U.S. international transactions, third quarter 1986.

Dilullo, Anthony

U.S. International Transactions, Third Quarter 1986

THE U.S. current-account deficit increased to $36.3 billion in the third quarter from $34.4 billion in the second. The increase reflected a rise in the merchandise trade deficit; net receipts for services increased slightly.

Capital inflows remained strong. Those of foreign official agencies reflected substantial intervention purchases of dollars in exchange markets. Those of private foreigners reflected unusually large net inflows to U.S. banks, mostly related to interbank transactions, and continued sizable purchases of U.S. securities, mostly corporate bonds and stocks.

The statistical discrepancy (errors and omissions in recorded transactions) shifted to a net outflow of $3.8 billion from a net inflow of $12.4 billion.

U.S. dollar in exchange markets

The U.S. dollar depreciated 3 percent in the third quarter on a trade-weighted quarterly average basis against the currencies of 22 OECD countries and 5 percent against the currencies of 10 industrial countries (table C; chart 5).

Depreciation of the dollar against most major European currencies accelerated after slowing in the second quarter, and depreciation against the Japanese yen continued at about the same pace as in the second quarter. The lowering of the U.S. discount rate in July and August and the decline in U.S. short-term interest rates, while most key short-term foreign rates were virtually unchanged, were contributing factors. Some foreign monetary authorities made substantial dollar purchases in exchange markets to limit appreciation of their currencies against the dollar. The dollar depreciated 7 percent against the German mark, 5-7 percent against the other European Monetary System currencies, 8 percent against the Japanese yen, and 10 percent against the Swiss franc.

In contrast, the dollar was unchanged against the Canadian dollar and appreciated 2 percent against the British pound. Slow growth in the British economy and a larger trade deficit, mostly the results of the drop in petroleum prices earlier this year, weakened the pound against the dollar and some European currencies, especially the German mark and the Swiss franc. The weakening of the pound may have contributed to appreciation of other major currencies against the dollar as investors shifted their preferences to German marks, Swiss francs, and Japanese yen.

The dollar remained virtually unchanged against the currencies of the newly industrialized countries in Asia--Korea, Taiwan, Singapore, and Hong Kong. The official exchange rate of the Mexican peso was lowered 27 percent, partly the result of continued weakness in petroleum prices.

Merchandise trade

The merchandise trade deficit was $37.7 billion in the third quarter compared with $35.7 billion in the second. EXports increased $0.2 billion, or less than 1 percent, to $55.3 billion. Imports increased $2.2 billion, or 2 percent, to $93.0 billion.

Nonpetroleum imports increased $2.0 billion, or 3 percent, to $85.0 billion; volume increased 2 percent (chart 6). In response to dollar depreciation since the first quarter of 1985, price increases have appeared in some key import categories, such as automotive products, capital goods, and consumer goods. However, the increases have been limited, partly because some foreign exporters may have reduced profit margins to maintain their U.S. market shares and partly because the currencies of several important U.S. trading partners have remained virtually unchanged against the dollar. Also, import price increases have been restrained by worldwide weakness in primary commodity prices.

The largest increase in value in nonpetroleum imports in the third quarter was in passenger cars from areas other than Canada. These imports increased $1.6 billion, mostly due to a 15-percent increase in the number of units from Japan and a 79-percent increase in the number from Korea. The average price of Japanese cars increased 7 percent, and the average price of Korean cars decreased 2 percent. Imports of consumer goods increased $0.9 billion; prices and volume each increased 2 percent. Almost one-half the increase was in textiles. A $0.5 billion increase in capital goods was accounted for by a 2-percent increase in prices. The increase in value was concentrated in business machines from Japan. Foods, feeds, and beverages increased $0.1 billion, as a 6-percent increase in volume more than offset a 4-percent drop in prices, mainly in coffee. An $0.8 billion decrease in imports of nonpetroleum industrial supplies and materials was more than accounted for by nonmonetary gold; an increase in paper and paper base stocks from Canada was partly offsetting. Prices of nonpetroleum industrial supplies and materials imports, which had decreased in each of the last eight quarters because of falling prices of primary commodities, were unchanged.

