from Follow the Money

The first quarter current account statistics are kind to the USA

June 16, 2006 9:56 am (EST)

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The 2005 current account deficit was revised down to $791.5b or so.

The q1 2006 deficit was $208.7b -- down from $223.1b in q4.   We knew the trade balance improved a bit.  But the income balance also improved, contrary to my expectations.  And the transfers deficit went down.

To my surprise, net official flows (recorded central bank flows) to the US in 2005 were revised down, to $199.5b.   Adding in the growth in central bank dollar deposits in the BIS data increases the known increase in dollar reserves by $80b or so.  But $280b in dollar reserve growth is very, very small relative to my and most other estimates for the total increase in official assets in 2005 -- which, including all Saudi central bank assets, likely topped $650b.  Something still doesn't add up.

Here though the Q1 data makes more sense.  Recorded official inflows to the US were nearly $75b.    FDI flows also reversed.  In 2005, inflows into the US topped outflows by about $100b.   Thank you Homeland Investment Act.   Outflows dried up.   In q1, outflows once again topped inflows by about $30b.   That increased the US borrowing need ...  

So what happened to the income and transfers balance.    

I need to dig a bit more, but it seems like US government aid flows fell by $4.3b, improving the transfers balance.  Is this result of the end of the big aid package for Iraq?  Perhaps.   Private transfers were also on the low side for a non-hurricane quarter.

On the income side, payments of interest and dividends increased by about $9.3b -- but US interest and dividend receipts increased by $7.1b or so, limiting the damage.  I suspect the fact that most US lending abroad is very short-term is helping the US here, as US lending "reprices" faster than US borrowing.  

But the big gains came from foreign direct investment.   The earnings of US firms abroad increased by $2.6b in the first quarter (v. q4).   But even more importantly, the earnings for foreign firms fell by $3.7b.    The net swing was $6.3b or so -- overwhelming the US interest bill.

Dark matter (though not from Disney)?

Continued gains from the export of US intangibles (just not by Disney)?

Or bad data? 

The implied return on foreign direct investment in the US remains very low -- too low, in my view, to be plausible.  Toyota must have had a good quarter ... to me, that suggest bad data.    The US has a bit more FDI abroad than foreigners have FDI in the US.  But the difference in stocks isn't big enough to explain why the US earned $70.1b on its FDI, and foreigners earned only $31.2b on their investments in the US.

The balance on FDI was about $40b in the United States favor in the first quarter.   The balance on debt was around negative 37.5b.   The negative interest balance makes sense to me.   The US has a lot more debt than it has loans abroad.   A favorable FDI balance makes sense to me as well.  Just not as favorable a balance as in the first quarter data.   The implied return on foreign FDI is just too low.

I am sure others will disagree.

Update:  more from Menzie Chinn and Michael Mandel.   Mandel certainly disagrees with my doubts.  He thinks the US earnings on FDI are likely understated.

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