U.S. dollar in exchange markets

In the fourth quarter, the dollar depreciated 2 percent on a nominal, trade-weighted quarterly average basis against a group of 7 major currencies that trade widely in international markets (table B, chart 1). The dollar depreciated 8 percent against the Japanese yen and it appreciated 1 percent against the euro.

The Japanese yen appreciated sharply in the fourth quarter, as it had in the third; by the quarter's end, the yen was 15 percent above its level early in 1999 and exceeded its high of 2 years ago. Economic reports released in the fourth quarter continued to point to recovery in the Japanese economy, although the strength of the recovery appeared to be very limited. Partly in anticipation of improving conditions, the Nikkei stock market, Economic reports released in the fourth quarter continued to point to recovery in the Japanese economy, although the strength of the recovery appeared to be very limited. Partly in anticipation of improving conditions, the Nikkei stock market, which had been rising for some time, reached a 2-year high. The more positive economic environment attracted large amounts of portfolio investment to Japan, including capital from the United States. During the quarter, there were several publicly confirmed reports of intervention in the foreign exchange markets by Japanese authorities to limit the yen's appreciation.

The dollar appreciated against the euro. U.S. economic growth remained strong, raising bank credit demand and interest rates and leading to a tightening of monetary conditions in mid-November, when the Federal Reserve raised the target federal funds rate 25 basis points to 5.50 percent. Nonetheless, U.S. stock prices continued to rise to record levels, and economic reports released in the quarter gave no indication that economic growth might slow in the near future. In contrast, though recovery in Europe was more apparent than earlier in the year and the rise in demand for credit led to small increases in market and official interest rates, economic growth was expected to remain restrained and thereby put little pressure on interest rates. Consequently, in November and December, interest-rate differentials moved more in favor of U.S. assets, which led to capital inflows to the United States and to appreciation of the dollar (charts 2and 3).

Goods and services

The deficit on goods and services increased to $75.5 billion in the fourth quarter from $72.6 billion in the third. The deficit on goods increased $4.3 billion, to $96.2 billion, and the surplus on services increased $1.4 billion, to $20.7 billion.

Goods.--The deficit on goods increased to $96.2 billion in the fourth quarter from $91.9 billion in the third. The increase resulted from a larger increase in imports than exports (table A).

Exports.--Exports increased $6.1 billion, or 3 percent, to $179.8 billion in the fourth quarter. Quantities increased 3 percent, and prices were unchanged.²

In value, nonagricultural exports increased $6.4 billion, or 4 percent, to $167.2 billion. Nonagricultural industrial supplies and materials increased $3.7 billion. Chemicals accounted for nearly one-third of the increase. Nonmonetary gold, energy products, and paper also rose. Capital goods increased $1.2 billion. Semiconductors accounted for nearly half of the increase and have risen strongly for six consecutive quarters. Electric generating machinery and industrial, agricultural, and service industry machinery also increased; both have risen strongly in each of the last three quarters. Civilian aircraft, engines, and parts changed little, and telecommunications equipment and computers, peripherals, and parts decreased. Consumer goods increased $0.8 billion. Automotive vehicles, engines, and parts increased $0.2 billion.

Agricultural products decreased $0.3 billion, or 2 percent, to $12.6 billion. Corn, mainly to the Republic of Korea and Japan, more than accounted for the decrease. Soybeans also fell. These decreases were partly offset by stronger exports of meat products and poultry and of raw cotton.

Imports.--Imports increased $10.3 billion, or 4 percent, to $276.0 billion in the fourth quarter. Quantities and prices each increased 2 percent.

In value, nonpetroleum imports increased $8.5 billion, or 3 percent, to $254.4 billion. Strength in imports was spread across all major commodity categories. Capital goods increased $3.0 billion. The same high-technology products that fueled growth in the first three quarters continued to do so in the fourth quarter. Over half of the fourth-quarter increase was accounted for by semiconductors, by communications equipment, and by computers, peripherals, and parts. Industrial, agricultural, and service industry machinery also increased strongly. Consumer goods increased $2.8 billion. Nonpetroleum industrial supplies and materials increased $2.3 billion, mostly in nonferrous metals, but also in steelmaking materials, iron and steel products, chemicals, and paper. Automotive vehicles, engines, and parts increased only $0.2 billion, but remained at historically high levels.

Petroleum imports increased $1.9 billion, or 10 percent, to $21.5 billion--the highest level since the first quarter of 1981. The average price per barrel jumped to $22.00--the highest level since the fourth quarter of 1996--from $18.63; prices have risen sharply since the first quarter of 1999, when major petroleum producers curbed production in an effort to boost prices. This cut in production, coupled with increases in world demand, also resulted in a drawdown of worldwide inventories. The average number of barrels imported daily decreased to 10.68 million from 11.49 million. U.S. domestic production and consumption increased, and inventories declined.

Balances by area.--The deficit on goods increased $4.3 billion, to $96.2 billion in the fourth quarter, compared with a $7.4 billion increase in the third.³ Higher deficits with industrial countries more than accounted for the fourth-quarter increase; the deficit with Western Europe was up $2.0 billion; that with Canada, up $2.0 billion; and that with Japan, up $1.6 billion. These higher deficits were partly offset by lower deficits with Asia and with Latin America; the lower deficit with Latin America was more than accounted for by Mexico.

Services.--The surplus on services increased to $20.7 billion in the fourth quarter from $19.4 billion in the third (table A). Most major categories of services exports increased. For services imports, travel, passenger fares, and "other" transportation more than accounted for the increase.

Foreign visitors spent $19.3 billion on travel to the United States, up 4 percent. Receipts from overseas visitors were $16.5 billion, up 5 percent, as a result of an increase in the number of visitors. Receipts from Canada decreased 4 percent, and receipts from Mexico were unchanged. Payments by U.S. travelers were $15.4 billion, up 3 percent. Payments for overseas travel were $12.4 billion, up 4 percent. Payments to Canada were up 2 percent, and payments to Mexico were down 4 percent.

Passenger fare exports were $5.5 billion, up 4 percent, and passenger fare imports were $5.5 billion, up 3 percent.

"Other" transportation exports were $7.3 billion, up $0.4 billion. The increase was mostly due to an increase in export volume that resulted in increases in both freight and port expenditures receipts. Increased economic activity in the United States, Europe, and Asia boosted the demand for bulk commodities such as iron ore and coal, and freight rates increased. "Other" transportation payments were $9.3 billion, up 1 percent. After two quarters of large rises, freight payments slowed sharply in response to smaller increases in export and import volumes in the fourth quarter.

Royalties and license fees exports were unchanged at $9.3 billion, and royalties and license fees imports were virtually unchanged at $3.1 billion.

"Other" private services exports increased $0.6 billion, to $25.7 billion; affiliated services (transactions between affiliated companies) changed little, and unaffiliated transactions increased, partly reflecting an increase in financial services as a result of higher foreign activity in U.S. financial markets. "Other" private services imports decreased $0.3 billion to $12.9 billion, largely as a result of a decrease in affiliated services.

Transfers under U.S. military agency sales contracts decreased $0.2 billion, to $4.0 billion. Direct defense expenditures abroad decreased $0.1 billion, to $3.7 billion.

