Academic journal article
By Morisse, Kathryn
Federal Reserve Bulletin , Vol. 78, No. 5
In 1991, for the fourth consecutive year, the U.S. current account deficit narrowed substantially. The largest changes reflected improvements in the merchandise trade balance and special transactions related to the war in the Persian Gulf. The sharp reduction in the recorded U.S. current account deficit was mirrored by changes in recorded capital inflows and the statistical discrepancy.
A $27 billion increase in merchandise exports and an $8 billion reduction in merchandise imports yielded a $35 billion narrower trade deficit for the year (table 1); the trade deficit in 1991 was the smallest since 1983. Cash contributions by foreign governments to help pay costs of the Persian Gulf War reduced the size of the current account deficit $43 billion in 1991; the amount of these grants received in 1991 was much larger than that received in 1990. In addition, net receipts from services expanded $10 billion in 1991 because of a strengthening in such areas as travel, professional services, and royalties and license fees. Net investment income receipts changed little in 1991. As a result of these changes, the U.S. current account deficit narrowed dramatically (chart 1). Even after excluding the special cash grants by foreign government the U.S. current account deficit narrowed sharply, from $96 billion in 1990 to $51 billion in 1991.
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MAJOR INFLUENCES ON
U.S. INTERNATIONAL TRANSACTIONS
Cyclical movements in economic activity at home and abroad and factors affecting U.S. international price competitiveness significantly influenced U.S. international transactions in 1991. The crisis in the Persian Gulf had large, but generally transitory, effects on the quarterly pattern of various components of U.S. international transactions.
Relative Growth Rates
From 1989 through 1991, economic growth abroad, on average, exceeded growth in the United States, and this difference contributed to the narrowing of the external deficit (chart 2). With the U.S. economy moving further into recession in the first quarter of 1991, consumer and investment spending declining, and business inventories being drawn down, expenditures on imported goods and services fell. Even though growth in domestic spending turned positive in the second quarter, spending by consumers on goods and by producers on durable equipment remained weak. By the third quarter, increased spending both by consumers and by producers supported some growth in U.S. gross domestic product (GDP). Imports accelerated sharply, and were probably an important component of a runup in inventories when industrial production fell and overall activity flattened out in the fourth quarter. Over the entire year, U.S. real GDP grew about 1/4 percent (fourth quarter over fourth quarter).
During 1991, economic growth in major U.S. export markets on average also slowed, although not as much as that in the United States. However, investment spending in key countries remained strong and was of particular importance to U.S. exports.
To some extent, the deceleration of economic activity in some foreign industrial economies was an ongoing response to tighter policies introduced earlier, which were designed to counter inflationary pressures and to bring economic activity to more sustainable, noninflationary levels. The general slowdown in the major industrial countries continued longer than had been expected, however. Declines in business confidence, the need for households and businesses to reduce high levels of debt, and concerns about the quality of assets on the balance sheets of banks also negatively affected economic activity in some countries. The pattern of growth varied considerably among major industrial countries (table 2). Pronounced recessions in Canada and the United Kingdom that began in 1990 extended into 1991, with only tentative signs of any recovery by year-end. In France and Italy, growth remained positive but sluggish. …