Another Record U.S. Current Account Deficit in 3Q

Last quarter the US current account deficit posted a new record of $225.6B versus a revised 2Q deficit of $217.1B which was slightly shallower than initially reported. The figure matched Consensus expectations for a 3Q deficit of $225B.

The deficit last quarter equaled 6.8% of GDP and so far this year has averaged 6.64% versus 6.35% during all of last year .

The deficit in merchandise trade deteriorated to $218.6B from an unrevised 2Q deficit of $210.6B. Exports grew 3.6% (16.5% y/y) yet that strong gain was again offset by a 3.7% surge in imports (13.5% y/y).

Last quarter, higher oil prices caused the balance in petroleum trade to deteriorate to $75.2B from $71.4B during 2Q. The nonpetroleum trade balance reversed all of its 2Q improvement and fell to $138.7B which was just shy of the record set during last year's fourth quarter.

The surplus in services trade improved sharply to a surplus of $18.3B from a revised $17.5B during 2Q which was better than initially estimated. Exports of services grew just 0.9% (8.5% y/y) last quarter but services imports grew an even smaller 0.1% (8.6% y/y).

The U.S. capital account improved q/q though the net US foreign direct investment balance deteriorated. U.S. direct investment abroad rose 35% to $$63.1B (37.7% y/y). Foreign direct investment in the US, however, increased $44.1B, less than the $45.8B increase during 2Q.

Would Protectionism Defuse Global Imbalances and Spur Economic Activity? from the Federal Reserve Bank of New York is available here.

Should We Worry About the Current Account Deficit? from the Federal Reserve Bank of Richmond can be found here.

How Dangerous is the U.S. Current Account Deficit? from the Federal Reserve Bank of St. Louis is available here.

The Euro Zone's surplus on trade in October declined to 1,710.7 million euros from 2,418.0 million euros in September, but was 2,927.8 million euros above the deficit of 1,217.1 million euros in October, 2005. The traditional surplus on trade that the Euro Zone had enjoyed was turned into a deficit in mid 2005, due in part to increased oil imports and in part to the unrelenting surge in imports from China. The first chart shows the balance of trade for the Euro Zone with the rest of the world.

As the second chart shows the deficit with OPEC appears to have stabilized in recent months, but that with China continues to widen. Imports from China now exceed those from the United States, which had been the largest source of imports after the United Kingdom. The third chart compares imports from China with those from the US. While imports from China are now lower than those from the UK, the recent growth in these imports suggest it will not be too long before they exceed imports from the UK as can be seen in the fourth chart.

The imbalances resulting from China's growing surplus on its trade account with the Euro Zone is adding to the pressure already being exerted by the US to appreciate the Chinese Yuan.