 

Revision to the Estimates for the Third Quarter of 1999 The international transactions account estimates for the third quarter were revised to incorporate more complete source data. The current-account deficit was revised to $89.1 billion from $89.9 billion. The goods deficit was revised to $91.9 billion from $92.1 billion (based on updated Census Bureau data); the services surplus was revised to $19.4 billion from $18.3 billion (reflecting newly available source data); the deficit on income was revised to $5.3 billion from $4.9 billion (reflecting updated capital flow and position data); and unilateral current transfers were net outflows of $11.2 billion, virtually unchanged from the previous estimate (based on updated U.S. Government agency reports). Net recorded financial inflows were revised to $94.3 billion from $105.7 billion (reflecting newly available source data).

Income

The deficit on income increased to $10.4 billion in the fourth quarter from $5.3 billion in the third (table A).

Investment income .--Receipts of income on U.S.-owned assets abroad increased to $72.8 billion from $69.5 billion. Much of the increase was attributable to "other" private receipts, but direct investment receipts were also higher. Payments of income on foreign-owned assets in the United States increased to $81.7 billion from $73.3 billion. Direct investment payments, "other" private payments, and U.S. Government payments were all substantially higher.

Receipts of income on U.S. direct investment abroad increased to $31.1 billion in the fourth quarter from $30.3 billion in the third. By industry, petroleum earnings increased; growth was mainly in the producing areas, such as the United Kingdom, Norway, and Australia. The increases were partly offset by lower downstream (refining and marketing) earnings in several regions, especially Japan. Manufacturing earnings increased slightly; much of the increase occurred in Latin America and Australia. Earnings of "other" affiliates also increased slightly, mostly due to an increase in earnings of British utility affiliates and Swiss wholesale trading affiliates. These increases were partly offset by a decrease in earnings in banking that was mainly in Asia, and by a decrease in earnings in finance in several financial centers.

Payments of income on foreign direct investment in the United States increased to $17.9 billion in the fourth quarter from $13.8 billion in the third. Continued strong expansion in the U.S. economy boosted earnings of manufacturing and of "other" affiliates, largely in wholesale trade. A decrease in petroleum earnings reflected poor results from downstream refiners and marketers.

Receipts of income on "other" private investment were $40.9 billion in the fourth quarter, up from $38.4 billion in the third. Higher amounts outstanding for securities and for bank and nonbank claims and a sharp rise in average interest rates accounted for the increase. Interest rates have risen strongly for four consecutive quarters.

Payments of income on "other" private investment were $38.6 billion in the fourth quarter, up from $35.4 billion in the third. As with receipts, increases in both amounts outstanding and average interest rates accounted for the rise.

Receipts of income on U.S. Government investment were virtually unchanged at $0.7 billion. Payments of income on U.S. Government liabilities were $25.2 billion, up from $24.1 billion, largely as a result of higher average interest rates.

Compensation of employees.--Receipts for compensation of U.S. workers abroad were unchanged at $0.5 billion in the fourth quarter. Payments for compensation of foreign workers in the United States were unchanged at $1.9 billion.

Unilateral current transfers

Unilateral current transfers were net outflows of $13.9 billion in the fourth quarter, up from $11.2 billion in the third (table A). Nearly all of the increase was attributable to U.S. Government grants, which rose to $5.1 billion from $2.7 billion, as a result of cash grants to Israel--$1.4 billion under the credit waiver program to finance military purchases and $1.0 billion for economic support. Not all of the funds allocated to Israel were drawn in the fourth quarter; another $0.5 billion will be drawn over the remainder of the U.S. Government's fiscal year (table O).

U.S.-owned assets abroad

Net U.S.- owned assets abroad increased $88.8 billion in the fourth quarter, following an increase of $113.4 billion in the third. Net U.S. purchases of foreign securities were sharply lower, but outflows by U.S. banks were sharply higher. Net outflows for U.S. direct investment abroad were lower.

U.S. official reserve assets.--Net U.S. official reserve assets decreased $1.6 billion in the fourth quarter, compared with a decrease of $2.0 billion in the third (table C).

Claims reported by banks.- -U.S. claims on foreigners reported by U.S. banks increased $37.9 billion in the fourth quarter, following an increase of $8.8 billion in the third. U.S. banks' own claims payable in dollars increased $28.2 billion, following an increase of $7.7 billion. Interbank claims were sharply higher, mainly on offices in the Caribbean, France, and Germany; the higher claims were partly to meet increased credit demands in Europe associated with business consolidations and with an acceleration in economic activity. Yearend lending for balance sheet adjustments at banks, mainly in the Caribbean, also accounted for some of the increase. These increases were partly offset by a decline in lending by U.S. securities dealers, mainly to the Caribbean in October. U.S. banks' domestic customers' claims payable in dollars increased $3.7 billion, following an increase of $6.1 billion. U.S. banks' claims payable in foreign currencies increased $6.0 billion, following a decrease of $5.0 billion.

Foreign securities .--Net U.S. purchases of foreign securities slowed sharply, to $7.0 billion in the fourth quarter from $34.4 billion in the third. Sharply reduced merger-related exchanges of stock resulted in a decline in net U.S. purchases of foreign stocks to $11.3 billion from $27.1 billion. Rising long-term interest rates in the U.S. bond market outpaced more slowly rising rates in foreign markets, resulting in a shift to net U.S. sales of foreign bonds of $4.3 billion from net purchases of $7.3 billion.

Net U.S. purchases of foreign stocks dropped to $11.3 billion from $27.1 billion. Merger-related exchanges of foreign stocks declined to $5.6 billion from $26.4 billion because of a reduction in large-scale mergers. Net purchases of other stocks increased to $5.8 billion from $0.7 billion; the increase was more than accounted for by a very strong step-up in net purchases from Japan. Signs of limited economic recovery in Japan buoyed expectations and resulted in record net purchases of $19.8 billion in Japanese stocks, more than double third-quarter net purchases, as Japanese stock prices rose 14 percent in the fourth quarter and the yen appreciated 8 percent against the U.S. dollar, yielding total appreciation of 22 percent in just 3 months. Net sales of stocks occurred in Western Europe, despite economic recovery and a sharp rise in stock prices. Gross trading in foreign stocks--that is gross purchases plus gross sales--increased 20 percent.

Transactions in foreign bonds shifted to net sales of $4.3 billion from net purchases of $7.3 billion. New issues in the United States were $2.9 billion--the lowest since the third quarter of 1990--compared with $9.7 billion. Rising U.S. long-term bond rates, associated with both sustained economic growth and a tightening of monetary policy, discouraged all but a few Latin American sovereign issues. Transactions in outstanding foreign bonds shifted to net sales of $1.1 billion from net purchases of $4.2 billion. Net sales to Latin America and to Japan more than offset net purchases from the United Kingdom and the euro area. Redemptions of outstanding bonds remained strong, particularly from Latin America and Western Europe. Gross trading in foreign bonds decreased 16 percent.

Direct investment .--Net financial outflows for U.S. direct investment abroad were $31.3 billion in the fourth quarter, compared with $47.4 billion in the third. Net equity capital outflows dropped to $5.9 billion from $22.8 billion. In the third quarter, but not in the fourth, there were a number of large-scale U.S. acquisitions of foreign companies. In addition, an increase in selloffs in the fourth quarter also contributed to the decline. Reinvested earnings increased to $22.0 billion from $21.6 billion. Net intercompany debt outflows increased to $3.4 billion from $3.0 billion.

Foreign-owned assets in the United States

Net foreign-owned assets in the United States increased $179.7 billion in the fourth quarter, following an increase of $207.7 billion in the third. Inflows for net foreign purchases of U.S. securities other than U.S. Treasury securities remained exceptionally strong, net inflows for direct investment in the United States were sharply lower, but still very sizable, and transactions in U.S. Treasury securities shifted to net sales from net purchases.

