It looks like the US current account deficit can continue to grow as foreigners appear willing to fund a saving-short America.
Treasury International Capital (TIC) data for June released yesterday showed that net foreign purchases of long-term securities were US$71.2 billion, which represents a rise from US$55.8 billion in May and appears enough to cover the US current account deficit.
Brad Setser analysed the data and concluded as follows:
London is emerging as the global hub for the recycling of the world's oil windfall into financing of the US current account
Inflows into the eurozone (and the UK) from OPEC and Asian central banks are bidding up the price of eurozone debt and driving yields down to the point where private European savings is forced to seek yield in the US (and, so far this year, that has been a good bet).
General Glut also has a post on the data and concludes as follows:
The Fed doesn't need to raise rates much further to keep foreigners interested in US debt or keep the dollar up. In fact, higher interest rates are likely to only strengthen the dollar.
With a strong dollar and relatively low real interest rates, the US will keep importing like a mad man. What, me save? Popular convention wisdom these days seems to be relying on an end to housing price inflation to produce a renewed interest in personal savings. Yet the US personal savings rate has been plummeting since the mid-1980s. It is going to take the equivalent of moving heaven and earth to get Americans to start saving more than 1-2% of their income.
Global imbalances will only grow more and more acute over the rest of 2005.
In 2005Q1 the US current account deficit as a percentage of GDP was -6.4%. CA balance of -7% of GDP, here we come!
Incidentally, I covered much of the same ground in my commentary yesterday, "US saving deficit leads to trade deficit".
Stephen Roach also cites the low US saving rate in providing his usual pessimistic take on the outlook.
Over the years, I’ve learned to be wary of betting against the American consumer. But the history of energy shocks argues to the contrary. Moreover, today’s saving-short, asset-dependent, overly-indebted consumer is far more vulnerable than in the past...
No doubt, the hot housing market, as represented by record home sales and home price gains in recent months, goes a long way towards contributing to the indebted consumer.
However, the consumer is not the only one contributing to the US current account deficit. So is the US government. Reuters reports on the latest estimate of the budget deficit.
The U.S. budget deficit will be $331 billion this year...significantly lower than last year's record $412 billion... Congress' fiscal watchdog also forecast a $314 billion deficit for the fiscal year beginning on Oct. 1... While the non-partisan agency saw strong economic growth this year and next, the CBO said deficits would remain well over $300 billion annually through 2010, assuming war costs in Iraq and Afghanistan continue at their current pace.
A pick-up in manufacturing activity in the coming months, as indicated by the latest Empire State manufacturing survey, could also lead to higher imports.