Current Account Deficit Unexpectedly Narrowed in Q2

The manageable current account deficit narrowed a bit in Q2 due to higher income received from abroad. The country is having few problems financing the deficit at present.

U.S. Current Account Deficit Remains Manageable

The U.S. current account narrowed from a downwardly revised deficit of $102.1 billion in Q1-2014 to $98.5 billion in the second quarter (top chart). Over the past four quarters, the red ink in the current account has been equivalent to 2.2 percent of GDP, a ratio that most economists would consider to be manageable (middle chart). Previously released monthly data indicated that the deficit in the balance on goods and services, the so-called “trade balance” widened to roughly $130 billion in Q2 from about  $125 billion in Q1. The $59 billion surplus in trade in services partly offset the $189 billion deficit that the country incurred in trade in goods during the second quarter.  

Exports and imports of goods and services account for the vast majority of  the transactions in the current account, so the broad contours of the current account deficit are already known when the actual data are released. The new piece of information today was the international receipts and payments of income. Although payments and receipts of investment income were roughly constant between Q1 and Q2, the United States received $8 billion more in “secondary” income (e.g., insurance-related transfers and other transfers) in the second quarter relative to the first quarter. This “surprise” largely explains the modest narrowing in the overall current account deficit that occurred during Q2. 

Broad-Based Financing of Deficit in Second Quarter

The counterpart to the U.S. current account deficit is the financial account surplus, which finances the former. In that regard, the financing of the deficit was broadly balanced during the second quarter. There were $72 billion worth of foreign direct investment inflows during Q2 (bottom chart). In addition, foreign purchases of American securities (i.e., stock and bonds) totaled $74.8 billion and “other” investments (e.g., currency and bank deposits) exceeded $100 billion. In short, the United States appears to be having little trouble financing its manageable current account deficit at present. A large swoon in the value of the dollar due to an unsustainable current account deficit does not appear to be anywhere close at hand. 

We believe that the current deficit will remain manageable for the foreseeable future. Although slow economic growth in the rest of the world likely will constrain export growth in coming quarters, the energy boom that is underway in the United States is reducing the amount of imported petroleum. Indeed, we forecast that the deficit will shrink from about $440 billion this year to less than $400 billion in 2015. Moreover, with unrest rampant in the rest of the world, the country likely will continue to find willing foreign buyers of its relatively safe assets, especially its U.S. Treasury securities.