound; most of the depreciation occurred in July and August. The British pound was boosted partly because of the potential benefits of the increases in crude petroleum prices to the United Kingdom-a net exporter of petroleum-and the expectation that the pound would soon become part of the Exchange Rate Mechanism of the European Monetary System (EMS).

The U.S. dollar depreciated 7 percent against the Japanese yen; most of the depreciation occurred late in the quarter, when Japanese interest rates rose in relation to U.S. rates. The interest-rate rise was the result of Japan's rapid pace of economic expansion and its anticipation of the inflationary impact of the sharp increases in crude petroleum prices. In addition, Japanese financial institutions may have sold dollar-denominated assets to improve domestic capital positions before the end of the fiscal half-year on September 30.

The U.S. dollar depreciated 5 percent against the German mark, 4-5 percent against other EMS currencies, and 8 percent against the Swiss franc. Most of the depreciation occurred in August. Short-term interest rates in Germany, which have been increasing since early 1989, increased further in the third quarter and exceeded U.S. rates (chart 6); these increases reflect the rapid pace of German economic expansion and the pressures of financing the German reunification.

The U.S. dollar depreciated 2 percent against the Canadian dollar. It fell to its lowest level in 12 years against the Canadian dollar in August, but it then appreciated in response to a slow down in economic growth in Canada and to expectations of decreases in Canadian interest rates.

The U.S. dollar depreciated 1 percent against both the Taiwan dollar and the South Korean won. In contrast, it appreciated 4 percent against the Singapore dollar and 1 percent against the Hong Kong dollar. Merchandise trade The U.S. merchandise trade deficit increased to $29.8 billion in the third quarter from $23.1 billion in the second. The increase was the first since the third quarter of 1989. Imports increased to $125.9 billion from $119.9 billion; more than one-half of the increase was in petroleum imports, which largely reflected petroleum price increases in the latter part of the quarter. Exports decreased to $96.2 billion from $96.8 billion; all of the decrease was in agricultural exports.

Exports.-Exports decreased $0.6 billion, or 1 percent, to $96.2 billion. Agricultural exports decreased $0.6 billion, or 6 percent, to $9.7 billion. Agricultural exports, which have decreased for two consecutive quarters, reached their lowest level since the second quarter of 1988, and they were 11 percent below the record of the first quarter of 1990. The third quarter decrease partly reflected large worldwide grain harvests and excess supplies in grain exporting countries increased competition, partly in the form of favorable credit terms from other exporting countries with large grain supplies, also contributed to drop. The third-quarter decrease wa concentrated in shipments of corn an wheat to Eastern Europe and, to a lesser extent, of soybeans to Western Europe and Japan; partly offsetting these decreases were increases in grains to Japan, Korea, and some developing countries. The average price of wheat decreased 12 percent, and corn, 1 percent. The average price of soybeans increased 1 percent.

Nonagricultural exports were unchanged, at $86.4 billion, after an increase of 1.3 percent in the second quarter and an average quarterly increase of 2.5 percent in the previous four quarters. Most of the slowdown in third-quarter growth reflected sizable decreases in aircraft and automotive products following exceptionally large increases in the second quarter. Aircraft decreased $0.8 billion, or 9 percent, and automotive products decreased $0.6 billion, or 6 percent. These decreases were offset by increases of $0.4 billion, or 4 percent in consumer goods (almost all in artwork and antiques) and $0.6 billion, or 2 percent, in industrial supplies and materials (mostly in petroleum products and nonferrous metals).

Imports.-Imports increased $6.1 billion, or 5 percent, to $125.9 billion. Petroleum imports increased $3.5 billion, or 29 percent, to $15.7 billion. Much of the increase in petroleum imports was in prices. The average price per barrel increased to $19.58 from $15.81, or 24 percent, and the average number of barrels imported daily increased to 8.71 million from 8.45 million, or 3 percent. After decreasing by one-third from January to July, petroleum prices increased strongly in August and September following the invasion of Kuwait by Iraq and in anticipation of shortages as a result of the worldwide embargo on shipments of petroleum from Iraq (chart 7). Although most other petroleum producing countries, particularly Saudi Arabia, increased production to offset the loss of shipments from Iraq, price pressures continued.

Nonpetroleum imports increased $2.5 billion, or 2 percent, to $110.2 billion, compared with an increase of 0.7 percent in the second quarter and an average quarterly increase of 0.5 percent in the previous four quarters. Eighty percent of the third-quarter increase was in automotive products and consumer goods. Automotive products increased $1.4 billion, or 7 percent. Most of the increase was in automotive vehicles from Canada and Mexico; imports from Japan, Korea, and Western Europe decreased. A significant amount of automotive products from Japan has been replaced by the rapidly increasing U.S. production of automobiles by U.S. affiliates of Japanese companies. The number of automobiles imported from Japan has decreased almost 20 percent since the first quarter of 1988, while the production of automobiles by U.S. affiliates of Japanese companies has doubled. Consumer goods were up $0.7 billion, or 3 percent, boosted by a large increase in textiles from China. Audio and video equipment also increased. Capital goods increased, as did industrial supplies and materials; the, increase in the latter partly reflected strong increases in aluminum and copper prices.