Petroleum imports increased $0.2 billion, or 2 percent, to $8.0 billion. The increase, most of which went into inventories, was more than accounted for by an increase in volume; the average number of barrels imported daily increased to 7.67 million from 6.52 million. The average price per barrel decreased 13 percent--to $11.42 from $13.17--following 18-percent and 39-percent decreases in the first and second quarters, respectively. Following agreement by OPEC members to new temporary production controls, the decline in prices began to slow in August; prices increased slightly in September.

Nonagricultural exports were nearly unchanged at $48.8 billion; volume increased 1 percent. Increases in exports of capital goods and consumer goods were offset by decreases in nonagricultural industrial supplies and materials and in automotive products. Capital goods increased $1.0 billion: Completed aircraft increased $0.9 billion, computers $0.3 billion, and scientific and professional equipment $0.1 billion; construction machinery decreased $0.3 billion, reflecting the continuing worldwide slowdown in oil well drilling activity. Consumer goods increased $0.2 billion. Industrial supplies and materials decreased $1.1 billion: Exports of non-monetary gold decreased $1.5 billion, following an equal increase in the second quarter due to purchases by Japan for the minting of commemorative coins, and energy products decreased $0.2 billion, reflecting the drop in petroleum prices; exports of chemicals increased $0.2 billion. A $0.4 billion decrease in automotive products was mostly in exports to Canada.

Agricultural exports increased $0.3 billion, or 5 percent, to $6.5 billion; volume increased 14 percent. Prices of all major export commodities decreased: Cotton, 26 percent; rice, 25 percent; wheat and corn, 17 percent each; and soybeans, 3 percent. The lower prices partly reflect the impact of the Food Security Act of 1985, which lowered price supports beginning in the 1986 crop year, as well as abundant world supplies. The largest increases in value were in wheat, $0.3 billion; cotton, $0.2 billion; and rice and corn, $0.1 billion each. Soybean exports decreased $0.4 billion, mainly to Western Europe and to the Soviet Union; the decrease partly reflected improved production of corn--a close substitute for soybeans when used as livestock feed--in the Soviet Union.

By area, the trade deficit with Western Europe decreased $1.0 billion to $7.0 billion. Imports decreased $0.7 billion, mainly in nonmonetary gold. Exports increased $0.3 billion, although agricultural exports to that area continued to decline. The deficit with Canada decreased slightly to $4.1 billion. Exports and imports both decreased. With Latin America, a substantial increase in exports and a decrease in imports reduced the deficit $1.0 billion to $1.6 billion. The deficit with Japan increased $1.7 billion to $14.1 billion. Imports, mainly automobiles and business machines, increased $1.0 billion. Nonagricultural exports decreased $0.6 billion, and agricultural exports were nearly unchanged. A $2.5 billion increase to $10.9 billion in the deficit with other countries was largely accounted for by an increase in imports from the newly industrialized countries in Asia; an increase in nonagricultural exports to those countries was partly offsetting.

Service transactions

Net service receipts increased $0.2 billion to $5.6 billion in the third quarter.

Receipts of income on U.S. direct investment abroad decreased $0.2 billion to $9.6 billion. Earnings before capital gains and losses decreased $0.3 billion. A $0.4 billion decrease in earnings of petroleum affiliates was about one-half as large as in the second quarter, because of the slower decline of crude petroleum prices. Earnings of nonpetroleum affiliates increased $0.1 billion. Capital gains were virtually unchanged at $2.2 billion.

Payments of income on foreign direct investment in the United States decreased $0.3 billion to $1.8 billion. Earnings before capital gains and losses decreased $0.7 billion. The decrease was largely in earnings of petroleum affiliates and of automotive affiliates of Japanese companies. A $0.4 billion shift to capital gains of $0.2 billion occurred mainly among petroleum affiliates.