Foreign official assets.--Net foreign official assets in the United States increased $28.6 billion in the fourth quarter, compared with an increase of $11.9 billion in the third. In the fourth quarter, assets of industrial countries increased $12.8 billion, and assets of developing countries increased $15.8 billion. The increase in industrial countries largely reflected intervention sales of foreign currencies for dollars by a few countries in Asia. The increase in assets of developing countries was widespread, reflecting a variety of factors (table C).

Liabilities reported by banks .--U.S. liabilities reported by U.S. banks increased $24.3 billion in the fourth quarter, compared with an increase of $22.6 billion in the third. U.S. banks' own liabilities payable in dollars increased $30.2 billion, following an $8.6 billion increase. Strong demand for funds to finance a sharp acceleration in U.S. commercial and industrial loans and demand for credit abroad, including yearend balance sheet adjustments, led to the step-up. In addition, the rise in U.S. short-term interest rates relative to foreign rates encouraged the placement of funds in the United States; most of the funds came from the Caribbean and Western Europe. These increases were partly offset by U.S. securities dealers' repayments of borrowings to banks in Western Europe, mostly to the United Kingdom in December.

U.S. banks' custody liabilities payable in dollars increased $6.4 billion in the fourth quarter, mostly to Caribbean banking centers, following a $6.7 billion increase in the third.

U.S. banks' foreign currency liabilities decreased $12.3 billion in the fourth quarter after a $7.3 billion increase in the third, as banks repaid earlier borrowings.

U.S. Treasury securities .--Foreign transactions in U.S. Treasury securities shifted to net sales of $17.2 billion in the fourth quarter from net purchases of $9.6 billion in the third. Foreigners continued to purchase higher yielding U.S. corporate and U.S. Government agency bonds rather than U.S. Treasury bonds, despite a 40-basis-point rise in the yield on the benchmark 30-year U.S. Treasury bond to 6.48 percent, its highest level in 2 years, and a substantial increase in interest-rate differentials of U.S. Treasury bonds over most foreign government bonds. Most sales of U.S. Treasury bonds occurred in October, when leveraged bond hedge funds in the Caribbean sold large amounts of bonds. Net sales also occurred by several countries in Asia. The net sales were partly offset by purchases by Western Europe.

Other U.S. securities.- -Net foreign purchases of U.S. securities other than U.S. Treasury securities were especially strong at $90.7 billion in the fourth quarter, but they were down from a record $94.6 billion in the third.

Net foreign purchases of U.S. stocks were a record $33.2 billion, up from $23.9 billion. Net foreign purchases of U.S. stocks accelerated, largely from Western Europe, as a result of solid economic expansion, low inflation, and a strong rise in corporate profits in the United States. In this environment, U.S. stock prices accelerated sharply in the fourth quarter, accounting for more than half of the gain for the year; the S & P 500 index gained 15 percent, the DJIA gained 11 percent, while the NASDAQ--which is weighted heavily with technology issues--gained 48 percent. The increase in foreign purchases occurred despite sharp rises in the broad European stock indexes, which rose even more sharply than the broad U.S. indexes. Gross trading in U.S. stocks increased 32 percent.

Net foreign purchases of bonds were $57.5 billion, down from a record $70.7 billion. Net foreign purchases of bonds dropped sharply, mostly as a result of a drop in new bonds issued abroad by U.S. corporations. New issues had been boosted to exceptionally high levels in the third quarter. In addition, a sharp rise in interest rates slowed new borrowing, despite a narrowing in the spread between Eurobond rates and U.S. bond rates. Net foreign purchases of outstanding U.S. corporate and U.S. Government agency bonds changed little. Gross trading in U.S. bonds decreased 2 percent.

U.S. currency flows .--Net U.S. currency shipments were $12.2 billion in the fourth quarter, up from $4.7 billion in the third. Large shipments toward yearend may have been partly attributable to currency ordered as a precaution against possible disruptions from Y2K problems.

 

Data Availability The current and historical estimates that are presented in tables 1-10 of the U.S. international transactions accounts are available as compressed files on BEA's Web site at www.bea.doc.gov, under "International," click on "Data," and look under "Balance of Payments." The estimates are also available from BEA on the following diskettes: U.S. International Transactions. The most recently released annual and quarterly estimates are available as a 1-year subscription (four installments)-product number IDS-0001, price $80.00. The subscription also includes the diskette of the historical estimates (see below). U.S. International Transactions, Fourth Quarter 1999. Annual estimates for 1998 and 1999 and quarterly estimates for 1998:I-1999:IV on a single diskette--product number IDN-0243, price $20.00. U.S. International Transactions, Historical Series. All the available historical annual and quarterly estimates on a single diskette, for some series as far back as 1960--product number IDN-0237, price $20.00. To order, call the BEA Order Desk at 1-800-704-0415 (outside the United States, call 202-606-9666).

Direct investment.- -Net financial inflows for foreign direct investment in the United States were $44.1 billion in the fourth quarter, down from $60.8 billion. A sharp drop in net intercompany debt inflows to $3.2 billion from $18.8 billion was mostly with the United Kingdom, where the decreases were widespread across most industries, and to a much lesser extent with Japan, where the decreases were concentrated in wholesale trade and manufacturing. Net equity capital inflows, at $30.4 billion, were down from $36.2 billion, but remained strong; they included several large-scale foreign acquisitions of U.S. companies, largely by Western European purchasers. Partly offsetting were outflows from the sale of several affiliate operations by, and return of capital to, Western European parents. Reinvested earnings increased to $10.6 billion.

U.S. dollar in exchange markets

In 1999, the dollar traded in a range just below the peak value achieved in the summer of 1998. The plateau on which the dollar traded was in marked contrast to the long period of dollar appreciation that began in mid-1995 and continued through mid-1998. However, many of the conditions that provided the impetus for sustained appreciation in the earlier period were the same as those that provided support to the dollar in 1999. In 1999, U.S. economic growth remained strong at 4.2 percent and much greater than growth in other industrial countries, inflation did not emerge as a major problem in the United States, U.S. interest rates exceeded those abroad by a significant margin, and U.S. stock prices rose substantially. By contrast, economic growth in industrial countries abroad was about 2.5 percent, but picked up over the course of the year; recessions lingered in many of the developing countries in Asia as a consequence of financial crises in 1997 and 1998, although some recovery occurred over the course of the year; and there was little growth in Latin America. In this environment, the United States remained an important destination for the exports of foreign goods and services and an attractive location for portfolio and direct investment capital.

The value of the dollar was unchanged from yearend 1998 to yearend 1999 on a nominal, trade-weighted basis against the group of 7 major currencies that trade widely in international markets (table B, chart 1). During the first half of the year, the dollar appreciated 12 percent against the euro and 7 percent against the yen. During the last half of the year, the dollar appreciated an additional 3 percent against the euro, but it fell 16 percent against the yen. Large differences in relative growth rates and perceptions about prospective changes in growth rates were key determinants of exchange rates in 1999.

