The current account deficit, which essentially reflects disproportionate US spending, widened sharply in the third quarter to its highest level in 15 years, driven by a lower surplus in services and increased imports of goods as businesses closed their doors. Had to run to make the list on the face. strong demand.
The Commerce Department said in a December 21 release that the US current account deficit widened by $16.5 billion, or 8.3 percent, to $214.8 billion in the third quarter. This is the highest level in 15 years, when it reached $218.4 billion in the third quarter of 2006.
“The widening of the current account deficit to $16.5 billion in the third quarter reflected a lower surplus on services and an expanded deficit on secondary income and goods that were partially offset by an expanded surplus on primary income,” the Commerce Department said.
The extent of the shortfall was an upside surprise, with consensus forecasts expecting a difference of $205 billion.
Many economists argue that the current account deficit is not inherently good or bad – for example, it may be related to time, temporarily higher imports within a certain period, later offset by higher exports at a later date. is done.
The World Bank said in its 2018 policy brief, “A good deficit supports a smooth transition – for example, from building productive capacity to post-accumulating assets while accumulating external debt, and then converting them to older populations.” reduce as.”
But economists also generally agree that the current account deficit is bad and can have harmful effects when it becomes volatile.
“While a current account deficit is neither good nor bad in itself, it is likely to be volatile and lead to harmful consequences when it is consistently large, fuel consumption rather than investment, excessive domestic debt growth. occurs with, follows a higher exchange rate, or with an unrestrained fiscal deficit, according to the World Bank.
While the United States is somewhat insulated from some of the harmful effects of the current account deficit because the US dollar is the world’s reserve currency and the country is seen as an attractive place to invest, large inflows of money from abroad are highly affected. Dependencies can be problematic.
“The US current account deficit ‘unexpectedly’ widened to $214.8 billion, a 15-year high,” said economist Peter Schiff. said in a tweet, “The extremely vulnerable US economy now depends more than ever on strong economies abroad. The current account deficit will hit a record high in 2022 as our debt servicing costs rise,” Schiff predicted.
Sebastian Edwards, a research associate at the University of California, wrote in a 2006 working paper for the National Bureau of Economic Research (NBER) on the US current account deficit that its stability depends on whether foreign investors will continue. To add US assets such as government securities to your investment portfolio.
“Even though the United States enjoys a special status in the global economy and is a very attractive place to park its money, it is unlikely for foreign investors to overreact to US trade and budget imbalances and spend indefinitely,” NBER wrote in Edwards’ review. paper.
For example, if investors sour on the US Treasury, this could raise yields and raise borrowing costs. According to Edwards, a US current account deficit “calculation” would lead to a painful adjustment that would stifle economic growth.