How the U.S. Current Account Was Funded in the Third Quarter of 2010
December 16, 2010
The U.S. current account deficit widened slightly more than expected last quarter to $127.2 billion, or 3.5% of GDP. That shortfall was over-funded by a $141.1 billion officials capital inflow, which was about $100 billion greater than net official capital inflows in the second quarter. Moreover, high-quality long-term capital inflows climbed steeply to $116.7 billion as a result mainly of significantly greater foreign direct investment in the United States and larger net purchases of U.S. corporate bonds, agency bonds, and equities.
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The table below breaks down the balance of payments for the past five quarters into its three major components: the current account, official capital flows, and private capital movements. I’ve also isolated those private capital movements consisting of direct investment by businesses and flows associated with the purchase and sale of long-term securities. Before the dollar floated, analysts used to monitor the Basic Balance, which adds long-term capital flows to the current account, in order to track implicit currency market pressures. The trade-weighted dollar indices in the final row are period averages. All other figures are expressed on a net basis and in billions of dollars. All transactions conform to double-entry accounting standards, so the sum of the current account and all private capital movements zero out allowing for some rounding errors. Note that the private capital line includes the statistical discrepancy.
| 3Q09 | 4Q09 | 1Q10 | 2Q10 | 3Q10 |
| C/A | -97.5 | -100.9 | -109.2 | -123.2 | -127.2 |
| % of GDP | -2.8 | -2.8 | -3.0 | -3.4 | -3.5 |
| Official | +105.3 | +164.0 | +81.2 | +41.0 | +141.1 |
| Private | -7.8 | -63.1 | +28.0 | +82.3 | -13.9 |
| Dir & Port | -30.8 | -51.6 | +11.7 | +20.9 | +116.7 |
| TW$ | 75.4 | 73.6 | 75.5 | 78.0 | 75.9 |
A second table below breaks down long-term capital inflows into their component parts in the second and third quarters of 2010. The changes between those two quarters are shown in the right-most column. A positively signed change indicates an increased net inflow, a reduced net outflow, or a swing from a net outflow to a net inflow. The eight elements of long-term capital movements are U.S. direct investment abroad, foreign direct investment in the United States, U.S. buying of foreign bonds, U.S. purchases of foreign equities, foreign buying of Treasuries, foreign purchases of U.S. corporate bonds, foreign buying of U.S. agency bonds and foreign purchases of U.S. stocks. U.S. buying of foreign bonds and reduced foreign demand for Treasuries were the largest of three adverse changes, but they were collectively swamped by net foreign demand for U.S. long-term securities other than Treasuries. The sum of the figures in the column labeled “change” corresponds to the difference between the second quarter and 3Q10 entries in the above table in the line labeled direct and portfolio investment. The match is not precise because of errors due to rounding.
| 2Q10 | 3Q10 | Change |
| U.S. DI Abroad | +72.5 | +83.1 | -10.6 |
| Fgn DI in U.S. | +18.0 | +70.5 | +52.5 |
| U.S. + Fgn Bonds | -1.8 | +28.0 | -29.8 |
| U.S. + Fgn Stocks | +22.2 | +16.5 | +5.7 |
| Fgn + Treasuries | +101.3 | +65.0 | -36.3 |
| Fgn + U.S. Corporates | -18.1 | +18.0 | +36.1 |
| Fgn + Agencies | +8.1 | +54.0 | +45.9 |
| Fgn + U.S. Equities | +4.4 | +36.8 | +32.4 |
Copyright Larry Greenberg 2010. All rights reserved. No secondary distribution without express permission.
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