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Third Quarter Trade Deficit
Yahoo News/AP
Deficit in Current Account Narrows in 3Q
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.

What a mess. If we had budget surpluses or at least an attempt to undo the Bush tax cuts this wouldn't be quite so bad, but when we add record (ore near record) budget deficits to record trade deficits we can easily see our entire economy is based on DEBT. GDP is irrelevant when we have trade and budget deficits this size so force yourself to ignore it.