The U.S. Current Account Balance and the Business Cycle

Transcription

1 The U.S. Current Account Balance and the Business Cycle Prepared for: Macroeconomic Theory American University Prof. R. Blecker Author: Brian Dew November 19, 2015

2 November 19, 2015 ECON-601 Empirical Exercise - Brian Dew 1 Definition, Components, and Accounting Identities The current account provides useful measures of imbalance 1 in the external sector of an economy. The current account is a grouping of accounts within a country s balance of payments which measures current transactions between a country and the rest of the world. These transactions fall into three subcategories: trade of goods and services, primary income, and international transfers. The goods and services account measures flows of goods and services between residents and nonresidents. Exports and imports of goods and services are shown separately. Importantly, there is a balance on goods and services, which is the total value of exports of goods and services minus the total value of imports of goods and services. The primary income account measures payments for the temporary use of capital. This includes dividends and similar receipts from direct investment, portfolio investment, and other investment income. Primary income also includes compensation of employees when the employer and employee reside in different countries. Changes in the holdings of assets are recorded separately under the capital account. The secondary income account shows transfer payments between residents and nonresidents 2. This component of the current account includes remittances, humanitarian aid, and other transfers where there was no corresponding return of economic value. Each of these subcategories has a corresponding balance, as shown above with the balance on goods and services. The sum of the individual balances from the three main components of the current account is called the current account balance. If a country has a positive current account balance, as is the case in Germany, China, and Japan, the country is said to have a current account surplus. Likewise, if the current account balance is negative, as is the case in the United States, the country has a current account deficit. Figure 1: Net flows for the main components of the U.S. current account (1960 Q1 to 2015 Q2) : U.S. is net 1991: Transfers from 2015Q2, detail 2 exporter of goods Gulf war turn CAB pos. Income 1.3% Percentage of GDP Current Account Balance Services Goods 1.4% -4.3% -2.4% -0.8% : Goods deficit exceeds 6% of GDP Transfers Source: NIPAs Table 4.1. Foreign Transactions (Q) (accessed November 16, 2015); Recession Dates from NBER. 1 Any non-zero value represents an imbalance, e.g. more imports of goods than exports of goods. 2 Until 1999, the U.S. included net transfers in the NIPAs. Since 1999, the U.S. has published separate lines for transfers to residents and transfers from residents. 2

3 November 19, 2015 ECON-601 Empirical Exercise - Brian Dew 2 United States current account and the business cycle 2.1 Data sources and transformations The U.S. current accounts are compiled by the Bureau of Economic Analysis (BEA). Quarterly data are available on from The large nominal increase in the size of the U.S. economy during the time series distorts the scale of plots which measure the nominal current account balance. It is traditional, therefore, to measure the current account balance as a percentage of gross domestic product (GDP). Graphs included in this exercise measure the vertical-axis variables as a percentage of GDP. The current accounts can be found both in the BEA s international transaction accounts, and in the national income and product accounts (NIPAs). For simplicity, I have used the values contained in the NIPAs, which are shown each quarter, as is GDP, on an annualized basis. The data are in billions of U.S. dollars and have been seasonally adjusted by the BEA. The data were last accessed from the BEA s interactive tables on November 16, 2015, and is included as an appendix. 2.2 Overview of U.S. Current Account since 1960 and theoretical relation to business cycle As a brief overview of what is shown in figure 1, in the 1960s, the U.S. maintained a modest current account surplus in each quarter. During the 1970s, there was some relative volatility in the current account as a share of GDP. From the 1980s onward, the U.S. has run a persistent large trade and current account deficit 3. Beyond these medium- and long-run trends, the U.S. current account balance is traditionally considered to be countercyclical in the short-run. When the economy is expanding rapidly (above medium-term trends), the current account deficit will increase 4. Near to the peak of the business cycle expansion, the current account deficit will also reach it s local peak. Then, during an economic downturn, the current account deficit will decrease. A simple explanation for this countercyclical behavior comes from looking at the short-run business cycle s effect on the income of consumers and firms. For example, when consumers income falls during a downturn, they demand fewer imports, and the total value of imports of goods and services will be relatively lower. Under the assumption that the domestic short-run contraction takes place only in the country of residence, foreign demand for our exports will not immediately change. Therefore, a country with a trade deficit will see the size of the deficit decrease during a domestic downturn. During a domestic boom, the opposite effect takes place, and imports increase while exports remain relatively constant, thus widening a trade deficit. In reality, the world has become increasingly interconnected, so the assumption of a strictly domestic downturn may not hold. 2.3 Double dip recession of Following the Iranian revolution in 1979, a major increase in the oil price brought the U.S. into what became a double-dip recession. Before the downturn, the U.S. had run a modest current account deficit, which peaked at more than one percent of GDP in the first quarter of As the U.S. entered into the first recession, the trade balance narrowed (figure 2), as import volumes fell more than exports. The result was a small current account surplus during nine consecutive quarters, beginning the second quarter of During the period from 1980 to 1986, the value of the U.S. dollar rose dramatically compared to other major currencies. This resulted in a widening of the trade gap, as U.S. export competitiveness was hurt by the dollar appreciation while imports became relatively cheaper. By 1985, the trade and current account deficits exceeded three percent of GDP. 3 In 1991, transfer payments from Kuwait and other allies to compensate for U.S. costs from the Gulf war created a temporary current account surplus. 4 An increase in the current account deficit corresponds to a nominal decrease in the current account balance. 3