During the first half of the year, the dollar appreciated 12 percent against the euro as the result of a large disparity between the prospects for economic growth in the United States and in the euro area countries. Growth in the U.S. economy continued strong, while growth in the euro area economies remained relatively weak. The spread between future U.S. and euro area short-term interest rates implied by futures market prices widened over much of the period in favor of the dollar, partly as a result of belief by financial market participants that the disparity between economic growth prospects would lead to a tightening of monetary conditions in the United States relative to those in the euro area. These expectations and continued rapid U.S. growth led to a strong rise in U.S. short-and long-term interest rates relative to those abroad (charts 2and 3). In late June, the Federal Reserve System raised the target Federal funds rate by 25 basis points to 5.00 percent. In contrast, weak economic growth led the European Central Bank to lower its short-term lending rate by 50 basis points to 2.50 percent.

During the second half of the year, the dollar appreciated 3 percent against the euro, partly as more positive European economic news, particularly from Germany, prompted increased interest in European investments, while expectations of tighter monetary policy in the United States encouraged profit-taking in U.S. stock and bond markets. A rise in German bond rates relative to U.S. long-term rates decreased the yield differential in favor of U.S. bonds and gave further indication that a pickup in economic growth was under way in Europe. However, conditions in the United States continued to be very positive and led to record U.S. stock prices and a tightening of monetary conditions by the Federal Reserve System in late August and mid-November. Consequently, interest rates and growth rates in the United States were well above those in the euro area, and the dollar appreciated.

The dollar appreciated 7 percent against the Japanese yen in the first half of the year. During the first half, there were indications that the recovery in Japan was beginning to take hold. However, the pace of expansion was unclear and considerable uncertainty prevailed as to whether the expansion was sustainable. By mid-year, in anticipation of recovery, Japanese stock prices had increased strongly, encouraging strong purchases of Japanese stocks by foreign investors. In contrast, rising U.S. interest rates created a strong incentive to place assets in the United States, which contributed to the dollar's appreciation.

During the second half of the year, the dollar depreciated 16 percent against the Japanese yen. Positive news about the Japanese economy, continued expansionary fiscal policy, and the maintenance of near-zero short-term interest rates all contributed to a more favorable outlook for the Japanese economy. Economic reports released in the second half continued to indicate a limited recovery, but expectations of a strengthening recovery encouraged further yen appreciation and a sharp rise in Japanese stock prices. In this environment, a considerable amount of portfolio capital flowed into the Japanese stock market, including capital from the United States. Japanese authorities intervened in exchange markets on several occasions in the third and fourth quarters to slow the especially rapid rise of the yen.

Goods and services

The deficit on goods and services increased to $267.5 billion in 1999 from $164.3 billion in 1998. A record annual increase in the goods deficit was augmented by the second annual decrease in the services surplus since 1985 (table D).

Goods.--The deficit on goods increased to $347.1 billion in 1999 from $246.9 billion in 1998. Imports increased by a very substantial amount, and exports recovered only slightly from a drop in 1998.

Goods exports increased $12.8 billion, or 2 percent, to $683.0 billion in 1999 after decreasing $9.5 billion, or 1 percent, in 1998. The increase was limited almost entirely to capital goods, mostly as a result of a pickup in worldwide demand for semiconductors, computers and computer parts, and telecommunications equipment (tables E and F).

Goods imports increased $113.0 billion, or 12 percent, to $1,030.2 billion in 1999, up from an increase of $40.8 billion, or 5 percent, in 1998. Petroleum imports increased $16.9 billion after 2 years of decline. Nonpetroleum imports increased $96.1 billion, or 11 percent, up from a $61.7 billion, or 8-percent, increase. Increases were especially strong in automotive products and capital goods.

U.S. export growth in 1999 was limited by real GDP growth in many industrial countries abroad that, for the year, was up only slightly from reduced growth in 1998 (chart 4). Growth in Western Europe was higher and picked up over the course of the year, and in Asia, several key countries partially recovered from the financial problems of late 1997 and 1998. Growth in Canada accelerated, and Japan showed some signs of recovery from its recession. There was little growth in Latin America.

U.S. import growth increased substantially in 1999, as the U.S. economy continued to grow strongly. Growth in U.S. real GDP was 4.2 percent in 1999, following growth of 4.3 percent in 1998 and 4.2 percent in 1997.

Domestic prices of exports slowed their decline in 1999, and some prices began to rise by yearend. The largest declines were in foods, feeds, and beverages and in capital goods (in computers, peripherals, and parts) (table G). When converted into foreign currencies, most price declines were larger, because appreciation of foreign currencies added to the price reductions (table H).

Dollar prices of most imports were unchanged. However, prices of petroleum and petroleum products were sharply higher, prices of other industrial supplies and materials were somewhat higher, and prices of capital goods (particularly computers, peripherals, and parts) continued to decline (table G).

Exports.--Nonagricultural exports increased $16.4 billion, or 3 percent, to $633.6 billion in 1999, following a decrease of 1 percent in 1998. Quantities increased 4 percent, and prices decreased 1 percent. In value, capital goods accounted for more than half of the increase in 1999. Other major commodity categories increased only slightly or decreased (chart 5).

Capital goods, except automotive, increased $10.5 billion, or 3 percent, following an increase of 1 percent. Unlike in 1998 when increases in aircraft, engines, and parts more than offset decreases in most other capital goods, in 1999, most capital goods increased, albeit some by small amounts, and aircraft decreased.

Semiconductors, which accounted for over 80 percent of the increase in capital goods, increased $9.2 billion, or 24 percent, following a decrease of $1.2 billion, or 3 percent. This is the largest annual increase on record, reflecting increased shipments to Asia, Latin America, and Western Europe. Electric generating equipment and parts increased $2.0 billion, following a decrease of $0.7 billion. Telecommunications equipment--mainly to Europe, Canada, and Mexico--increased $1.6 billion, up from an increase of $1.0 billion. Computers, peripherals, and parts--mainly to the newly industrialized countries in Asia--increased $1.3 billion, following a decrease of $4.1 billion. Scientific, hospital, and medical equipment--mainly to Europe, Canada, Mexico, and Japan--increased $1.0 billion, following a decrease of $0.3 billion. These increases were partly offset by lower exports of oil drilling, mining, and construction machinery, which fell $4.1 billion, following little change, largely to developing countries in Asia and Latin America but also to Western Europe (table I).

Civilian aircraft, engines, and parts decreased $0.6 billion, or 1 percent, following increases of 29 percent in 1998, 34 percent in 1997, and 18 percent in 1996. A decline in deliveries of both complete aircraft and aircraft parts to Asia reflected the weakened financial position of countries in that area and more than accounted for the worldwide decline. Deliveries to Europe were higher and nearly offset the decline to Asia.

Automotive vehicles, engines, and parts increased $1.5 billion, or 2 percent, following a 1-percent decrease. Exports to Canada increased $4.2 billion, or 10 percent. In contrast, exports to other countries, mainly in Latin America, decreased $2.7 billion, or 8 percent, largely as a result of the economic difficulties in countries where major production facilities are located.

Consumer goods increased $1.4 billion, or 2 percent, following a 2-percent increase. Medicinal, dental, and pharmaceutical preparations more than accounted for the increase in 1999.

Nonagricultural industrial supplies and materials increased $0.7 billion, or 1 percent, following a 6-percent decrease. Increases in chemicals, "other" nonmetals, and textile supplies more than offset decreases in metals and nonmetallic products and in energy products (table J).

Agricultural products decreased $3.7 billion, or 7 percent--the third consecutive annual decrease--reaching the lowest level since 1994. Quantities increased 1 percent, and prices declined 8 percent. Raw cotton decreased $1.6 billion, 42 percent in quantity and 20 percent in price. Other bulk commodities, such as soybeans and wheat, increased in quantity, but large price declines more than offset the increases. Soybean prices declined 21 percent, and wheat prices, 9 percent.

