Factoids: US Current Account Deficit Down, Petroleum Exports and Financial Account Up

Here are some news tidbits about US trade and net flows of dollars into and out of the US.

AP reports that the US current account deficit from October to December of 2013 was at its lowest level in 14 years. The biggest component of the current account is the trade balance (exports - imports) which is generally in deficit for the US. However, the current account also includes the balance of transfer payments such as income on investments, private transfers of money (such as people sending money to relatives in other countries), and government transfers between nations (such as foreign aid).

The current account deficit for last quarter of 2013 was $81.1 billion (down from $96.4 billion from July-September 2013). The US received more income on its investments than it paid on foreign investments in the US so there was a $64 in that part of the current account. The balance of trade in services was also positive with a surplus of $57.9 billion.

The balance of trade in goods was negative with a deficit of $171.8 billion dollars. Both exports and imports increased in the last of quarter of 2013. If we look at the Bureau of Economic Analysis' (BEA's) new release, we see that the US exported $405.4 in goods (up from $7.6 billion from the previous quarter) and imported $577.2 billion in goods (up just $1 billion from the previous quarter).

US Oil Imports and Petroleum Exports: Part of the reason that US exports rose faster than US imports is that US oil production has been increasing, thereby decreasing imports of oil. At the same time, US exports of petroleum products (refined products such as gasoline, diesel, aviation fuel and heating oil) have been increasing. Indeed, US petroleum exports have almost doubled since 2008.  Mark Perry has some good graphics that show the dramatic increases in US oil production and petroleum product exports, as well as the equally dramatic decrease in the percentage of oil the US imports.

It is important to note that US exports of petroleum products are driven by more than just increases of crude oil production.  Bloomberg reports that US demand for distillate fuels (which includes gasoline, diesel and heating oil) fell to its lowest level in 16 years. Part of this is blamed on the recent bad weather which resulted in people driving less, but this is also part of a larger trend in distillate fuel consumption in the US. As people drive more fuel efficient cars, airlines buy more fuel efficient planes, and people switch from oil to natural gas for more heating, they demand less distillates. Also, since 2005, federal mandates have required that increasing amounts of ethanol be blended with gasoline and diesel, thereby decreasing the amount of oil distillates we use when we pump a gallon of fuel into our cars. All of this leaves refiners with excess capacity which they sell overseas (mainly in Latin America).

Current Account versus Capital (or Financial) Account: Another thing to keep in mind when looking at, or thinking about, the US current account deficit is the the capital account surplus that inevitably goes along with it. News reports never mention this even though the capital account information is usually included in the same BEA news release they are using as a source under the heading of Financial Account. The BEA's Financial Account tracks changes in US owned assets abroad and foreign owned assets in the US (for some reason BEA does not use the generic economic term of capital account). An increase in US owned assets abroad shows up as a negative number or deficit here as it reflects an out-flow of dollars. Conversely, an increase in foreign owned assets in the US shows up as a positive number or surplus because it reflects an in-flow of dollars to the US.

In the last quarter of 2013, there was a surplus of $173.7 billion in the Financial Account (up from $68.2 billion in the third quarter of 2013). This increase probably has something to do with the Dow Jones Industrial average steadily increasing 1000 points (or 6%) from October to December of 2013, which might have attracted foreign investment. Alternatively, the large inflows of foreign investment may have been behind the increase in the US stock market if foreign investors were driven by a lack of good investment alternatives in the rest of the world.

Note that the financial account surplus increased 154% from one quarter to another and was 114% larger than the current account deficit in the same quarter.  This is probably the bigger news in the BEA press release because it means that there was a net inflow of $92.6 billion in the US from October to December last year. It also shows the problem with only focusing on one side of the national accounting equation. If all you look at is the trade or current account deficit, you think that the US bled dollars into the world and the best news is that the bleeding slowed down a bit in the end of 2013.

Of course, in the long run the current and financial accounts must balance. The dollars that go out must come back to the US because their value lies in the fact that they are a claim on the goods and services produced in the US. Also, in technical terms, the zero balance between the two accounts is an accounting identity that results from how the two accounts are defined. In practice, the floating exchange rate of the dollar (or its market value) keeps the two accounts in balance over long periods of time.

This is more obvious when we look at yearly figures. For all of 2013, BEA estimates that the US current account deficit was $379.3 billion and the financial account surplus was $351.2 billion (these numbers were both down from $440.4 billion and $439.4 billion respectively in 2012). You may mote that there is a $28.1 difference between BEA's estimate of the current and financial accounts. This is known as the statistical discrepancy and it is running at between 7.4% and 8%. This discrepancy is largely due to inaccuracies in the available data upon which BEA bases its preliminary estimates. You will note that in 2012 the statistical discrepancy was only $1 billion (or about 0.2%) and this reflects the fact that BEA revises its estimates over the course of the year as it gets better data. Undoubtedly the difference in the 2013 numbers will shrink as BEA revises it preliminary estimates over the course of this year.