U.S Current Account Deficit Unexpectedly Narrowed in 4th Quarter

The U.S. trade deficit has now narrowed for three quarters in a row as the fourth quarter deficit fell to -$172.9B (consensus 1$183.8B, prior revised down to -$177.4B from 1$178.5B). The deficit for the fourth quarter of 2007 was the smallest in three years. 2007 saw the first annual decrease in the size of the deficit since 2001. The total deficit for 2007 was $738.6B versus $811.6B in 2006, causing the deficit to fall to 5.3% of GDP from 6.2% the prior year. At the current deficit rate, this still indicates that the U.S. is requiring $1.9 billion of foreign inflows a day to fund the deficit. The decline in the dollar is an indication that demand for U.S. assets is declining. The current account deficit is the broadest measure of trade because it includes income from investments and other transfer payments as well as regular goods and services. The trade deficit accounts for about half of the total current account deficit. The weaker dollar has been helping exports to increase. If not for export growth, the economy would have shrunk last year by -0.3%. That would have been the first decline since the last recession in 2001. Export growth was focused on non-agricultural and capital goods. Most of the import increase was due to higher petroleum prices. Foreigners saw a large drop in their income from U.S. investments in the fourth quarter of last year, which was the major reason for the improvement in the current account deficit in the fourth quarter. The income paid to foreigners fell by a third, from $33 billion in the 3rd quarter to $21.3 billion in the fourth quarter. In contrast, the U.S. government paid slightly more to foreigners in the fourth quarter. Part of the reason for the change is the lower dollar exchange rate.