America’s deficit in the broadest measure of international trade showed a slight improvement in the April-June quarter although it was still at the second-highest level in history.
The Commerce Department reported that the deficit in the U.S. current account totaled $195.7 billion in the second quarter. That was down 1.5 percent from the deficit in the first three months of this year — $198.7 billion — which was the all-time high.
Even with the slight improvement, America is on track to surpass last year’s record current account deficit of $668.1 billion. While the United States so far has not had any trouble attracting the foreign money needed to finance this deficit, economists worry that at some point foreign investors will no longer want to hold such sizable sums of dollar-denominated assets.
The slight improvement meant that the second quarter deficit represented 6.3 percent of the country’s total economy, down from the record level of 6.5 percent in the first quarter.
Federal Reserve Chairman Alan Greenspan has called the current account deficit unsustainable at present levels but he has also said he believes market forces should be able to deal with the problem in a way that does not seriously disrupt the economy.
A less benign outcome would have foreigners suddenly deciding to dump their U.S. stocks and bonds, sending stock prices plunging and interest rates soaring. Such a stampede for the exits by foreigners could be enough of a jolt to push the country into a recession.
However, in the view of Greenspan and many private economists, the country’s current account deficit will gradually improve over time as a slow decline in the dollar’s value improves the country’s trade performance by making U.S. products cheaper in foreign markets and foreign goods more expensive in the United States.
The slight improvement in the second quarter deficit reflected the fact that the country made lower payments of foreign aid. This caused unilateral transfers to decline to $21.9 billion in the second quarter, down from $26.3 billion in the first quarter.
The deficit in goods and services increased in the second quarter, rising to $186.9 billion, up from $186.3 billion in the first quarter. The increase was driven by higher payments for foreign oil.
The balance on investment earnings turned negative in the spring, something that had not happened for three years. The deficit in this category totaled $455 million, down from a surplus of $643 million in the first quarter.