U.S. International Transactions in 2001
Helkie, William L., Holland, Sara B., Federal Reserve Bulletin
The U.S. current account deficit narrowed noticeably in 2001. Both imports and exports of goods and services fell during the year in response to a global weakening of economic activity. The decline in the deficit followed a substantial widening during most of the past decade. For 2001, a smaller merchandise trade deficit and a slightly larger surplus in trade in services offset a continued widening of the deficit on investment income.
Meager foreign economic growth and the continued real appreciation of the dollar throughout the year induced a $61 billion decline in the value of U.S. exports of goods and services. The slowing in the U.S. economy caused imports of goods and services to fall even more--$89 billion. In the third quarter the deficit declined further, but only temporarily, because payments for imported services were reduced by a one-time large estimated insurance payment from foreign insurers (reported on an accrual basis) related to the destruction caused by the terrorist attacks of September 11. The net effect of these developments was a $28 billion narrowing in the goods and services deficit for 2001 (table 1).
The deficit in investment income widened slightly. Higher net payments on the growing net portfolio liability position were nearly offset by higher net receipts from direct investment. Weak growth abroad and the effect of lower oil prices on the profitability of U.S. energy companies lowered the return on U.S. foreign direct investment assets; slower growth in the United States reduced the return on foreign direct investment assets in the United States by an even greater amount. The deficit on unilateral transfers narrowed slightly.
Although smaller than the deficit in 2000, the U.S. current account deficit in 2001 was still large relative to U.S. historical experience (chart 1). The U.S. current account deficit is the counterpart of a net inflow of foreign capital that represents a source of saving (of more than $400 billion) to help finance U.S. domestic investment. To finance the U.S. current account deficit, net private capital flowed in at a record pace in 2001 and included unprecedented net inflows through private securities transactions. Net official capital outflows were slight. The statistical discrepancy in the U.S. international accounts was negative, indicating either small unrecorded net capital outflows or an underreporting of the current account deficit.
MAJOR ECONOMIC INFLUENCES ON U.S. INTERNATIONAL TRANSACTIONS
Several factors had a significant influence on U.S. international transactions in 2001: cyclical movements in U.S. and foreign economic activity, a decline in primary commodity prices, movements in U.S. international price competitiveness, swings in the rates of return on real and financial assets at home and abroad, and the terrorist attacks of September 11.
U.S. Economic Activity
In 2001 the U.S. economy turned in its weakest performance in a decade, and the slowing pace of activity contributed to a decline in U.S. imports. Real gross domestic product increased at an annual rate of 3/4 percent in the first half of the year and remained virtually stagnant in the second half (table 2). Although the effects of the weakening economy were broadly felt, the manufacturing sector was especially hard hit. Faced with slumping demand both in the United States and abroad, manufacturers cut production aggressively to limit excessive buildups of inventories relative to sales. In addition, businesses sharply reduced their investment spending with particularly dramatic cuts in outlays for high-technology equipment. Firms trimmed payrolls through most of the year, and by year-end the unemployment rate moved up 1 3/4 percentage points, to around 5 3/4 percent. Job losses were especially large following the terrorist attacks of September 11, which had extremely adverse effects on certain sectors of the economy--most notably the air transportation and hospitality industries. …