By Joe Richter
December 18, 2006 (Update3)
SourceDec. 18 (Bloomberg) -- The U.S. current-account deficit widened to a record $225.6 billion last quarter as the trade gap grew and the country paid more interest to overseas investors.
The shortfall in the current account, the broadest measure of trade because it includes transfer payments and investment income, followed a revised $217.1 billion second-quarter gap, the Commerce Department said today in Washington.
Stronger economies abroad and a weakening dollar have trimmed the trade deficit in recent months, raising the prospect the current-account gap won't deteriorate much more. A smaller deficit reduces the sum the U.S. needs to attract from overseas, diminishing the dollar's vulnerability to an extended decline.
``Improvement is going to be a slow process,'' said Chris Low, chief economist at FTN Financial in New York. ``The important thing though is that the deficit isn't growing as fast as it was before, which is exactly what you want to see. Sudden shifts would scare financial markets.''
The gap amounted to 6.8 percent of the economy, the second- biggest proportion ever, up from 6.6 percent in April to June, according to Commerce Department figures. The deficit reached an all-time high of 7 percent of gross domestic product in 2005's fourth quarter.
Economists forecast a third-quarter deficit of $225 billion, according to the median estimate of 39 economists in a Bloomberg News survey, after an initially reported $218.4 billion shortfall the previous three months.
$2.5 Billion a Day
A growing deficit would pose a risk to the economy should investors sour on U.S. assets and diversify to other countries by precipitating a sharp weakening of the dollar and pushing interest rates higher. The U.S. needs to attract about $2.5 billion a day to fund the gap.
So far, that's not been difficult. International investment in U.S. long-term securities rose in October as stocks climbed and demand for Treasury notes rebounded, a government report last week showed. Purchases of stocks, notes and bonds increased to a net $82.3 billion, from a revised $70.2 billion in September, according to a Treasury Department report.
``In spite of gloom and doom scenarios that have been voiced for years, the U.S. has had no problems attracting the foreign capital needed to finance its current account gap,'' said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York.
The deficit in trade, which accounts for about 90 percent of the total current-account imbalance, widened to $200.3 billion last quarter from $193.1 billion in the second quarter.
Builders Less Confident
A separate report today showed confidence among U.S. homebuilders unexpectedly fell in December, suggesting a slump in housing may continue to weigh on the U.S. economy. The National Association of Home Builders/Wells Fargo index of sentiment fell to 32 this month from 33 in November. A reading below 50 means most respondents view conditions as poor.
U.S. investors received less income on their holdings of overseas investments than foreigners received here. That helped to widen the overall current-account deficit.
Income on overseas assets held by U.S. investors rose to $160.8 billion from $156 billion. Foreign earnings on U.S. assets, including wages and other compensation, rose to $164.6 billion in the third quarter from $158.2 billion in the previous three months. That left $3.8 billion deficit on income payments, the largest ever, compared with a $2.2 billion shortfall in the second quarter.
U.S. government payments to foreigners and other private transfers abroad registered a $21.5 billion deficit, compared with the $21.9 billion deficit in the prior quarter.
Gap With China
The trade gap narrowed 8.4 percent in October, the most in almost five years, to $58.9 billion, the government said Dec. 12. The improvement came even as the U.S. had a record shortfall with China, which is on course to surpass Mexico this year as the nation's second-biggest trading partner behind Canada.
A widening deficit with China is aggravating trade tensions between the two nations. Some U.S. lawmakers have called for higher tariffs and other measures against the Asian nation for currency policies that they say unfairly assist Chinese exports.
``We are impatient for quicker change,'' U.S. Steel Chief Executive Officer John Surma said in an interview earlier this month. Surma participated in U.S. Treasury Secretary Henry Paulson's meeting on Dec. 4 with the National Association of Manufacturers' China Business Task Force.
China-U.S. Talks
In two days of talks last week with Paulson, China reaffirmed pledges to make its currency more flexible, while the U.S. said it will boost its savings rate to reduce its trade imbalance. Both countries have made similar promises at past meetings.
Federal Reserve Chairman Ben S. Bernanke, who also took part in last week's talks, urged China to let its currency gain at a faster pace to end a ``distortion'' that benefits exporters.
As the recent decline in the value of the dollar has helped stimulate exports, it has also made some foreign investors wary. The dollar has fallen 1.4 percent this quarter against a basket of currencies, and dropped 4.6 percent so far this year.
``We recognize the weakness of the dollar at this time and we are naturally concerned about it,'' said Organization of Petroleum Exporting Countries President Edmund Daukoru during a press conference in Nigeria last week. Daukoru said the group has looked into pricing oil using a mixture of yen, dollar, euro and sterling and for now has ruled against any immediate change.
To contact the reporter on this story: Joe Richter in Washington
Jrichter1@bloomberg.netLast Updated: December 18, 2006 14:36 EST