There’s a temptation to view the upward revision to the current account balance, and the components thereof, as yet more evidence that the US external situation is in better shape than commonly perceived.
While the results in the latest release are positive, relative to what we believed before (after all the income deficit for 2006 is not revised away), I wouldn’t say that the situation looks completely different than before the 2007Q1 release.
First, consider the revision to the current account balance, expressed as a share of GDP (preliminary release for 07Q1).
Figure 1: Current account balance as a share of GDP, from 2007Q1 international transactions release (blue), 2006Q4 release (red), and 2006Q1 (green). Source: International Transactions releases, and 2007Q1 preliminary GDP release.
The CA balance has indeed been shifted up relative to the 06Q4 release (in red). One interesting aspect is that the 06Q4 release did not change the 2005Q4 figure. In other words, the latest release incorporates revisions of a magnitude and nature that are unlikely to be replicated. The release notes:
“The estimates of the international transactions accounts released today have been updated and revised to reflect newly available source data and a methodological change. The major improvements this year include new and comprehensive estimates of transactions in financial
derivatives, a new methodology for estimating interest received and paid on bonds, and the incorporation of results of the U.S. Treasury Department’s annual survey of securities claims for December 2005 and of securities liabilities for June 2005 (revised) and 2006. The incorporation of these results and other newly available source data led to significant improvements in the estimates of services receipts and services payments, income receipts and income payments, and financial flows for U.S.-owned assets abroad and foreign-owned assets in the United States.”
The second observation is that the upward bump in net income receipts is somewhat lackluster given the depreciation in the trade weighted dollar (using a major currencies basket). The dollar depreciation usually boosts returns to the extent that returns on assets abroad are denominated in foreign currency.
Figure 2: Nominal trade weighted dollar exchange rate (narrow basket) annual depreciation (purple, up is depreciation), and net income receipts as a share of GDP, from 2007Q1 international transactions release (blue), 2006Q4 release (red), and 2006Q1 (green). Source: Federal Reserve Board, and International Transactions releases, and 2007Q1 preliminary GDP release.
Third, while the revisions pushes down net interest payments on US Government debt, the trajectory remains much the same. Moreover, payments were rising in 2007Q1 despite the fact that interest rates have flattened out. Indeed, payments to foreign bond holders have been rising quarter after quarter, for the last nine quarters…
Figure 3: Nominal one year constant maturity yields (purple), and net income payments as a share of GDP, from 2007Q1 international transactions release (blue), 2006Q4 release (red), and 2006Q1 (green). Source: FREDII, and International Transactions releases, and 2007Q1 preliminary GDP release.
For more discussion of the empirical modeling and projection of these flows, see John Kitchen’s forthcoming paper in Review of International Economics.
A last nugget from the release: The amount the U.S. borrowed from abroad in 2006 was revised upward by $94.7 billion. The amount the rest-of-the-world borrowed from the U.S. was revised upward by $9.4 billion. Including financial derivatives, net inflows were revised upward by $114.0 billion.
Additional coverage is provided by Brad Setser.