from Follow the Money

Q3 current account deficit: $900b annualized

December 18, 2006

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A deficit of $225b in a quarter/ $900b is big by any standard -- and bigger (in nominal terms) than the previous record in q4 2005.   Those convinced that the US current account deficit has already stabilized might want to take notice.

That said, the q3 deficit is a tiny bit smaller than I expected.  The deterioration in the income balance wasn't quite as big as I expected.  More on that later.

The q1 and q2 deficits look to have been revised up a bit -- so the deficit in the first half of the year now stands at $430b.    The q4 deficit will likely fall a bit from its q3 levels.   The October trade defict was better than expected.   The US oil import bill may be $15b smaller in q4 than q3.   Say the q4 deficit comes in at $210b.   The deficit for the year will still be $865.   That is,  I suspect, a bit conservative -- the q3 deficit could easily be revised upwards, the deterioration in income balance could be larger in q4 and so on.

The pace of deterioration in the current account deficit seems to have slowed.  But it hasn't, in my judgement, yet stabilized -- in nominal or real terms. 

A few other quick points.

The q3 deterioration in the income balance wasn't as bad as expected larger because the increase in q3 "other private income receipts" -- $3.8b -- was higher than the increase in US non-FDI interest payments (about $3.1b).    In other words, interest income on US lending abroad increased faster than interest payments on US borrowing from the world.   That won't continue.  I had expected income from US lending abroad (which is usually short-term lending) to stabilize in q3 -- that didn't happen, but with the Fed on hold, it should happen soon.

US government transfers (foreign aid) are look to be about $20b in 2006, v. $30b last year.  I think that reflects the end of the big aid package to Iraq.

US firms foreign investment outside the US still tops foreign direct investment in the US.    Portfolio equity inflows are (I think) about even (that data comes from the TIC, so it isn't in the data release).   That means the US is financing its current account deficit the same way it has for the past few years, namely, with debt.

There is, however, a $50b gap between the scale of identified inflows to the US and the $225b the US needed to cover its current account deficit.   This gap -- "errors and ommissions" -- has been large all year.   Identified net inflows to the US so far this year are about $150b smaller than what the US needs to cover its deficit.

Central banks are back.   They accounted for $80b of the $175b of identified net inflows to the US in q3.    Recorded inflows from official institutions have been running at a $300b pace all year.  

On current trends, the US will run a $875b deficit for the year.   Offiical inflows will finance about $325b of it (official inflows should be strong in q4 -- all that intervention in November).    Identified (net) private inflows will finance about $350b of it (and that total may include some disguised central bank/ oil fund purchases).   Net private debt inflows will be bigger -- probably over $400b -- but they will in part finance ongoing net equity outflows.  And there still will be a $200b gap -- the errors term -- between identified net flows and the financing the US needs.

I may have more on the data in a bit, after I start playing with it.  You never know.

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