US: Current account deficit falls to three-year low - Wells Fargo

According to analysts from Wells Fargo, a sizeable increase in net investment income led to a larger-than-expected decline in the deficit in Q3. They pointed out that foreigners seem to be quite willing to finance modest amounts of red ink in the U.S. current account.

Key Quotes: 

“Data released this morning showed that the U.S. current account deficit narrowed significantly from $124.4 billion (revised) in the second quarter to $100.6 billion in Q3. The decline that occurred in the current account deficit came as little surprise because previously released monthly data on trade in goods and services, which comprises the vast majority of the current account, had showed the trade deficit narrowing by more than $7 billion in Q3.”

“The big surprises, however, occurred in the income sub-accounts. Specifically, Americans received roughly $9 billion more in income payments on their foreign assets in Q3 than they did in Q2. Not only did owners of directly invested capital receive more income payments, but income on foreign portfolio assets also increased. In addition, income transfers to and from abroad (e.g., worker remittances, etc.) declined by more than $9 billion.”

“As a percent of GDP, the current account deficit has been more or less steady around 2 percent or so over the past few years. This ratio is at a level at which most economists, us included, do not worry about it. When a country incurs red ink in its current account, it must finance the deficit via net capital inflows from abroad. In the past, foreigners have been quite willing to finance modest current account deficits, and this benign behavior remained in place in the third quarter.”

“Looking forward, we forecast that the U.S. current account deficit will widen modestly from $450 billion or so this year to more than $500 billion in the next two years. In our view, foreigners will continue to willingly finance these manageable deficits due to the ample investment opportunities that are available to them in the United States. Although our currency strategists look for the dollar to trend modestly lower versus most major currencies in coming quarters, they do not expect the greenback to "crash" due to foreign angst about the U.S. current account deficit.”