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U.S. 2nd-Qtr Current Account Deficit Narrows to $195.7 Billion

*The deficit news is being merged into the general scheme of things, the previously deficit-related thread ended here: #msg-7014103

U.S. 2nd-Qtr Current Account Deficit Narrows to $195.7 Billion

Sept. 16 (Bloomberg) -- The U.S. current-account deficit narrowed last quarter for the first time since 2003 as the federal government sent less financial aid to other countries, a government report showed.

The deficit, the broadest measure of trade because it includes income from investments and transfer payments, shrank to $195.7 billion from April through June, from a revised record $198.7 billion in the first three months of the year that was more than originally reported, the Commerce Department said today in Washington. The last time the gap narrowed was in the last quarter of 2003.

Federal Reserve policy makers said they didn't believe the deficit would continue to improve because demand for imported goods will accelerate as the economy grows, according to minutes of their Aug. 9 meeting. A surge in imported fuel costs following Hurricane Katrina will add to the gap in coming months, economists said.

``We should see a big increase in oil imports and, given the overall robust demand in the U.S., we are also going to see higher non-oil imports,' said Jay Bryson, global economist at Wachovia Corp. in Charlotte, North Carolina, before the report. ``Over the next few quarters, the deficit is going to get bigger.'

Greenspan

Fed Chairman Alan Greenspan last month said the current- account gap and the boom in home prices were the most notable imbalances facing the economy. The need to address those imbalances is one reason central bankers will probably increase their interest rate target when they meet Sept. 20 and keep raising it in subsequent meetings, economists said.

``The only thing that the Fed can do to correct the current- account imbalance is to slow the U.S. economy,' said Bryson. ``If you are adding up reasons for why the Fed will keep on tightening, the current-account deficit is on that list.'

Economists expected the second-quarter deficit to fall to $193 billion, the median of 43 estimates in a Bloomberg News survey, from an initially reported $195.1 billion shortfall in the previous quarter. At the current pace, the U.S. needs to attract about $2.1 billion a day in investment from abroad to fund the deficit and keep the value of the dollar steady. The deficit account for 6.3 percent of gross domestic product, down from a record 6.5 percent in the first quarter.

A drop in government grants of aid and other transfers abroad was more than enough to offset a wider trade gap and the first deficit in income payments since the second quarter of 2002.

Trade

A deficit in the nation's balance of trade accounts for about 89 percent of the current-account shortfall. Americans imported $173.3 billion more goods and services than they exported in the second quarter compared with a $173.1 billion trade gap the prior three months.

``Continued brisk import growth appeared likely to be sustained for the foreseeable future by gains in domestic demand,' Fed policy makers said during their meeting last month, according to the minutes issued Aug. 30.

That wasn't the case in July as the trade gap improved. The deficit narrowed to $57.9 billion, from $59.5 billion in June as imports of clothing, aircraft and pharmaceuticals dropped, the Commerce Department reported this week.

The rising price of oil is likely to boost imports in coming months, economists said. Crude oil on the New York Mercantile Exchange for September delivery averaged $64.99 a barrel last month compared with $59.03 in July. So far this month, the average price is $65.15 a barrel.

Katrina

Not all economists agree the deficit will widen immediately. Claim payments from foreign insurance companies and grants from foreign governments sent to aid in the rebuilding after Hurricane Katrina will help restrain the deficit this quarter, said John Shin, an economist at Lehman Brothers Inc. in New York.

The U.S. paid foreigners more income on their holdings of American assets than it received from U.S. investments abroad. That's helping to widen the deficit.

Foreign earnings on U.S. assets, including wages and other compensation, rose to $113.8 billion in the second quarter from $106.3 billion in the previous three months. Income on overseas assets held by U.S. investors rose to $113.3 billion from $107 billion. That left a deficit of $455 million on income payments, the first shortfall since the second quarter of 2002. That compared with a surplus of $643 million in the first quarter.

Net government payments to foreigners and other private transfers abroad narrowed to a deficit of $21.9 billion, smaller than the $26.3 billion deficit in the prior quarter.

``If we can maintain an adequate degree of flexibility, some of America's economic imbalances, most notably the large current- account deficit and the housing boom, can be rectified by adjustments in prices, interest rates, and exchange rates rather than through more-wrenching changes in output, incomes, and employment,' Fed Chairman Greenspan said Aug. 26 at the start of the central bank's yearly meeting in Jackson Hole, Wyoming.

Interest Rates

Michael Moskow, president of the Chicago Fed, and Janet Yellen, president of the San Francisco Fed, both said last week that the current-account deficit has reached an ``unsustainable' level.

Central bankers are expected to raise the target for the overnight bank lending rate to 3.75 percent when they meet Sept. 20, the 11th consecutive quarter-percentage-point increase, according to the median estimate of economists surveyed by Bloomberg News.

So far, foreign investors are willing to fund the nation's appetite for foreign goods. International investors bought a net $175.3 billion of U.S. assets from April through June, enough to offset the trade gap, according to Treasury figures. The report on July flows is due today at 9:00 a.m.

Funding

Still, ``when people become risk averse, imbalances matter,' said Wachovia's Bryson. ``If anything were to happen that puts into question the U.S.'s ability to repay foreign investors, then those investors could head for the exits.'

A drop in foreign funding would cause the dollar to drop and interest rates to rise, Bryson said.

U.S. exports rose more than 25 percent in the last two years even as imports rose 32 percent, Commerce Department figures show.

Shares of Tyson Foods Inc. fell 2.2 percent yesterday, the most in six weeks, when an analyst said the world's biggest meat processor will take longer than expected to recover the export business lost when mad-cow disease was found in the U.S. in 2003.

Japan, normally the biggest overseas customer for U.S. beef, was among more than 60 countries that banned the meat when the U.S. confirmed its first case of mad-cow disease in December 2003. Japan purchased about $1.7 billion in U.S. beef and beef products in 2003. JP Morgan Securities' Pablo Zuanic predicted Japan would not resume purchasing U.S. beef until early 2007.

To contact the reporter on this story:
Carlos Torres in Washington [e-mail].


LINK: http://www.bloomberg.com/apps/news?pid=10000103&sid=at0B9ArGG7wE&refer=us