Third Quarter Trade Deficit
Yahoo News/AP
Deficit in Current Account Narrows in 3Q
By MARTIN CRUTSINGER, AP Economics Writer
December 16, 2005
WASHINGTON - America's deficit in the broadest measure of international
trade showed a slight improvement in the July-September quarter although it was
still at the third highest level in history.
The Commerce Department reported that the deficit in the U.S. current
account totaled $195.8 billion in the third quarter. That was down 1 percent
from the deficit in the April-June quarter of $197.8 billion, which had been a
0.4 percent improvement from the record deficit of $198.7 billion set in the
first three months of the year.
The third quarter figure was below the $205 billion imbalance that had been
forecast. Analysts said payments by foreign insurance firms to settle damage
claims stemming from hurricanes Katrina and Rita accounted for most of the
improvement.
Analysts are forecasting that current account deficit for all of 2005 will
set a new high, topping $800 billion and will rise above $900 billion next
year. Those figures are well above the current record-holder, last year's
$668.1 billion deficit.
To support their view of a widening current account deficit, analysts noted
that the government earlier this week reported that the deficit in just goods
and services for October, the first month of the fourth quarter, had surged to
a record of $68.9 billion.
While the country's trade performance continues to deteriorate, analysts
said they saw no slackening in demand by foreigners to hold dollar-denominated
assets.
They pointed to a Treasury report Thursday that showed foreigners had made
net purchases of $106.8 billion in U.S. securities in October, an all-time
high.
"The key point is that the deficit is being easily financed," said Ian
Shepherdson, chief U.S. economist at High Frequency Economics, a private
forecasting firm.
The slight improvement in the current account deficit for the third quarter
came despite the fact that the imbalance in goods rose by $10.9 billion to
$197.9 billion. The government said 80 percent of that deterioration reflected
a higher foreign oil bill with larger imports of cars and auto parts accounting
for much of the rest.
The current account is the broadest measure of foreign trade because it
includes not only sales of merchandise and services but also investment flows
and foreign aid. The current account deficit must be financed by convincing
foreigners to hold more dollars, which they invest in U.S. stocks, bonds and
Treasury securities.
So far, the country has not had trouble attracting those investments but the
worry is that at some point foreigners will slow their purchases of
dollar-denominated investments. Such a change, if it occurs abruptly, could
send the dollar plunging in value against other currencies. It could also send
U.S. stock prices down sharply and cause interest rates to rise, which if
severe enough could send the economy into a tailspin.
None of these dire outcomes has occurred. And Federal Reserve Chairman Alan
Greenspan, while calling the surge in the current account unsustainable, has
forecast that market forces will correct the imbalance without disrupting the
U.S. economy.
Another positive factor in the narrowing of the deficit was a return of the
investment category to a surplus for the United States of $512 million after
investments had been a negative of $1.5 billion in the second quarter.
However, analysts said the trend will put this category back in negative
territory given that the United States is now the world's largest debtor
country, meaning that foreigners own more in U.S. assets than U.S. citizens own
in foreign assets.
In addition to trade in goods and investment flows, the balance on services
improved by $1.8 billion to $15.1 billion in the third quarter, while
unilateral transfers, the category that includes foreign aid and the insurance
payments for hurricane damage, narrowed to a deficit of $13.5 billion, down
from a deficit of $22.6 billion in the second quarter.
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