Imports.--Nonpetroleum imports increased $96.1 billion, or 11 percent, to $962.4 billion in 1999, following an 8-percent increase in 1998. Quantities increased 13 percent, and prices fell 2 percent. In value, the largest increases were in automotive vehicles, engines, and parts and in capital goods, and both increased by substantially greater amounts in 1999 than in 1998. The increase in consumer goods was also sizable, while the increase in nonpetroleum industrial supplies and materials was small (chart 6).

Automotive vehicles, engines, and parts increased $30.5 billion, or 20 percent, up sharply from a $9.2 billion, or 7-percent increase in 1998. Imports of passenger cars increased $17.1 billion, up from a $7.1 billion increase; increases were strong from all areas of the world. The quantity of imported new passenger cars increased 20 percent, and the average price fell 6 percent. U.S. sales of domestic and foreign autos increased 9 percent, up from a 3-percent increase. Imports of engines, other parts, and accessories increased $7.8 billion. Trucks, buses, and special purpose vehicles increased $5.5 billion.

Capital goods, except automotive, increased $27.3 billion, or 10 percent, following a $16.3 billion, or 6-percent increase in 1998. The increase was the largest since 1995. High-technology products dominated capital goods imports in 1999. Computers, peripherals, and parts increased $9.0 billion, up from a $2.3 billion increase; computer parts accounted for over two-thirds of the increase, reflecting stronger purchases from Asia and Latin America. Telecommunications equipment, largely from Asia and Mexico, increased $6.9 billion, up from a $2.3 billion increase. Semiconductors, largely from Asia, shifted to an increase of $4.2 billion from a decrease of $3.5 billion. In 1998, the chip industry had been plagued by a variety of factors, among them excess manufacturing capacity, falling prices, and economic crises in Asia. The market rebounded in 1999, driven by demand from Internet users as well as from producers of communications equipment, consumer electronics, and automotive electronics. Electric generating machinery, electric apparatus, and parts increased $3.8 billion, up from a $1.2 billion increase. Civilian aircraft, engines, and parts slowed to an increase of $1.5 billion from an increase of $5.2 billion. As a partial offset to these increases, machine tools and metalworking machinery decreased $1.1 billion, the first annual decrease since 1992 (table I).

Consumer goods remained strong, increasing $23.1 billion, or 11 percent, in 1999, compared with an increase of $22.7 billion, or 12 percent, in 1998. Durable and nondurable goods contributed nearly equal amounts to the 1999 increase. Within durable goods, household products and home entertainment equipment increased the most. Within nondurables goods, pharmaceutical preparations, apparel, and household goods increased the most.

Nonpetroleum industrial supplies and materials slowed in 1999, increasing $4.4 billion, or 3 percent, following a $6.6 billion, or 5-percent, increase in 1998. Building materials, largely from Canada, accounted for much of the increase in 1999. Chemicals, mainly from Western Europe and Canada, precious metals (excluding nonmonetary gold) from Eastern Europe, and paper, mainly from Canada and Western Europe, also increased. These increases were partly offset by a $3.1 billion decrease in iron and steel products, mainly from Japan and Eastern Europe. Steel imports surged into U.S. markets throughout much of 1998, and in response, the U.S. steel industry filed antidumping complaints. As a result, penalties were imposed beginning in the fourth quarter of 1998, which helped reduce steel imports in 1999 (table J).

Petroleum and products rebounded in 1999, increasing $16.9 billion, or 33 percent, to $67.8 billion, compared with a decrease of $20.9 billion, or 29 percent, in 1998. The rebound resulted from an increase in prices to an average of $16.41 per barrel from $12.31 per barrel. Quantities were nearly unchanged at 11.31 million barrels per day. In response to the sharp decline in oil prices in 1997-98, major oil producers met in March 1999 and agreed to curb production. This action, combined with the pickup in demand by developing countries in Asia and by industrial countries, led to a drop in worldwide crude oil stocks and an average price per barrel of $25.65 by December that was the highest in 9 years (chart 7).

U.S. consumption of petroleum and products increased 2 percent to an average of 19.3 million barrels per day in 1999. In contrast, U.S. domestic production decreased 1 percent to an average of 9.3 million barrels per day. Inventories decreased.

Balances by area.--The U.S. deficit on goods increased $100.2 billion in 1999, following a $50.3 billion increase in 1998. The sizable increase in 1999 reflected limited expansion in exports, which was attributable to a modest upturn in economic growth abroad in many industrial countries and in Asia, and a substantial strengthening in imports (table K).

The deficit with Western Europe increased to $52.9 billion from $34.9 billion. Exports in 1999 slowed to one-half their increase in 1998, mostly due to a slower rise in consumer goods and capital goods and a decrease in industrial supplies and materials. Imports accelerated in nearly all major commodity categories except capital goods.

The deficit with Canada increased to $34.4 billion from $19.0 billion. Exports were sharply higher in 1999, mainly due to automotive exports. Imports were up even more strongly than exports, mostly in automotive products and in industrial supplies and materials.

The deficit with Latin America increased to $30.0 billion from $7.3 billion. Exports changed little in 1999 from 1998. Imports of petroleum shifted by a sizable amount to an increase, and imports of automotive products and capital goods were stronger than in 1998.

The deficit with Asia, excluding Japan, increased to $149.6 billion from $121.3 billion. Exports increased a small amount in 1999, after a sharp drop in 1998, as a result of a turnaround in capital goods. For imports, capital goods were up very sharply, and petroleum and consumer goods were up strongly.

The deficit with Japan increased to $74.9 billion from $65.3 billion. Exports changed little in 1999, following a large decrease in 1998. For imports, automotive products and capital goods picked up.

Services.--The services surplus decreased $3.1 billion in 1999 to $79.6 billion, following a decrease of $9.3 billion in 1998. In 1999, exports increased $13.4 billion, up sharply from a $4.8 billion increase. Services imports increased $16.5 billion, up from a $14.1 billion increase (table L).

Foreign visitors spent $74.4 billion for travel in the United States in 1999, an increase of 4 percent, following a decrease of 3 percent in 1998. In 1998, receipts from overseas had decreased to $61.2 billion from $63.0 billion, as the number of visitors from Western Europe dropped to a 3-percent increase in 1998 from a 7-percent increase in 1997 (as a result of slower European economic growth), and as the number of visitors from Asia shifted to a 13-percent decrease in 1998 from a 3-percent increase in 1997 (as a result of recession in Japan and financial crises in other Asian countries). In 1999, receipts increased to $63.7 billion, as the number of visitors from Europe recovered to a 6-percent increase, reflecting the pickup in European economic activity, and as the number of visitors from Asia recovered to an increase of 4 percent, reflecting some improvement in Asian economic conditions. However, the 7.0 million visitors from Asia in 1999 were still well below the record 7.8 million visitors from Asia who visited the United States in 1997 prior to the financial crises. Receipts from Canada were $6.5 billion in 1999, up 5 percent. Receipts from Mexico were $4.3 billion in 1999, up 12 percent.

U.S. residents spent $60.1 billion for travel abroad in 1999, an increase of 7 percent, following an increase of 8 percent in 1998. Expenditures overseas were $47.9 billion; the number of travelers to Western Europe and Asia strengthened somewhat, largely as a result of continued strong growth in the United States and a high level of consumer confidence. Payments to Canada increased to $6.1 billion in 1999, up 6 percent. Payments to Mexico were $6.1 billion in 1999, down 5 percent.