Balances by area.-The merchandise trade deficit with members of OPEC increased $2.5 billion, to $6.9 billion, in the third quarter, reflecting an increase in petroleum imports. The balance with Western Europe shifted $2.1 billion to a deficit of $0.6 billion from a surplus of $1.5 billion, as exports decreased. The deficit with the newly industrialized countries in the Far East increased $1.5 billion, to $6.4 billion; an increase in imports was partly offset by an increase in exports. The $1.1 billion surplus with Eastern Europe was almost entirely eliminated as agricultural exports to that area decreased. An increase of $0.4 billion, to $2.5 billion, in the deficit with Canada was largely due to a pickup in automotive imports. Although the deficit with Japan remained the largest, it decreased $0.7 billion, to $9.7 billion, in the third quarter, and it has decreased by more than one-third since the record deficit in the fourth quarter of 1988. Most of the change reflects an increase in exports to Japan. Services

The surplus on services decreased $0.2 billion, to $5.8 billion, in the third quarter. Receipts increased $1.7 billion, to $33.6 billion, and payments increased $1.9 billion, to $27.8 billion. In the first three quarters of 1990, the surplus on services was $17.8 billion, compared with $14.3 billion in the same period of 1989.

Navel receipts increased $0.6 billion, to $10.3 billion. Receipts from all areas increased strongly. Receipts from overseas visitors increased 5 percent; from Canada, 7 percent; and from Mexico, 9 percent. A large part of the increase in receipts from Canada and Mexico was for travel in the U.S. border areas. Travel payments increased $0.6 billion, to $10.1 billion. AH of the increase was in overseas travel and partly reflected higher costs related to the appreciation of foreign currencies against the U. S. dollar. Passenger fare receipts increased $0.2 billion, to $3.1 billion, and payments increased $0.1 billion, to $2.5 billion. The slightly larger increase in receipts partly reflected expanded service by a few U.S. air carriers.

Other transportation receipts increased $0.2 billion, to $5.5 billion, and payments increased $0.3 billion, to $6.0 billion. Freight receipts decreased $0.1 billion because of a drop in export cargo carried by U.S. carriers. Freight payments increased $0.1 billion, reflecting an increase in the volume of U.S. imports. Receipts and payments for port services each increased $0.2 billion, partly as a result of increases in fuel prices, especially jet fuel, in the latter part of the quarter.

Receipts from royalties and license fees and from other private services each increased $0.2 billion, to $3.8 billion and $8.1 billion, respectively. Payments for royalties and license fees increased $0.1 billion, to $0.7 billion, and payments for other private services increased $0.2 billion, to $3.7 billion.

Transfers under U.S. military agency sales contracts increased $0.4 billion, to $2.7 billion. Transfers were boosted by a step-up in deliveries of equipment-mainly aircraft and missiles-to the Middle East. Direct defense expenditures increased $0.6 billion, to $4.3 billion. The impact of the buildup of U.S. troops in the Middle East was limited in the third quarter because troop transportation was provided mostly by U.S. carriers and because supplies were initially provided largely from the United States and from U.S. military supplies already overseas, mainly in Western Europe. Net investment income shifted to a surplus of $2.5 billion in the third quarter from a deficit of $1.0 billion in the second. The shift mainly resulted from an increase in direct investment income receipts and a decrease in direct investment income payments. In the first three quarters of 1990, the surplus on investment income was $3.5 billion, compared with a deficit of $1.5 billion in the same period of 1989. Direct investment income.-Receipts of income on U.S. direct investment abroad increased $2.0 billion, to $14.9 billion, in the third quarter. Almost all of the increase was in operating earnings. Earnings of petroleum affiliates increased $0.8 billion, to $2.7 billion, as producing affiliates benefited from the increase in crude petroleum prices. Earnings of nonpetroleum affiliates increased $1.2 billion, to $12.0 billion. Earnings in Latin America increased substantially. Much of the increase was in Brazil, where economic activity may have picked up after adjusting to the initial shock of strong antiinflationary measures imposed earlier this year. Payments of income on foreign direct investment in the United States decreased $0.9 billion, to $1.6 billion. Operating earnings decreased $0.3 billion. Weaker earnings by chemical and banking affiliates accounted for most of the decrease. An increase in capital losses also contributed to the decrease in income. Portfolio income.-Receipts of income on other private investment abroad were unchanged, at $16.0 billion, in the third quarter. A decrease in receipts on U.S. bank claims was offset by an increase in receipts from holdings of foreign securities. Receipts of income on U.S. Government assets increased $0.4 billion, to $2.2 billion. Much of the increase resulted from payments by Egypt of overdue interest on credits financing military purchases. Earnings on foreign currency holdings also increased. Payments of income on other private assets in the United States decreased $0.2 billion, to $19.5 billion. U.S. Government income payments increased $0.1 billion, to $9.5 billion. Unilateral transfers