Declining interest rates led to decreases of $0.6 billion, to $10.9 billion, in receipts of other private income and of $0.2 billion, to $9.4 billion, in payments. Part of the impact of declining interest rates on payments was offset by recent large increases in foreign holdings of U.S. securities and in bank liabilities to foreigners.

Receipts of income on U.S. Government assets increased $0.6 billion to $2.0 billion. Most of the increase was related to provisions of the second Polish Debt Rescheduling Agreement; the agreement, which covered obligations maturing January 1, 1982 to December 31, 1984, entered into force September 8. (Related transactions appear in the U.S. Government credits and long-term assets, repayments, and short-term assets accounts.) Payments of income on U.S. Government liabilities increased $0.1 billion to $5.7 billion, as increased foreign holdings of U.S. Treasury securities more than offset the impact of declining interest rates.

Net travel and passenger fare payments decreased $0.1 billion to $1.9 billion. Travel receipts were $3.3 billion, up $0.2 billion, mainly from Western Europe and the Far East. Travel payments were unchanged at $4.4 billion. Payments for overseas travel were $2.6 billion, the same as in the second quarter, as increased foreign currency costs offset the decrease in the number of travelers. The number of U.S. residents traveling to Western Europe and the Mediterranean area continued to decline, but at a slower pace than in the second quarter. Passenger fare receipts were unchanged at $0.8 billion; payments increased $0.1 billion to $1.6 billion.

Other transportation receipts increased $0.2 billion to $3.7 billion, and payments increased $0.3 billion to $4.3 billion. A larger volume of imports contributed to both increases: Additional expenditures of foreign ship operators in U.S. ports boosted receipts, and additional freight charges boosted payments.

Transfers under military sales contracts were unchanged at $2.3 billion. An increase in deliveries of aircraft to the Middle East was offset by decreases in deliveries of missiles and technical services. Direct defense expenditures, at $3.0 billion, were also unchanged.

Net unilateral transfers increased $0.1 billion to $4.2 billion, reflecting an increase in U.S. Government grants. Grants to finance military purchases remained strong, as did outflows of funds from the Agency for International Development's economic support fund.

U.S. assets abroad

U.S. official reserve assets decreased $0.3 billion in the third quarter. Decreases in holdings of special drawing rights and in the U.S. reserve position in the International Monetary Fund were partly offset by a $0.4 billion increase in U.S. holdings of foreign currencies, largely Mexican pesos. The acquisition of pesos reflected U.S. participation in international support arrangement for Mexico.

Claims on foreigners reported by U.S. banks increased $20.5 billion in the third quarter compared with $14.4 billion in the second. The third-quarter increase was dominated by quarter-end interbank transactions (which were subsequently reversed in October). Otherwise, claims during the quarter increased little, with the exception of those on Japan and on several newly industrialized countries in Asia. In general, demand for bank credit outside the interbank market remained weak, as corporate borrowers continued to rely heavily on the securities market as a source of funds. Claims payable in foreign currencies increased $2.9 billion, and claims of banks' domestic customers increased $3.6 billion.

Net U.S. transactions in foreign securities shifted to net sales of $0.2 billion from net purchases of $1.7 billion. Transactions in foreign stocks shifted to net sales of $0.8 billion from net purchases of $2.1 billion, reflecting profit-taking by some investors and weakening stock prices in several leading markets. The largest shift was in Japanese stocks; net sales were $1.2 billion following net purchases of $0.2 billion. The shift to net sales of Japanese stocks occurred in May, and net sales continued in the third quarter. Similar shifts occurred in Canadian and British stocks. Rising interest rates in the United Kingdom and appreciation of the dollar against the pound probably also contributed to net sales of British stocks.

