Current account deficit in US widens to record level

The US current account deficit widened to a record USD 187.9 billion from October through December, as Americans bought more imports.


The deficit, the broadest measure of trade because it includes financial transfers, followed a USD 165.9 billion gap the previous quarter, the Commerce Department said this week in Washington. For all 2004, the deficit reached a record USD 665.9 billion, equivalent to 5.7 percent of gross domestic product.


The US. imported a record USD 392.1 billion worth of goods last quarter. Americans are borrowing more from abroad to satisfy the growing demand for foreign-made goods. A report this weekshowed foreigners bought more US assets in January, bolstering Federal Reserve Chairman Alan Greenspan's expectation that the deficit will probably correct with limited disruption for the economy.


Home construction unexpectedly rose to 2.195 million at an annual rate last month, a 21-year high, suggesting low mortgage rates are still fueling demand, the Commerce Department said in a separate report. That's as factory utilization climbed to 79.4 percent, the highest since December 2000, the Fed reported.


Foreign Purchases


The fourth-quarter deficit was financed by a USD 12.1 billion increase in foreign purchases of US Treasury securities and a record USD 170 billion jump in purchases of all other types of assets. Foreigners bought USD 46 billion more stocks, $69 billion more corporate bonds and a record USD 55 billion more of government- sponsored agency bonds, such as Freddie Mac and Fannie Mae debt.


A fourth-quarter deficit of USD 183 billion was forecast, according to the median of 50 estimates in a Bloomberg News survey, from an initially reported USD 164.7 billion shortfall in the previous quarter. The gap set a record every quarter last year.


At the current pace, the US needs to attract USD 2.1 billion a day to fund the deficit and keep the value of the dollar steady.


Smaller Surplus


In addition to a wider trade shortfall in goods and services, the deficit also reflected a smaller surplus in income payments and an increase in US transfer payments. The money paid to foreign stock holders as a result of Microsoft Corp.'s one-time USD 32.6 billion dividend payout in December, accounted for some of the increase in income paid to foreigners.


A deficit in the balance of trade accounts for 91 percent of the current account gap. Americans imported USD 171.1 billion more goods and services than they exported in the fourth quarter compared with a USD 155.9 billion trade gap the prior three months.


Trade prospects so far this quarter aren't good. The trade deficit widened to USD 58.3 billion in January, the second largest ever, as imports of consumer goods, such as televisions, clothing and toys, jumped to a record, Commerce said last week.


Foreign financial flows into the US more than compensated for the shortfall in trade. Foreigners increased their holdings of US assets by USD 92.5 billion in January, the Treasury reported yesterday, almost twice the gap in trade. The gain compares with an average USD 76.3 billion increase per month in 2004.


The US paid foreigners USD 103.7 billion in income on their holdings of American assets, up from USD 92 billion in the previous three months. That helped to widen the overall deficit.


Fed View


The surplus on income narrowed to USD 2.1 billion in the fourth quarter from USD 4.9 billion. Government payments to foreigners and other private transfers abroad registered a USD 19 billion deficit, larger than the USD 14.9 billion deficit in the prior quarter.


Fed policy makers don't view the growing deficit as a threat.


Should international financial markets continue to become more interconnected and flexible, ``history suggests that current account imbalances will be diffused with modest risk of disruption,'' Greenspan said in a speech last week.


Global investors might rebalance portfolios to hold a smaller proportional share of dollars ``at some point,'' he said. Yet, ``to date, the proportional shift out of dollars from the total of official and private sector foreign currency accounts has been modest. The market absorbed this change in an orderly manner.''


Savings `Glut'


The same day, Fed Governor Ben Bernanke said the imbalance reflects a ``glut'' of savings overseas that is being recycled into the US. ``I see no reason why the whole (adjustment) process should not proceed smoothly,' Bernanke said.

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