U.S. Current-Account Gap Shrank Last Quarter as Trade Declined

By Bob Willis

Sept. 16 (Bloomberg) -- The U.S. current-account deficit narrowed in the second quarter to $98.8 billion, the least since 2001, reflecting a smaller shortfall in trade of goods as imports and exports both decreased.

The gap, the broadest measure of trade because it includes transfer payments and investment income, was more than forecast and followed a revised $104.5 billion deficit in the previous three months, the Commerce Department said today in Washington.

The current-account deficit may widen in coming months as U.S. demand for imports rebounds as the economy pulls out of a recession that caused companies to slash inventories at a record pace and sapped consumer purchases. The deficit narrowed even as the government boosted sales of debt to overseas investors to fund recovery programs and a soaring budget gap.

``There is a sense that the best of the gains in these external accounts have already been achieved,'' Alan Ruskin, head of currency strategy for RBS Securities Inc. in Stamford, Connecticut, said before the report. ``It's relatively easy to make reductions in the deficit while domestic demand is slumping.''

Economists forecast a deficit of $92 billion, according to the median of 39 estimates in a Bloomberg News survey, after an initially reported $101.5 billion shortfall the prior quarter. Forecasts ranged from deficits of $66.8 billion to $100 billion.

Foreign earnings on U.S. assets decreased to $116.6 billion from $117.1 billion in the prior three months.

U.S. income on overseas assets, including wages and compensation, decreased to $133 billion from $135.4 billion.

Trade Deficit

That left a $16.4 billion surplus on income payments, compared with an $18.3 billion surplus in the previous quarter.

U.S. government payments to foreigners and other private transfers abroad increased to $32.2 billion from $30.3 billion.

The U.S. trade deficit, which accounted for most of the current-account imbalance, narrowed to $83 billion in the second quarter from $92.4 billion in the previous three months. The figures aren't adjusted for inflation.

Weaker consumer spending this year has boosted household savings in the U.S. and depressed imports, helping to offset increased government borrowing as federal spending soars.

Consumer spending, which makes up about 70 percent of the economy, is forecast to grow at a 1.7 percent annual rate in the third quarter, slowing to 1 percent in the last three months of the year, according to economists surveyed by Bloomberg this month. Purchases shrank 1 percent in the April- to-June period.

Budget Gap

The federal budget deficit will total $1.6 trillion this year as revenue falls and the U.S. government spends at the fastest pace in 57 years, according to projections released by the nonpartisan Congressional Budget Office on Aug. 25.

President Barack Obama urged a joint session of Congress last week to pass a $900 billion health-care plan to contain medical costs, which are causing Medicare and Medicaid spending to surge. Obama signed a $787 billion stimulus program in February and committed funds to rescue automakers and banks.

The current-account gap amounted to 2.8 percent of gross domestic product, the lowest since 1991, compared with 2.9 percent in the prior quarter. The deficit was 6.6 percent of GDP during the last quarter of 2005, the highest level since records began in 1960.

Adjusted for prices, which are the numbers used to calculate GDP, the trade deficit narrowed last quarter, according to the Commerce Department.

GDP Contribution

Trade contributed 1.6 percentage points to economic growth in the second quarter, helping to limit the contraction for the three-month period to 1 percent, following a 2.6 percentage point contribution in the first three months of 2009.

International demand for long-term U.S. financial assets rebounded in June from the prior month as investors sought safe haven in Treasuries amid concerns about the timing of a recovery in financial markets and economies worldwide. Demand slowed in previous months as China, Japan and Russia scaled back purchases, underscoring the danger of U.S. reliance on foreigners to finance the fiscal deficit.

Total net purchases of long-term equities, notes and bonds were a net $90.7 billion in June, compared with net sales of $19.4 billion in May, the Treasury Department said Aug. 17. Net buying of U.S. government notes and bonds totaled $100.5 billion, the most since records began in 1977, after net selling of $22.6 billion in May.

To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net