Transactions in foreign bonds shifted to net purchases of $0.6 billion from net sales of $0.5 billion. The shift was more than accounted for by a large step-up in net purchases of British bonds, especially gilt-edge bonds, due to sharply higher yields. New foreign bond issues in the United States, at $0.9 billion, were slightly higher than in the second quarter.

Net outflows for U.S. direct investment abroad were $7.7 billion compared with $8.1 billion. Net intercompany outflows increased $0.8 billion to $2.6 billion. A $2.4 billion shift to net outflows in transactions with petroleum affiliates, as U.S. parents reduced trade payables accumulated earlier this year, was partly offset by a $1.5 billion slowdown in outflows to other affiliates. The slowdown was largely due to a shift to net inflows from finance affiliates in the United Kingdom. Also, repayment of debt to Netherlands Antilles finance affiliates slowed (table D). Net equity capital inflows were $0.3 billion, down from $0.7 billion, reflecting a decrease in inflows from Canada following sales of two affiliates in the second quarter. Unflows from the United Kingdom increased: Equity in a British petroleum affiliate was reduced as an offset to a reduction in debt to the affiliate. Re-invested earnings were $5.4 billion compared with $7.0 billion.

Foreign assets in the United States

Foreign official assets in the United States increased $15.8 billion in the third quarter compared with $14.7 billion in the second (table B). Dollar assets of industrial countries increased $12.6 billion, reflecting substantial intervention purchases of dollars in exchange markets by foreign monetary authorities to limit appreciation of their currencies. Dollar assets of OPEC members decreased $2.8 billion. Dollar assets of other countries--mostly in Asia--increased $6.1 billion.

Liabilities to foreigners and international financial institutions reported by U.S. banks, excluding U.S. Treasury securities, increased $32.2 billion compared with $3.6 billion. The third-quarter increase was dominated (as was the case with bank claims) by interbank flows; inflows from Caribbean branches at quarter-end approximately matched the increase in U.S. claims on those branches. Large inflows through the same branches in August may have partly reflected the narrowing of U.S. and Eurodollar interest rates differentials, along with a strong demand by banks for funds to purchase municipal bonds. Less favorable tax treatment of such purchases takes effect next year. Liabilities payable in foreign currencies increased $5.1 billion, mainly to Japan and to the United Kingdom, and banks' custody liabilities increased $4.9 billion.

Net purchases of U.S. Treasury securities by private foreigners and international financial institutions declined to $0.6 billion from $3.8 billion. Large sales by international financial institutions more than offset net purchases by several countries, particularly Japan, where gross purchases picked up slightly and gross sales dropped sharply. In the United Kingdom, transactions shifted to net sales, perhaps related to a widening of interest differentials in favor of British bonds.

Net foreign purchases of U.S. securities other than U.S. Treasury securities were $17.1 billion compared with $23.0 billion. Net foreign purchases of U.S. stocks slowed to $4.5 billion from the second-quarter record of $7.0 billion. Net purchases by a number of countries were reduced. Exceptions were British and Canadian purchases, which increased slightly, and Japanese purchases, which increased to $1.4 billion from $0.9 billion. Net foreign purchases of U.S. bonds were $12.6 billion compared with $16.0 billion. New issues sold abroad by U.S. corporations remained strong at $10.3 billion, but were off $1.5 billion from the second quarter. New issues rose sharply in September, when U.S. interest rates rose relative to Eurobond rates.

Net inflows for foreign direct investment in the United States slowed to $3.4 billion from $4.1 billion. A $2.7 billion shift to net outflows of $1.2 billion in intercompany debt reflected a conversion of debt to equity of U.S. affiliates of parent companies in the United Kingdom, Sweden, and Canada and reductions in debt of a number of other U.S. affiliates to parents in other Western European countries. Equity inflows increased $2.2 billion to $4.2 billion, due to the above-mentioned conversions and to an increase in other equity inflows related to acquisitions. Reinvested earnings were $0.4 billion compared with $0.5 billion.