Current account deficit increases in first quarter

AP News
Posted: Jun 16, 2011 9:21 AM
Current account deficit increases in first quarter

Americans bought more expensive foreign oil in the first three months of the year, increasing the deficit in the broadest measure of foreign trade.

The deficit in the current account increased 6.3 percent to $119.3 billion in the January-to-March period, the Commerce Department reported Thursday. The increase reflected a big spike in global oil prices that sent petroleum imports surging. The increase in imports offset strong sales by American companies of autos, computers and heavy machinery in foreign markets.

The current account is the broadest measure of foreign trade because it includes not only trade in goods and services but also investment flows between countries. It represents the bottom line in how much the United States must borrow from the rest of the world to finance its deficit.

For the first three months of the year, the current account deficit equaled 3.2 percent of the total economy, up from 3 percent in the fourth quarter. For all of last year, the current account deficit totaled $470.9 billion, up 25 percent from a decade-low of $376.6 billion in 2009. The current account deficit hit an all-time high of $800.6 billion in 2006.

Jennifer Lee, senior economist at BMO Capital Markets, said that while the current account deficit did increase in the first quarter, the big surge in oil imports was partially offset by the gains in service exports and U.S. investment earnings. She said if the first quarter deficit would translate into a deficit for the year of around $477 billion or 3.2 percent of the total economy, just about half the record imbalance set in 2006.

Economists believe the deficit will keep rising this year even though they expect American companies will benefit from strong sales of their products overseas. They believe the decline of the dollar's value against many major currencies will boost demand for American products because they will be cheaper in foreign markets.

For the January-March period, the deficit in goods widened by $23.2 billion to $182.5 billion, with much of that increase accounted for by the big jump in oil imports, reflecting higher prices triggered by instability in the Middle East. America's surplus in services, items such as airplane fares, brokerage fees and royalty payments, increased by $1.2 billion to $41.7 billion in the first quarter. The surplus in investment flows increased by $14.8 billion while a category that includes U.S. foreign aid payments shrank by $112 million.

The deficit in the current April-to-June quarter is likely to be affected by the March 11 earthquake in Japan, which caused a sharp drop in shipments of autos and auto parts from Japan to the United States in April. However, economists expect the disruption to Japanese auto imports to be temporary given that Japanese auto factories are now returning to normal production levels.

A widening trade deficit acts as a drag on U.S. economic growth. That's because more goods and services that are consumed in the United States are being produced overseas and not by U.S. workers.