Passenger fare exports increased 6 percent to $21.1 billion in 1999, and passenger fare imports increased 8 percent to $21.3 billion.

"Other" transportation exports were $27.3 billion, up $1.8 billion, or 7 percent, in 1999, following a decrease of $1.5 billion, or 6 percent, in 1998. Exports to nearly every geographic area increased, but they were particularly strong with Asia, as goods exports to that area of the world rebounded from large drops in 1998 as a result of the Asian financial crises. Port service receipts increased $1.2 billion, or 8 percent, following a 6-percent decrease, mostly because of increases in export and import tonnage on foreign-operated vessels. Port services receipts were constrained by a drop in the demand for bulk commodities in Europe and Asia in the first half of the year and by a 5-percent decrease in revenues from purchases of bunker fuel in U.S. ports, as a decrease in volume more than offset an increase in price. Freight receipts increased $0.6 billion, or 5 percent, following a 5-percent decrease, partly reflecting a turnaround in goods exports. Air freight increased 4 percent on larger export volume to nearly all geographic areas except Latin America, where volume declined. Ocean freight increased 3 percent after 3 years of decline, mostly as a result of increased export volume to Asia.

"Other" transportation imports were $34.5 billion in 1999, up $4.0 billion, or 13 percent, following an increase of $1.5 billion, or 5 percent, in 1998. Freight payments increased $3.0 billion. Ocean freight accounted for much of the increase as a result of a strong increase in goods imports. In addition, ocean freight rates on imports from Asia increased, largely as a result of an especially large increase in imports from that area. Air freight import volumes also increased. Port expenditures payments increased $1.1 billion, mostly reflecting an increase in air port expenditures that resulted from increases in both export and import volumes and from higher prices for jet fuel.

"Other" private services exports were $99.4 billion in 1999, up from $92.1 billion in 1998. Affiliated services (transactions between affiliated companies) increased slightly. Among unaffiliated services, business, professional, and technical services increased by a much larger amount than in 1998 and financial services by a smaller amount.

"Other" private services imports were $51.6 billion in 1999, up from $47.7 billion in 1998. Affiliated services (transactions between affiliated companies) accounted for three-fifths of the increase. Among unaffiliated services, both financial services and business, professional, and technical services increased by smaller amounts than in 1998.

Transfers under U.S. agency military sales contracts were $16.7 billion in 1999, down from $17.2 billion in 1998. The totals for both years represent a plateau from the steady annual rises of 1991-97 that followed the Persian Gulf War, when many Middle Eastern countries rebuilt their weapons systems and many other countries also entered into multiyear contracts to upgrade their weapons systems. Deliveries under these contracts have been largely completed, and deliveries in 1998 and 1999 represent a moderation in both new orders and deliveries. Lower oil prices in 1997 and 1998 may also have moderated new orders.

Direct defense expenditures abroad were $14.6 billion in 1999, up from $12.8 billion in 1998. U.S. participation in the NATO air campaign against Serbia resulted in the deployment of U.S. troops in Europe to the Balkan region and entailed higher costs for transportation, materials and supplies, and contractual purchases from local economies. Petroleum stocks were also run down and replenished later in the year during a period of rapidly rising prices.

Income

The deficit on income was $24.8 billion in 1999, up from $12.2 billion in 1998 (table D).

Investment income.--Receipts of income on U.S.-owned assets abroad increased to $272.0 billion in 1999 from $256.5 billion in 1998. Most of the increase was attributable to direct investment receipts. Payments of income on foreign-owned assets in the United States increased to $291.2 billion from $263.4 billion. Direct investment payments, "other" private payments, and U.S. Government payments all increased by substantial amounts.

Direct investment income.--Receipts of income on U.S. direct investment abroad were $116.7 billion in 1999, up from $102.8 billion in 1998 (table M, chart 8). Financial crises in Asia and Latin America and slower growth in Western Europe reduced earnings abroad in 1998. In 1999, limited economic recovery in Asia and a pickup in growth in Western Europe led to a rise in earnings, but to levels that did not exceed those in 1997.

Earnings increases in 1999 were widespread by area and by industry. The largest increases were in the Pacific Rim countries (including Japan), Canada, and the United Kingdom. Earnings of "other" affiliates increased $7.3 billion, earnings of manufacturing affiliates increased $3.5 billion, and earnings of petroleum affiliates increased $2.3 billion.

Payments of income on foreign direct investment in the United States were $58.3 billion in 1999, up from $43.4 billion in 1998 (table M, chart 9). In 1998, sizable drops in petroleum earnings, as a result of petroleum price declines, and in banking and finance (part of "other" industries), as a result of losses partly related to financial crises abroad, contributed to a substantial drop in total earnings. In 1999, a turnaround in banking and strong increases in earnings in manufacturing, "other" (especially wholesale trade), and petroleum industries brought total earnings well above their level in 1997.

The strength of earnings in 1999 reflected growth in the U.S. economy and an expanded affiliate universe as a result of increased investment from abroad in recent years. Foreign acquisitions were particularly large in 1998 and 1999. In 1999, earnings of "other" affiliates increased $5.3 billion, earnings of manufacturing affiliates increased $4.1 billion, and earnings of petroleum affiliates increased $2.0 billion.

"Other" private and U.S. Government income.--Receipts of income on "other" private investment increased to $152.1 billion in 1999, up from $150.0 billion in 1998 (table N, chart 10). Bank and nonbank interest receipts declined after several years of increases. Interest rates rose significantly in 1999 after falling sharply in 1998, and on average they were lower in 1999 than in 1998; lower average rates more than offset a rise in outstanding amounts. Higher outstanding amounts of foreign stocks led to a strong increase in dividends, and higher outstanding amounts of foreign bonds and sharply higher interest rates led to higher interest receipts on bonds.

Receipts of income on U.S. Government investment fell to $3.2 billion in 1999 from $3.6 billion in 1998.

Payments of income on "other" private investment increased to $137.8 billion in 1999 from $128.9 billion in 1998 (table N, chart 10). Bank and nonbank interest payments decreased after several years of increases. Interest rates rose significantly in 1999 after falling sharply in 1998, and on average they were lower in 1999 than in 1998; lower average rates more than offset a rise in outstanding amounts. Bond interest payments were higher as a result of both higher outstanding amounts and sharply higher interest rates. Dividend payments were higher as a result of higher outstanding amounts.

Payments of income on U.S. Government liabilities increased to $95.1 billion in 1999 from $91.1 billion in 1998, as both liabilities outstanding and interest rates increased (table O).

Compensation of employees .--Receipts for compensation of U.S. workers abroad were unchanged at $1.9 billion in 1999. Payments for compensation of foreign workers in the United States increased to $7.5 billion from $7.1 billion.

Unilateral current transfers

Unilateral current transfers were net outflows of $46.6 billion in 1999, up from $44.1 billion in 1998. Most of the increase was attributable to an increase in private remittances and other transfers, mainly from an increase in institutional remittances and net taxes paid to foreigners. U.S. Government grants were below the total in 1998, because not all of the funds allocated annually for assistance extended to Israel under the Sinai Peace Accords were disbursed in the fourth quarter. A small amount of additional funds will be disbursed over the remainder of the U.S. Government's fiscal year (table O).

