U.S. Current-Account Deficit Fell to $190.8 Billion (Update1)
By Shobhana Chandra and Joe Richter
Sept. 14 (Bloomberg) -- The U.S. current-account deficit narrowed to $190.8 billion in the second quarter, as Americans earned more interest on overseas investments and government payments abroad slowed.
The shortfall followed a revised $197.1 billion in the first quarter that was larger than initially reported, the Commerce Department said today in Washington. The median forecast in a Bloomberg News survey of economists was $190 billion for the second quarter.
Even at current levels, Federal Reserve Chairman Ben S. Bernanke this week said the gap couldn't last ``indefinitely'' and called on Americans to save more. A persistently high imbalance risks a jump in interest rates and a slump in the dollar should foreign investors decided to unload U.S. assets. The U.S. must attract about $2.1 billion a day to fund the gap.
``The current account deficit improved modestly and has clearly peaked,'' said Steven Wood, president of Insight Economics LLC in Danville, California. Still, ``it will be difficult to improve substantially on a sustained basis.''
The median estimate reflected 51 forecasts in a Bloomberg News survey. Estimates ranged from deficits of $180 billion to $202 billion. The current-account gap in the first quarter was initially reported at $192.6 billion.
The current account is the broadest measure of trade because it includes transfer payments and investment income. The gap amounted to 5.5 percent of the economy compared with 5.8 percent in the prior quarter.
For all of 2006, the current-account gap grew to $811.5 billion, the biggest ever.
Trade Gap
The deficit in trade, which accounts for about 90 percent of the total, was little changed at $177.7 billion in the second quarter, compared with $177.6 billion in the first three months this year. Overseas demand is fueling sales at companies such as General Electric Co. and Deere & Co.
U.S. investors received more income on their holdings of overseas investments than foreigners received here. Income on overseas assets rose to $190.3 billion from $175.5 billion.
Foreign earnings on U.S. assets, including wages and other compensation, increased to $179.2 billion from $166.4 billion in the previous three months. That left a $9.4 billion surplus on income payments compared with a $7.5 billion surplus the prior quarter.
The U.S. government paid out $22.5 billion more to foreign governments and private entities than Americans received from abroad, compared with $27 billion in the previous quarter.
Foreign Investors
Investors abroad hold half of Treasuries outstanding, financed by savings built up in part from trade surpluses. U.S. liabilities to foreigners ``are not, at this point, putting an exceptionally large burden on the American economy,'' Bernanke said in a Sept. 11 speech in Berlin.
Even so, there is a need to increase domestic saving rather than rely on the ``global saving glut'' that is helping to fund the U.S. current account shortfall and keeping interest rates low, he said.
U.S. current-account gaps can't last ``indefinitely'' at the current level, and there's a risk ``foreign investors would ultimately become satiated with dollar assets, and financing the deficit at a reasonable cost would become difficult,'' the Fed chief said.
Bernanke's predecessor, Alan Greenspan, had in 2004 told the European Banking Congress in Frankfurt that a diminished appetite for adding to dollar balances ``must occur at some point.''
China's Reserves
China has a record $1.3 trillion of foreign-exchange reserves and household savings that amount to almost one-fifth of its economy. Some U.S. policy makers and manufacturers say that country has kept its currency, the yuan, artificially low to stimulate overseas demand for its products. Treasury Secretary Henry Paulson has urged China to let the yuan rise more.
A Commerce report on Sept. 11 showed the trade gap with China, the second-largest U.S. trading partner after Canada, widened in July to a level that was second only to the record $24.4 billion reached in October 2006.
The overall U.S. trade deficit narrowed in July to $59.2 billion after an upwardly revised $59.4 billion in June, as exports grew by the most in three years. The imbalance will become less of a risk in coming years, economists said.
``After 5 consecutive years of a widening current account deficit, we expect a stable-to-narrowing gap in 2007-2009,'' said Peter Kretzmer, a senior economist at Banc of America Securities LLC in New York.
The dollar is down 7.9 percent since the beginning of 2006 against a basket of currencies from major trading partners, making American goods cheaper for foreign buyers.
That's helped manufacturers such as Moline, Illinois-based Deere, the world's largest farm-equipment maker. The company increased its full-year profit forecast in August as third- quarter sales of machinery outside the U.S. jumped 30 percent.
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