4 November 19, 2015 ECON-601 Empirical Exercise - Brian Dew Figure 2: U. S. Imports and Exports of Goods and Services as Percent of GDP (1960 Q1 to 2015 Q2) Imports GDP Percentage of GDP Exports GDP Trade Balance 5 Exports - Imports GDP Source: NIPAs Table 4.1. Foreign Transactions (Q) (accessed November 16, 2015); Recession Dates from NBER. 2.4 Recession of and transfers from the Gulf war The current account deficit narrowed to less than two percent of GDP in the late 1980s, primarily as a result of the shrinking goods deficit, and to a smaller extent to a growing trade in services surplus. The exchange rate of the U.S. dollar with major currencies was lower, and as a result, import growth leveled out, while export growth continued to climb (figure 2). While the trade balance almost reached zero by the end of the recession in 1991, the current account balance turned positive in the first two quarters of the year. The temporary surplus was the result of transfer payments from Kuwait and other allies for their share of the cost of the Gulf war. These transfer payments are the only time in the data in which the U.S. has a net transfers surplus. In the nearly 25 years following the downturn, the U.S. has not returned to a current account or trade surplus. 2.5 Recession of 2001 During the mid and late 1990s, the demand for imports continued to rise rapidly. In part, this is due to surprise productivity and wage increases leading consumers to spend (and increasingly borrow). Imports as a share of GDP, and likewise the trade deficit, reached a new peak in 2000 (figure 2). The recession of 2001 caused a reduction of imports to GDP and a small reduction in the current account deficit. As people lost their jobs, consumption was reduced and imports decreased. Tax cuts went into effect, with hopes of stimulating economic growth. Compared to the most recent recession, the recession of 2001 had a very mild effect on the imbalances in the U.S. external sector. During the economic boom following the recession of 2001, which includes the housing bubble, imports again swelled to new highs. The current account balance, mainly as a result of the trade balance, reached a peak of more than six percent in 2005 and Imports peaked slightly later, in 2008, at 18 percent of GDP. 4

5 November 19, 2015 ECON-601 Empirical Exercise - Brian Dew 2.6 Great Recession The most recent recession, sometimes referred to as the great recession, follows the theory that the current account balance is countercyclical. The current account deficit shrank extremely rapidly in from a major drop in imports and a relatively smaller drop in exports. Income had fallen; many people lost their jobs and the unemployment rate climbed to 10 percent. Many were also financially burdened, or had their credit damaged, as a result of the collapse of the housing market. In the years following the great recession, the current account deficit has hovered in roughly the 2 3 % range. The absence of a sharp rebound, which was seen in the previous three recessions, is not necessarily comforting for those worried about the U.S. external sector imbalance. There seems to be a global slowdown in trade. Two major U.S. trading partners, Canada and Japan, have recently both entered a recession, China s rapid growth seems to have slowed down, and the euro area is experiencing very low growth. U.S. exports have fallen in the last few quarters, partially as a result. Domestic economic growth has also been weak relative to previous recoveries. The current ratio of imports to GDP is below not only the 2008 peak, but also the peak. While the domestic income and demand for imports relationship works well in explaining short-run movements of the current account balance, there are many theories and frameworks for explaining the longer-term trends in U.S. external sector statistics. Some economists have written about the large and persistent U.S. current account deficit from the perspective of excess savings in other countries 5, or as the result of a government deficit (the so-called twin deficits discussion). 3 Sources: Bernanke, Ben S. (2005) The Global Saving Glut and the U.S. Current Account Deficit. Remarks at the Sandridge Lecture, Virginia Association of Economists, Richmond, Virginia. March 10, Blanchard, Olivier and Johnson, David R. (2013) Macroeconomics (Sixth ed.). Boston: Pearson. Print. International Monetary Fund. (2009) Balance of payments and international investment position manual (6th ed.). Washington D.C. U.S. Bureau of Economic Analysis, Table 4.1 Foreign Transactions in the National Income and Production Accounts. (accessed November 16, 2015). 5 Bernanke(2005), for example. 5