U.S.-owned assets abroad

Net U.S.-owned assets abroad increased $372.6 billion in 1999, compared with an increase of $292.8 billion in 1998. U.S. claims reported by banks increased substantially more than in 1998. Net U.S. purchases of foreign securities remained strong.

U.S. reserve assets.--Net U.S. official reserve assets decreased $8.7 billion in 1999, in contrast to an increase of $6.8 billion in 1998 (table C). The decrease in 1999 was attributable to special transactions in foreign currencies related to a quota increase at the International Monetary Fund in the first quarter and to decreases in the U.S. reserve position with the International Monetary Fund in the third and fourth quarters.

Claims reported by banks.--U.S. claims on foreigners reported by U.S. banks increased $61.4 billion in 1999, compared with an increase of $24.9 billion in 1998 (tables P and Q).

Funds provided through interbank channels were much smaller in 1999 than in 1998--an increase of $17.8 billion, compared with an increase of $49.2 billion--as lending to banks slowed significantly. U.S. banks' claims on Japan decreased $18.1 billion in 1999. As capital positions improved, banks in Japan were able to rely on borrowings in international money markets without a large credit risk premium and therefore needed to rely less on borrowings from their branches in the United States (and elsewhere) U.S. banks' claims on Canada decreased $11.2 billion in 1999. However, U.S. banks' claims on Western Europe were up sharply--to an increase of $65.2 billion in 1999 from an increase of $27.9 billion in 1998. Higher credit demands resulted from substantial merger and acquisition activity, some of which was associated with further integration in countries of the European Union, and from a recovery in economic growth in many European countries, particularly in the last half of the year. Interbank lending also increased strongly to offices in the Caribbean in the fourth quarter and included some funding of balance sheet adjustments at yearend. U.S. banks' claims on foreign public borrowers and other private foreigners, including claims of U.S. brokers and dealers, increased $17.3 billion in 1999; U.S. brokers and dealers resumed lending in 1999, following a sharp pull back during the disruptions caused by financial problems in Russia and Asia in the last half of 1998.

U.S. banks' domestic customers' claims payable in dollars increased $27.9 billion in 1999, in contrast to a decrease of $2.0 billion in 1998. In 1999, large increases in foreign commercial paper and in negotiable and readily transferable instruments accounted for much of the increase.

U.S. banks' claims payable in foreign currencies decreased $7.5 billion in 1999 and increased $0.3 billion in 1998.

Foreign securities.--Net U.S. purchases of foreign securities were $97.9 billion in 1999, down from $102.8 billion in 1998. Net purchases of foreign bonds fell to only $0.1 billion--the lowest level since 1982--from $25.1 billion, and net purchases of foreign stocks increased to a record $97.8 billion from the previous record of $77.8 billion in 1998 (table P, charts 11 and 14).

Investments abroad by U.S. mutual funds resumed at a brisk pace in 1999, as total assets increased 6 percent and as foreign assets increased over 40 percent. Investments in foreign-targeted equity funds rebounded strongly with gains from both price appreciation and new investment. Mutual funds continued to sell foreign bonds. The proportion of foreign to total investments increased to 12 percent at yearend 1999 from 8 percent at yearend 1998.

Net U.S. purchases of foreign bonds fell to only $0.1 billion in 1999 from $25.1 billion in 1998. U.S. bond interest rates rose substantially during the year, prompted by sustained U.S. economic growth and tighter monetary policy. For 1999, U.S. A-rated corporate rates increased 135 basis points to 7.7 percent, while Eurobond rates rose 180 basis points to 7.3 percent. Although the yield differential narrowed over the year, the advantage to borrowers for acquiring funds in the Eurobond markets remained sizable and attracted placements away from the U.S. market, where new issues dropped sharply from $58.3 billion to $34.7 billion, the lowest level since 1992. The drop was particularly sharp in the corporate sector. In addition, borrowing problems of emerging market countries continued in 1999, resulting in sharply lower new sovereign issues from Asia. In contrast, though some Asian financial problems affected Latin America in early 1999, new sovereign issues by Latin American countries in 1999 were just under 1998 levels despite political instability in Venezuela, financial problems in Brazil early in the year, and a default by Ecuador on its Brady bonds in midyear. The risk premium on emerging market debt fell over 200 points in the last half of 1999, but it remained well above its level just prior to the Russian debt moratorium in July 1998 (chart 13). Trading activity in foreign bonds--that is, gross purchases plus gross sales--decreased 40 percent in 1999, following a decrease of 12 percent in 1998.

Net U.S. purchases of foreign stocks were $97.8 billion; they consisted of $114.0 billion in numerous merger-related exchanges of stock, which were partly offset by $16.3 billion in net sales of other stocks. Exceptional U.S. stock price performance over the past several years facilitated some of the mergers. The largest merger-related exchanges of stock were with the United Kingdom, the Netherlands, and France. Net purchases of Western European stocks were $34.0 billion; they consisted of $97.9 billion in purchases through merger-related exchanges of stocks and $63.9 billion in sales of other stocks. Sales of other stocks were largest in the first half of the year, when it was not clear that the European recovery would take hold and the euro fell significantly against the dollar. Sales were sharply lower in the last half of the year, when economic recovery appeared under way, particularly in Germany, when the euro's decline against the dollar slowed, and when price increases on most European stock exchanges were exceptionally strong. The sell-off of other European stocks was partly offset by a rebound in net purchases of outstanding Japanese stocks to $46.0 billion, up from $1.4 billion. Net purchases were driven by a 45-percent increase in Japanese stock prices and by an additional 13-percent appreciation in the value of the yen, yielding a 58-percent return. The cautiously optimistic outlook for the Japanese economy was based on restructuring in several major industries, promises of fiscal and monetary policy stimulus, and indications of renewed, yet limited, economic growth. Net purchases of other stocks of developing countries were $6.6 billion, down from $14.3 billion, despite economic recovery in Asian countries and price gains, that in percentage terms, exceeded the strong performances of the U.S. and European markets (chart 12). Trading activity in foreign stocks increased 26 percent in 1999, following an increase of 25 percent in 1998.

Direct investment.--Net financial outflows for U.S. direct investment abroad were $152.2 billion in 1999, up from $132.8 billion in 1998 (table M).

Most of the step-up was attributable to larger reinvested earnings, which were $77.6 billion, up from $58.7 billion. The increase in reinvested earnings reflected both an increase in total earnings and a decline in the portion of those earnings that was distributed. Strong domestic earnings by U.S. parents may have lessened the need to repatriate earnings from their overseas operations. Net equity capital outflows were down slightly to $56.4 billion from $59.4 billion, but remained very strong. Although the number of acquisitions exceeding $1 billion was down from 1998, capital outflows associated with the fewer acquisitions were still larger in 1999 than in 1998. The outflows for these acquisitions are but one manifestation of the worldwide explosion in merger activity that has continued for several years. In 1999, these outflows were partly offset by inflows from several large sales of U.S.-owned foreign operations. Net intercompany debt outflows were $18.2 billion, compared with $14.8 billion.

Foreign-owned assets in the United States

Net foreign-owned assets in the United States increased $750.8 billion in 1999, compared with an increase of $502.6 billion in 1998. Net foreign purchases of U.S. securities other than U.S. Treasury securities and financial inflows for foreign direct investment in the United States were both substantially larger. Inflows for both accounts were records and exceeded previous records by substantial amounts.

