December 16, 2005
Current Account figures for 2005q3
Reading behind the numbers
The BEA released preliminary figures today for 2005q3 international transactions and revised figures for 2005q2. From Bloomberg:
Dec. 16 (Bloomberg) -- The U.S. trade deficit unexpectedly widened to a record $68.9 billion in October, as imports of crude oil, automobiles and televisions increased, a government report showed. The U.S. current-account deficit unexpectedly narrowed from July through September, as insurance payments and donations from abroad poured in following Hurricane Katrina, a government report showed.
The deficit, the broadest measure of trade because it includes transfer payments and income from investments, shrank to $195.8 billion last quarter from a revised $197.8 billion the previous three months, the Commerce Department said today in Washington. It was the second straight narrowing after a record $198.7 billion in the first three months of the year.
The deficit is still likely to widen because demand for imported goods is rising as the economy grows, economists said. The trade deficit unexpectedly increased to a record $68.9 billion in October, as imports of crude oil, autos and televisions rose, a government report earlier this week showed.
``The insurance payments are going to go away,'' said Jay Bryson, global economist at Wachovia Corp. in Charlotte, North Carolina. ``The outlook remains very bleak.''
Two other notable points:
1. The net income account was 512 million, essentially zero. Even more interesting was the fact that the revised figure for 2005q2 was -1.541 billion (both reported at quarterly rates, so multiply by 4 to get annual rates). The fact that the revised (and hence more reliable) numbers are negative suggest that the seeming paradox of a large negative US NIIP and a consistently positive entry on the net income account may be a thing of the past.
2. Debt payments on foreign owned US assets keep on rising. In 2004q1, such payments were $20.2 billion; in 2005q3 they were $30.1 billion. With short term rates likely to continue their upward climb for at least several more weeks, then 2005q4 figures should be even higher.
The entire release is at:
Posted by Menzie Chinn at December 16, 2005 06:52 AMdigg this | reddit
Doesn't the income deficit for Q2 largely reflect the strengthening of the dollar?
Posted by: knzn at December 16, 2005 11:14 AM
Some people in U.S. are so accustomed to the word "deficit" that they think it does not matter. I bet a lot of people get all the various kinds of deficits confused. Or people in the U.S. are completely oblivious to deficits.
Posted by: anon at December 17, 2005 10:30 AM
I have been too busy shopping to know about deficits.
Posted by: anonymous at December 17, 2005 02:14 PM
knzn: It may well be that the dollar appreciation in 2005q2 had a role in the negative net income account. But unless one is willing to bet on secular dollar, I don't think that gives one much hope.
Brad Setser has a more in-depth post on this subject:
Posted by: menzie chinn at December 17, 2005 04:12 PM
Since dollar interest rates are now significantly higher than those on most other currencies, it would appear that the market is anticipating a declining dollar. If the dollar decline is in line with what the market is pricing, then it seems possible that net income would go back to positive. (I certainly don't expect the dollar to keep rising, so in that respect, 2006 is likely to be better for US net income than 2005q2. Maybe this difference will be offset by the deteriorating net asset position, but I don't think negative net income is a safe bet.)
Posted by: knzn at December 18, 2005 03:31 PM
knzn: I'm not certain but I think you're referring to uncovered interest rate parity. If so, it's important to recall that at short horizons (up to a year and more) positive interest differentials are associated with home currency appreciation, not depreciation. So, conditional upon the interest differential, one should expect dollar appreciation (although admittedly, I'm basing the statement on a relationship with a R-squared of about 0.05).
It may be that the weight of the massive current account deficit will drag down the dollar, and you prove right. JP Morgan Chase predicts a 6.8% dollar depreciation against the euro in the year from November 29 (but only 4.7% against the pound).
Posted by: menzie chinn at December 18, 2005 08:15 PM
From the Morgan Stanley Global Economic Forum, more on the prospects for the income account in the current account:
"A renormalization of US interest rates is a third factor that will widen the current account gap as interest payments to foreign investors and central banks increase. Our colleague Shital Patel estimates that, other things equal, renormalizing US interest rates could add $80?100 billion (0.6?0.8% of GDP) to the current account gap over the next two years."
The entire post on the twin deficits by Dick Berner and Ted Wieseman is at:
Posted by: menzie chinn at December 19, 2005 07:24 AM
This is quite interesting, I am wondering about the impact of the deficit on the American dollar. But during 2005 it was quite strange, even Bufflet world 2nd richest man predicted wrong of a dollar slide.
Will the dollar defy our expectation this year?
Apparently the only investors supporting the appreciation of the dollar are the Chinese and Japanese. Japanese (mostly the ageing popullation) and Chinese (massive trade surplus) nothing to spend it on, apart from buying Amercians' long term-bond. But how will this affect it since our Bond curve is now inverted, would Chinese and Japanese still invest in long-term bonds despite the low interest?
If not than the Amercia's currency is in big trouble.
Posted by: Keith at January 5, 2006 12:32 AM