America still buys more goods and borrows more money from the rest of the world than foreigners do from the U.S., but the gap has now shrunk to a 14-year low.
The government on Wednesday said the U.S. current-account deficit fell 16% to a preliminary $81.1 billion in the fourth quarter from $96.4 billion in the third quarter. That’s the lowest deficit in 14 years.
What’s more, the deficit as a percentage of the size of the U.S. economy dropped to 1.9% from 2.3% to mark the lowest level in 16 years. The gap as a percentage of gross domestic product reach as high as 6.5% in 2005.
The current account is an eye-glazing economic statistic, but it’s still a very important one. It basically tells us how much the U.S. in in arrears with the rest of the world, based on trade and income inflows and outflows. Surpluses reflect economic strength while persistent deficits are a sign of weakness.
The U.S. mostly ran surpluses from the end of World War Two until the mid-1970s. By then rising petroleum prices began to drain more money out of the oil-dependent domestic economy and the U.S. started borrowing heavily from abroad to finance government and consumer spending.
In short, America has been living beyond its means for decades, buying from goods from other nations only too happy to lend to the U.S. to pay for it all. The current-account deficit is a reflection of the large U.S. trade gap and the nation’s steadily rising national debt.
The good news is that the trend has sharply reversed since the current-account deficit hit a record $214.5 billion in 2006. The growth in U.S. imports has slowed, for one thing, and that’s due in large part to the biggest domestic oil boom in decades. A technique known as fracking has allowed the nation to extract far more oil and natural gas compared to a decade earlier. American vehicles are also more fuel-efficient, reducing demand for gasoline.
Higher inflows of foreign money into the U.S. and smaller outflows from America to the rest of the world have also helped lower the gap.
Foreigners have also invested more in America because the U.S. economy is better off compared to Europe and most developing nations. In the fourth quarter, for instance, foreigners bought more Treasury bonds and made more direct investments. Foreign-owned assets in the U.S. surged to $325 billion in the fourth quarter compared to a $145.6 billion increase in the prior period.
At the same time, though, foreigners are not earning as much investment income from the U.S. because of very low interest rates. Still, they’ve kept a lot of money parked in assets such as Treasurys as a safe haven given economic and political uncertainty elsewhere.
Surprisingly, foreigners appeared to take profits from the stock market in the fourth quarter. They sold a net $61.3 billion worth of shares after boosting net purchases by $127.9 billion in the third quarter.
Can the downward trend be sustained and eventually push the U.S. toward its first current-account surplus in more than 20 years? That will be a lot harder to do. As the economy improves Americans are likely to buy more imports and the U.S. still relies heavily on foreign-produced petroleum products.
– Jeffry Bartash