Foreign official assets.--Net foreign official assets in the United States increased $44.6 billion in 1999, in contrast to a decrease of $21.7 billion in 1998 (table C). In 1999, assets of industrial countries increased $31.6 billion, and assets of developing countries increased $13.0 billion. The increase in assets of industrial countries included large intervention sales of foreign currencies for dollars in exchange markets by a few countries in Asia. The increase was partly offset by a reduction in reserve assets of a single European country, which sold dollars in order to acquire foreign currency. Among developing countries, several Asian countries added to their holdings of dollar assets.

Liabilities reported by banks.--U.S. liabilities reported by U.S. banks increased $67.7 billion in 1999, compared with an increase of $40.7 billion in 1998 (tables P and Q).

U.S. banks' own liabilities payable in dollars increased $75.8 billion in 1999, following an increase of $24.4 billion in 1998. The sharp acceleration of dollar inflows reflected heightened U.S. and international demand for credit, much of it in the second half of the year, and a widening of short-term interest-rate differentials in favor of investment in U.S. assets.

Interbank liabilities increased $55.4 billion, following a $34.8 billion increase. Inflows from overseas were an important source of funding for the rapid acceleration in U.S. commercial and industrial loans in the last half of the year and for meeting temporary surges in international loan demand in the second and fourth quarters, including demands abroad for funds for bank balance sheet adjustments at yearend. Some of the temporary surges in demand were probably part of financing packages for mergers and acquisitions, both in the United States and abroad. In addition, as U.S. interest rates rose faster than foreign rates, rising short-term interest-rate differentials in favor of U.S. assets encouraged deposits in the United States, also mostly in the second and fourth quarters.

Most of the inflows were from own offices in the Caribbean and Western Europe, which increased $75.7 billion. These inflows were partly offset by a $42.3 billion decrease in inflows from parent banks in Japan to their U.S. branches, mostly in the first half of the year, as Japanese banks reduced their activity in the U.S. market.

U.S. banks' custody liabilities decreased $5.6 billion in 1999, mostly in the first half of the year, following an increase of $38.1 billion in 1998.

U.S. banks' liabilities payable in foreign currencies decreased $2.5 billion in 1999, following a decrease of $21.8 billion in 1998.

U.S. Treasury securities.--Transactions in U.S. Treasury securities shifted to net sales of $21.8 billion in 1999, the first year of net sales since 1990. In 1998, net purchases had dropped sharply to $46.2 billion from peak net purchases in 1997 and 1996 (table P and chart 11).

Several factors contributed to the shift to net sales. First, as confidence grew from the sustained strength of the U.S. economic growth and the renewed expansion of foreign economies throughout 1999 and as financial crises in Asia and Latin America waned, foreign investors moved from U.S. Treasury bonds to higher yielding U.S. Government agency bonds and U.S. and foreign corporate bonds, despite the higher risk. Second, U.S. Treasury bond prices fared considerably more poorly than corporate bond prices, and the large issuance of new U.S. Government agency and U.S. corporate bonds made up for reduced supplies of U.S. Treasury bonds that were retired with the large Federal budget surplus. Both of these factors more than offset a rise in yields on the benchmark 30-year U.S. Treasury bond of 139 basis points to 6.48 percent, its highest level in 2 years.

Net sales from Western Europe were $20.4 billion in 1999, in contrast to net purchases of $16.1 billion in 1998, marking the first time in 10 years that Western Europe had been net sellers of U.S. Treasury bonds. Net purchases from Asia totaled $17.6 billion, down from net purchases of $28.3 billion. The Caribbean, where many international bond hedge funds are located, was again a net seller in 1999; net sales totaled $12.7 billion, up from net sales of $7.6 billion. Trading activity in U.S. Treasury bonds--that is, gross purchases plus gross sales--decreased 17 percent in 1999, following an increase of 8 percent in 1998.

U.S. securities.--Net foreign purchases of U.S. securities other than U.S. Treasury securities were a record $325.9 billion in 1999, surpassing the previous record of $218.0 billion in 1998 by a large amount (table P, charts 11 and 14). Net foreign purchases have increased strongly every year since 1994.

Net foreign purchases of U.S. stocks were a record $94.9 billion, double net purchases of $47.5 billion in 1998. After a sharp dip in U.S. stock prices in the third quarter of 1998 as a consequence of uncertainties created by the Russian debt moratorium and to renewed concerns about emerging market economies, U.S. stock prices recovered quickly. In 1999, the S & P 500 stock index posted a 20-percent gain, the DJIA stock index gained 25 percent, and the NASDAQ, which is heavily weighted with technology and Internet stocks, gained 86 percent. Net foreign purchases both responded to, and contributed to, the rise. Western European purchases increased the most, to $89.5 billion from $65.2 billion, despite a concurrent sharp pickup in most European stock prices (chart 12). Trading activity in U.S. stocks increased 50 percent in 1999, following an increase of 60 percent in 1998.

Despite steeply falling bond prices, net foreign purchases of U.S. corporate and U.S. Government agency bonds were a record $231.0 billion, surpassing the 1998 record of $170.5 billion. As concerns about financial problems in developing countries subsided, foreign investors in the United States were less risk adverse and sought the high yields of U.S. corporate and U.S. Government agency bonds, often at the expense of purchases of U.S. Treasury securities. U.S. Treasury securities were in reduced supply as the U.S. Federal debt was repaid with budget surpluses, and they performed more poorly than U.S. corporate and U.S. Government agency bonds. Investors also benefited from a sizable interest-rate differential in favor of holding U.S. assets rather than foreign corporate and government instruments. Net foreign purchases of outstanding U.S. corporate bonds were a record $115.5 billion, up sharply from the 1998 record of $68.2 billion, and net foreign purchases of U.S. Government agency bonds were a record $73.7 billion, easily surpassing the 1998 record of $48.3 billion. Trading in U.S. bonds decreased 13 percent in 1999, following an increase of 87 percent in 1998.

New bond issues sold abroad by U.S. borrowers were $65.8 billion, down from $87.1 billion. Issues by banks and nonbank corporations and government agencies all slowed as a result of the rise in interest rates, mostly in fixed-rate issues. Issues denominated in dollars continued to dominate, though issues denominated in euros gained considerably in importance (table R).

U.S. currency flows.--Net U.S. currency shipments were $22.4 billion in 1999, up from $16.6 billion in 1998. Shipments to Eastern Europe weakened, but shipments to the Middle East, Asia, and Europe strengthened, in many cases reflecting concerns about exchange rate and financial instability in certain countries in those regions. Toward yearend, probably partly in response to concerns about disruptions from potential Y2K problems, countries who could afford to do so ordered additional currency, and some countries that typically return currency to the United States did so less rapidly.

Direct investment.--Net financial inflows for foreign direct investment in the United States were $282.5 billion in 1999, up from $193.4 billion in 1998 (table M). Net equity capital inflows increased by a very substantial amount to $215.8 billion from $154.2 billion; about half of the inflows were directly related to new foreign acquisitions of U.S. companies. The other half was the result of capital contributions to existing affiliates, which in some cases were used to finance acquisitions by the affiliates. The increase in equity inflows in 1999 follows an increase to $154.2 billion in 1998 from $64.7 billion in 1997, marking the second consecutive year of exceptionally large inflows. These inflows are another manifestation of the explosion in business consolidations and acquisitions that have occurred worldwide over the past 4 years. Net intercompany debt inflows were also substantially higher in 1999 at $40.7 billion, up from $26.4 billion, and reinvested earnings more than doubled to $26.0 billion from $12.8 billion, as manufacturing and "other" earnings were sharply higher.

Tables 1 through 10 follow.