Wednesday, March 14, 2012

US Borrows PI from the Rest of the World

A little PI day gift from the BEA, which released a preliminary estimate showing that US Current Account deficit as a share of GDP fell slightly last year, to 3.14%.  That's down a bit from 3.24% in 2010 (the actual deficit grew, but GDP grew more), and well off its peak of 5.98% in 2006.
The current account deficit is smaller than the trade deficit, which was 3.82% of GDP, reflecting the fact that the US receives more payments from foreign assets than it sends out.  This is true even though the value of US foreign assets is less than foreign-held assets in the US, because the US gets higher returns on its foreign investment than foreigners get on their investments here.  That doesn't mean the US is a lousy place to invest - it reflects the mix of assets held.  A large part of foreign-owned assets are low-yielding US treasury bonds, while US investment abroad tends to be more weighted towards higher-return (but riskier) equity investment.

The current account deficit represents how much the US is borrowing from the rest of the rest of the world. Roughly speaking, the part of our imports that aren't covered by exports or net income from foreign assets are paid for by selling I.O.U.'s (financial assets like stocks and bonds).

In 2005-06 there was a great deal of hand-wringing about the ballooning deficit and worry about how much longer the rest of the world would be willing to lend to the US.  While it hasn't gotten much attention, amidst all the hysteria about debt, it is noteworthy that the US is now considerably less dependent on borrowing from the rest of the world than it was 6 years ago. 

Although the annual numbers suggest the US current account deficit may be stabilizing at a lower level, there are some worrying signs in the quarterly data.  In the fourth quarter, exports fell slightly and the balance on income decreased.  The widening trade deficit continued in more recent monthly data. This is where we may see the impact of rising oil prices (petroleum products account for over 40% of the US trade deficit) and the slump in Europe - not only is European demand not growing, the crisis is probably depressing the value of the Euro, which makes European exports cheaper relative to US goods.  In the actual fourth quarter data, exports to Europe increased slightly, but it is something to watch going forward.

On a related note, NPR recently ran a story on "reshoring" of manufacturing to the US.

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