6 APPENDIX Table 1: U.S. current account selected components (billions of USD or percentage terms, as indicated) Net Net Primary Net Gross Current CAB Exports Imports Exports Net Income transfers Domestic Account to to to Net to Primary to Net to Quarter Product Balance GDP Exports GDP Imports GDP Exports GDP Income GDP transfers GDP 1960 Q % % % % % % 1960 Q % % % % % % 1960 Q % % % % % % 1960 Q % % % % % % 1961 Q % % % % % % 1961 Q % % % % % % 1961 Q % % % % % % 1961 Q % % % % % % 1962 Q % % % % % % 1962 Q % % % % % % 1962 Q % % % % % % 1962 Q % % % % % % 1963 Q % % % % % % 1963 Q % % % % % % 1963 Q % % % % % % 1963 Q % % % % % % 1964 Q % % % % % % 1964 Q % % % % % % 1964 Q % % % % % % 1964 Q % % % % % % 1965 Q % % % % % % 1965 Q % % % % % % 1965 Q % % % % % % 1965 Q % % % % % % 1966 Q % % % % % % 1966 Q % % % % % % 1966 Q % % % % % % 1966 Q % % % % % % 1967 Q % % % % % % 1967 Q % % % % % % 1967 Q % % % % % % 1967 Q % % % % % % 1968 Q % % % % % % 1968 Q % % % % % % 1968 Q % % % % % % 1968 Q % % % % % % 1969 Q % % % % % % 1969 Q % % % % % % 1969 Q % % % % % % 1969 Q % % % % % % 1970 Q % % % % % % 1970 Q % % % % % % 1970 Q % % % % % % 1970 Q % % % % % % 1971 Q % % % % % % 1971 Q % % % % % % 1971 Q % % % % % % 1971 Q % % % % % % 1972 Q % % % % % % 1972 Q % % % % % % 1972 Q % % % % % % 1972 Q % % % % % % 1973 Q % % % % % % 1973 Q % % % % % % 1973 Q % % % % % % 1973 Q % % % % % % 1974 Q % % % % % % 1974 Q % % % % % % 1974 Q % % % % % % Continued on next page 6

7 APPENDIX Table 1 continued from previous page Net Net Primary Net Gross Current CAB Exports Imports Exports Net Income transfers Domestic Account to to to Net to Primary to Net to Quarter Product Balance GDP Exports GDP Imports GDP Exports GDP Income GDP transfers GDP 1974 Q % % % % % % 1975 Q % % % % % % 1975 Q % % % % % % 1975 Q % % % % % % 1975 Q % % % % % % 1976 Q % % % % % % 1976 Q % % % % % % 1976 Q % % % % % % 1976 Q % % % % % % 1977 Q % % % % % % 1977 Q % % % % % % 1977 Q % % % % % % 1977 Q % % % % % % 1978 Q % % % % % % 1978 Q % % % % % % 1978 Q % % % % % % 1978 Q % % % % % % 1979 Q % % % % % % 1979 Q % % % % % % 1979 Q % % % % % % 1979 Q % % % % % % 1980 Q % % % % % % 1980 Q % % % % % % 1980 Q % % % % % % 1980 Q % % % % % % 1981 Q % % % % % % 1981 Q % % % % % % 1981 Q % % % % % % 1981 Q % % % % % % 1982 Q % % % % % % 1982 Q % % % % % % 1982 Q % % % % % % 1982 Q % % % % % % 1983 Q % % % % % % 1983 Q % % % % % % 1983 Q % % % % % % 1983 Q % % % % % % 1984 Q % % % % % % 1984 Q % % % % % % 1984 Q % % % % % % 1984 Q % % % % % % 1985 Q % % % % % % 1985 Q % % % % % % 1985 Q % % % % % % 1985 Q % % % % % % 1986 Q % % % % % % 1986 Q % % % % % % 1986 Q % % % % % % 1986 Q % % % % % % 1987 Q % % % % % % 1987 Q % % % % % % 1987 Q % % % % % % 1987 Q % % % % % % 1988 Q % % % % % % 1988 Q % % % % % % 1988 Q % % % % % % 1988 Q % % % % % % 1989 Q % % % % % % 1989 Q % % % % % % 1989 Q % % % % % % Continued on next page 7