Net unilateral transfers decreased to $4.1 billion in the third quarter from $4.4 billion in the second. A decrease in U.S. Government grants from an unusually high level was partly offset by a step-up in private remittances and other transfers, which had been unusually low in the second quarter. In the first three quarters of 1990, net unilateral transfers were $11.9 billion, compared with $1 0.1 billion in the same period of 1989.

U.S. assets abroad U.S. assets abroad increased $26.5 billion in the third quarter, compared with an increase of $31.7 billion in the second. Net outflows for direct investment were a record. Increases in bank claims and in net purchases of foreign securities dropped sharply. In the first three quarters of 1990, U.S. assets abroad increased $25.3 billion, down sharply from an increase of $78.3 billion in the same period of 1989.

U.S. official reserve assets.-U.S. official reserve assets decreased $1.7 billion in the third quarter, compared with a decrease of $0.4 billion in the second. Most of the third-quarter decrease was in holdings of foreign currencies, mainly Mexican pesos and German marks.

Claims reported by banks.-U.S. claims on foreigners reported by U.S. banks increased $7.6 billion in the third quarter, compared with an increase of $13.6 billion in the second. Banks' own claims payable in dollars increased $2.5 billion; this small increase reflected continued limited demand for U.S. dollar credits abroad. Claims on Western Europe increased $6.7 billion, mostly as a result of an increase in interbank lending to the United Kingdom in August. Bank claims on nonbank residents in Western Europe also increased. Claims on banks own foreign offices in the Caribbean increased $4.6 billion, partly to finance offshore borrowing by U.S. nonbank residents. Claims on Japan decreased $2.8 billion; interbank lending increased strongly in July, but it decreased in August and September, reflecting large repayments to U.S. offices. Claims on public borrowers, especially in Latin America, continued to decrease. Banks' domestic customers' claims increased $4.0 billion.

Foreign securities.-Net U.S. purchases of foreign securities were $0.9 billion in the third quarter, down sharply from record net purchases o $11.2 billion in the second. Net U.S. purchases of foreign stocks were $0.5 billion, compared with $5.7 billion. Net purchases increased in the second quarter and in July, when stock prices remained strong in many industrial countries and when U.S. investors sought gains from an appreciation of foreign currencies against the dollar. Net purchases fell in August and shifted to net sales in September, when stock prices fell sharply in Japan, the United Kingdom, and Germany.

Net U.S. purchases of foreign bonds dropped to $0.4 billion in the third quarter from $5.6 billion in the second. Placements of new foreign issues in the United States decreased to $1.5 billion from $4.6 billion. Most of the drop occurred in August and September, when the cost of borrowing rose significantly and purchasers grew reluctant to acquire long-term assets. New Canadian issues, mainly issues of Canadian Provincial governments, decreased $2.1 billion; new Western European issues, mainly corporate issues, decreased $1.2 billion. Net purchases of outstanding bonds decreased to $0.5 billion from $2.5 billion, reflecting declining demand for bonds. Redemptions increased $0.1 billion, to $1.6 billion.

Direct investment abroad-Net outflows for U.S. direct investment abroad surged $14.4 billion, to a record $19.3 billion, in the third quarter. Equity capital shifted $10.5 billion to net outflows of $8.0 billion; the acquisition of a Swiss holding company with interests in numerous industries and of a foreign telecommunications company serving the Pacific region accounted for about two-thirds of the shift. A shift to outflows to other countries in Western Europe, following a few large divestitures in Western Europe in the second quarter, accounted for most of the remainder of the shift.

Intercompany debt outflows increased $1.1 billion, to $4.9 billion. The increase partly reflected a large loan related to the acquisition of the Swiss holding company; it was partly offset by a decrease in outflows to other countries.

Reinvested earnings increased $2.8 billion, to $6.4 billion. Foreign assets in the United States

Foreign assets in the United States increased $52.5 billion in the third quarter, compared with an increase of $25.5 billion in the second. Much of the increase was from a step-up in private bank-reported liabilities. Transactions in other U.S. securities shifted to net sales. Net foreign purchases of U.S. Treasury securities decreased. Inflows for foreign direct investment in the United States increased somewhat. In the first three quarters of 1990, foreign assets in the United States increased $45.0 billion, down sharply from an increase of $145.3 billion in the same period of 1989. The primary factors that contributed to lower capital inflows were the slowing in U.S. economic growth, particularly relative to economic growth in Japan and Germany; further movement of key interest differentials against dollar denominated assets; and significant dollar depreciation from the highs in mid-1989.

