Current account deficit falls to lowest level since 2001

Before you go, we thought you'd like these...
Before you go close icon

In general, economists view recessions at net-negative events, due to the disruptions created by unemployment and an economy performing well below its potential.

But recessions do tend to correct, if not eliminate, imbalances -- and one that's being corrected is the U.S. current account deficit. The current account is the broadest measure of U.S. trade with the rest of the world, and includes goods, services, and income transfers. The U.S. Commerce Department announced Wednesday that the current account deficit plunged in the first three months of 2009 to $101.5 billion, its lowest level since Q4 2001. Moreover, Q4 2001's low current account deficit also occurred during a recession.

Further, the current account represented only 2.9 percent of U.S. GDP, its lowest rate in 10 years and a substantial decline from the 4.4 percent of GDP registered in Q4 2008. The current account totaled a revised deficit of $154.9 billion in Q4 2008.

Investors should follow the current account stat because it can, among other signals, provide clues concerning the trend in foreign trade and sales -- major factors is U.S. corporate revenue and earnings.

Markets eye Q2 earnings reports

Meanwhile, Wall Street, at least initially, shrugged-off the Q1 current account report, with the Dow moving only about 20 points lower to 8,485. Commerce Trust Co. Equity Management Director Joe Williams said that's a predictable response from the stock market, pending news on Q2 earnings next month.

"Stocks are probably appropriately priced at this point, not particularly expensive or cheap," Williams told marketwatch.com Wednesday. "What we really need now is for earnings to come through. But no one is expecting that to happen."

Both imports and exports fell during Q1. The key factor in the shrinking current account deficit? The decline in imported oil, and other petroleum-based products, due to the U.S. recession: the shrinking imported oil bill accounted for one-third of the drop in total imports. On the export side, all major categories contributed to the export decline. In Q1, exports declined to $509.6 billion from $591.7 in Q4 2008, while imports fell more, to $581.5 billion from $715.1 billion in Q4 2008.

Economists prefer that a nation run a current account surplus, as it suggests the nation's products and services are in demand, and that it's not outspending its income. Conversely, protracted current account deficits suggest that a nation is not living within its means and is dependent on foreign sources of credit.

Economic Analysis: A basically in-line Q1 current account report, but one that underscored two macroeconomic themes: soft international demand, and the U.S. imported oil bill. First, international demand must increase in a sustained way before one can say there's a foundation for the U.S. recovery.

Second, if the nation remains committed to the Obama administration's energy policy that emphasizes increased vehicle fuel efficiency and conservation, it will decrease its foreign oil bill -- keeping more dollars at home, recirculating in the domestic economy, stimulating domestic businesses and creating domestic jobs.

Read Full Story

Sign up for Breaking News by AOL to get the latest breaking news alerts and updates delivered straight to your inbox.

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.

From Our Partners