8 APPENDIX Table 1 continued from previous page Net Net Primary Net Gross Current CAB Exports Imports Exports Net Income transfers Domestic Account to to to Net to Primary to Net to Quarter Product Balance GDP Exports GDP Imports GDP Exports GDP Income GDP transfers GDP 1989 Q % % % % % % 1990 Q % % % % % % 1990 Q % % % % % % 1990 Q % % % % % % 1990 Q % % % % % % 1991 Q % % % % % % 1991 Q % % % % % % 1991 Q % % % % % % 1991 Q % % % % % % 1992 Q % % % % % % 1992 Q % % % % % % 1992 Q % % % % % % 1992 Q % % % % % % 1993 Q % % % % % % 1993 Q % % % % % % 1993 Q % % % % % % 1993 Q % % % % % % 1994 Q % % % % % % 1994 Q % % % % % % 1994 Q % % % % % % 1994 Q % % % % % % 1995 Q % % % % % % 1995 Q % % % % % % 1995 Q % % % % % % 1995 Q % % % % % % 1996 Q % % % % % % 1996 Q % % % % % % 1996 Q % % % % % % 1996 Q % % % % % % 1997 Q % % % % % % 1997 Q % % % % % % 1997 Q % % % % % % 1997 Q % % % % % % 1998 Q % % % % % % 1998 Q % % % % % % 1998 Q % % % % % % 1998 Q % % % % % % 1999 Q % % % % % % 1999 Q % % % % % % 1999 Q % % % % % % 1999 Q % % % % % % 2000 Q % % % % % % 2000 Q % % % % % % 2000 Q % % % % % % 2000 Q % % % % % % 2001 Q % % % % % % 2001 Q % % % % % % 2001 Q % % % % % % 2001 Q % % % % % % 2002 Q % % % % % % 2002 Q % % % % % % 2002 Q % % % % % % 2002 Q % % % % % % 2003 Q % % % % % % 2003 Q % % % % % % 2003 Q % % % % % % 2003 Q % % % % % % 2004 Q % % % % % % 2004 Q % % % % % % 2004 Q % % % % % % Continued on next page 8

9 APPENDIX Table 1 continued from previous page Net Net Primary Net Gross Current CAB Exports Imports Exports Net Income transfers Domestic Account to to to Net to Primary to Net to Quarter Product Balance GDP Exports GDP Imports GDP Exports GDP Income GDP transfers GDP 2004 Q % % % % % % 2005 Q % % % % % % 2005 Q % % % % % % 2005 Q % % % % % % 2005 Q % % % % % % 2006 Q % % % % % % 2006 Q % % % % % % 2006 Q % % % % % % 2006 Q % % % % % % 2007 Q % % % % % % 2007 Q % % % % % % 2007 Q % % % % % % 2007 Q % % % % % % 2008 Q % % % % % % 2008 Q % % % % % % 2008 Q % % % % % % 2008 Q % % % % % % 2009 Q % % % % % % 2009 Q % % % % % % 2009 Q % % % % % % 2009 Q % % % % % % 2010 Q % % % % % % 2010 Q % % % % % % 2010 Q % % % % % % 2010 Q % % % % % % 2011 Q % % % % % % 2011 Q % % % % % % 2011 Q % % % % % % 2011 Q % % % % % % 2012 Q % % % % % % 2012 Q % % % % % % 2012 Q % % % % % % 2012 Q % % % % % % 2013 Q % % % % % % 2013 Q % % % % % % 2013 Q % % % % % % 2013 Q % % % % % % 2014 Q % % % % % % 2014 Q % % % % % % 2014 Q % % % % % % 2014 Q % % % % % % 2015 Q % % % % % % 2015 Q % % % % % % Source: U.S. Bureau of Economic Analysis (BEA), National Income and Production Accounts, (accessed November 16, 2015) 9