Foreign official assets.-Foreign official assets in the United States increased $13.6 billion in the third quarter, compared with an increase of $5.5 billion in the second. Nearly all of the increase was in assets of industrial countries, which increased $12.6 billion (table B). Assets of OPEC members decreased $1.3 billion, and assets of other developing countries increased $2.3 billion.

Liabilities reported by banks.-U.S. liabilities to foreigners reported by U.S. banks, excluding U.S. Treasury securities, increased $32.3 billion in the third quarter, compared with an increase of $4.9 billion in the second. Both U.S.-owned and foreign-owned banks increased borrowing from their own foreign offices abroad during the quarter, mainly to meet a temporary interbank demand for dollars in the United Kingdom and Japan. In addition, inflows, particularly from unaffiliated banks in Western Europe, accelerated in August, when investors' preferences shifted briefly to short-term assets in response to the uncertainties created by the Middle East crisis. Inflows slowed in September, when interbank lending eased and the uncertainties in financial markets abroad subsided.

Banks' custody liabilities increased $5.4 billion, compared with a $0.7 billion increase in the second quarter. Some U.S. borrowers shifted to Eurodollar credits when LIBOR rates decreased while the U.S. prime rate remained unchanged.

U.S. Treasury securities.-Net foreign purchases of U.S. Treasury securities slowed to $0.5 billion in the third quarter from $3.6 billion in the second. A pickup in foreign purchases in May and June continued into July, but transactions shifted to net sales in August and September. Although U.S. bond yields increased significantly in August and September during the escalation of the Middle East crisis, foreign investors were deterred from buying U.S. bonds by more favorable interest rates in other industrial countries, apprehension about U.S. inflation, and a depreciating dollar.

Other U.S. securities.-Transactions in U.S. securities other than U.S. Treasury securities shifted to net sales of $1.5 billion from net purchases of $2.9 billion. Net foreign purchases of U.S. corporate and other bonds decreased to $0.9 billion in the third quarter from $6.6 billion in the second. New issues sold abroad by U.S. corporations were $4.7 billion, unchanged from the previous quarter. A large portion of the new issues were medium term, fixed-rate dollar issues. Most of the new issues occurred in July, when Eurodollar bond rates eased. New issues decreased in August and September, as investors grew reluctant to acquire medium- and long-term obligations. Transactions in outstanding bonds shifted to net sales of $3.8 billion from net purchases of $1.9 billion.

Net foreign sales of U.S. stocks were $2.5 billion in the third quarter, compared with net sales of $3.7 billion in the second. Foreign investors were net sellers of U.S. stocks for the fourth consecutive quarter. In July, when U.S. stock prices rose slightly, transactions shifted to net purchases, but they reverted to large net sales in August and September, when U.S. stock prices fell.

Direct investment.- Net inflows for foreign direct investment in the United States were $7.6 billion in the third quarter, compared with $7.2 billion in the second. Equity capital inflows, which increased to $10.1 billion from $9.1 billion, included several large acquisitions in manufacturing and service industries by France and Switzerland and many smaller acquisitions by other Western European countries. These inflows offset a decline in acquisitions by Japan, which had been boosted by a large transaction in the second quarter.

Intercompany debt outflows were $1.3 billion, up from $1.0 billion.

Negative reinvested earnings increased to $1.1 billion from $0.8 billion; losses were reported by affiliates in insurance and retail trade. Reconciliation of United States - Canadian current-account

statistics

A reconciliation of the 1989 bilateral current-account statistics of the United States and Canada and a revision of the 1988 current-account reconciliation were completed in November 1990 (table F). A full reconciliation of the statistics for 1988 and 1989 was not possible: The differences in some investment income transactions and in a few service transactions could not be satisfactorily resolved, because of differences in U.S. and Canadian source data.

Revisions in the U.S. international transactions estimates based on the reconciliation will be incorporated as far as possible into the estimates published in June 1991. A full substitution of the reconciled estimates for the previously published estimates is not possible, because of methodological and definitional differences. In addition, transactions with other areas would be affected: For example, U.S. published estimates of merchandise imports are based on country of origin, and Canadian published estimates are based on country of shipment; this difference involves transactions with third countries. Another, difference is the treatment of direct investment income; reinvested earnings of incorporated affiliates are included in the U.S. published estimates and excluded in the Canadian published estimates.

Current-account reconciliations for 1970-87 were published in the June 1975, September 1976, September 1977, December 1979, June 1981, and December 1981-89 issues of the SURVEY OF CURRENT BUSINESS.