Current Account Deficit Shrinks Less Than Expected

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The U.S. current account (search) deficit narrowed in the second quarter to $195.7 billion as government transfers declined and the surplus on services grew, Commerce Department (search) data showed on Friday, but the previous quarter's record deficit was revised even higher.

The quarterly shortfall, the second highest on record, compared with Wall Street forecasts for a deficit of $193.0 billion. The Commerce Department revised the first quarter gap to a record $198.7 billion versus a $195.1 billion deficit initially reported.

"Despite the fact that you had a narrowing on the quarter based on the first quarter being revised wider, the outlook really isn't that positive," Sophia Drossos, G10 currency strategist at Morgan Stanley in New York.

The current account, the broadest measure of U.S. trade with the rest of the world as it includes investment flows, ran at 6.3 percent of gross domestic product (search) in the second quarter compared with 6.5 percent in the previous three months, a Commerce Department official said.

Economists warn such levels represent a serious imbalance in the U.S. economy, reflecting high levels of U.S. consumption but an extremely low savings rate. This leaves foreign investors to finance the gap and is seen as an unsustainable in the long run.

The dollar has been plagued in recent years by concerns over the current account deficit, although it has appreciated from lows hit last year and has been steady in recent months.

"The expectation is that it (the gap) will continue to grow until there's more give from the Asian countries because most of their currencies are tied to the U.S. dollar," said Timothy Rogers, chief economist at in Boston.

Net foreign-owned assets (search) in the United States rose in the second quarter to $393.1 billion from $243.5 billion in the first quarter.

The second-quarter deficit reflects a slight increase in the goods deficit over the prior quarter of $600 million to $186.9 billion.

The department said imports of both petroleum and nonpetroleum products increased, and the increase in nonpetroleum products was mostly accounted for by a rise in capital goods.

The service surplus rose $325 million to $13.6 billion. Increases in government grants, private remittances and other transfers reduced net outflows of unilateral transfers by $4.4 billion to $21.9 billion in the second quarter.