U.S. consumers plod along; Foreign investors pull back their money

The U.S. Department of Commerce released the 3rd Quarter 2007 U.S. International Transactions report Monday. Per the report the current account deficit narrowed by $10.463 billion to $178.5 billion in the third quarter of 2007 from $188.9 billion (revised figures) in the second quarter.

$5.279 billion of the reduction in the current account deficit came from an improvement in the goods and services trade deficit. The goods and services trade deficit for October 2007 was announced earlier this month and deteriorated slightly ($0.705 billion higher than September 2007). $7.787 billion of the reduction in the current account deficit came from income receipts from U.S.-owned assets in foreign countries versus income payments on foreign-owned assets in the U.S. Net unilateral current transfers (transfers without anything received in return) increased the deficit by $2.603 billion largely due to an increase in U.S. government grants.

While the weakened dollar has naturally strengthened exports, the U.S. consumer is not flinching at the weak dollar. Recession also appears to be held at bay as they have not decreased their imports as was the case during the 2001 recession.


Per the report “Net capital account payments (outflows) were virtually unchanged at $0.6 billion in the third quarter.”

For the Financial Account: “Net financial inflows--net acquisitions by foreign residents of assets in the United States less net acquisitions by U.S. residents of assets abroad--were $93.4 billion in the third quarter, down from $152.8 billion in the second.”

Foreign investors flocked to safety of U.S. Treasuries, which were up $46.7 billion in the third quarter, up from $1.8 billion in the second. At the same time they shunned Agency securities (Fannie Mae, Freddie Mac, etc.) and U.S. corporate stocks and bonds with “net foreign sales of $44.2 billion in the third quarter from net foreign purchases of $243.0 billion in the second. Transactions in U.S. stocks shifted to net foreign sales of $19.7 billion from net foreign purchases of $104.1 billion. Transactions in U.S. corporate bonds shifted to net foreign sales of $8.2 billion from net foreign purchases of $109.7 billion. Transactions in federally sponsored agency bonds shifted to net foreign sales of $16.2 billion from net foreign purchases of $29.1 billion.”

This is only the third time in over 30 years that there were net foreign sales in U.S. securities other than treasuries. During the recession of 1990 in the 3rd quarter, there was a net sale of $2.874 billion. During the stock market crash of 1987 in the 4th quarter there was a net sale of $4.888 billion. You have to go back to the recession in 1974 for the next previous net sale. Net foreign sales to the degree of $44.2 billion is without precedence. After reaching a low in net sales in August, transactions have reverted back to net purchases in September and October per the U.S. Department of the Treasury’s Treasury International Capital (TIC) report.

One quarter does not necessarily set a trend, but we are at an unique point in history.

Sphere: Related Content