Meet the Author

Owen F. Humpage |

Senior Economic Advisor

Owen F. Humpage

Owen F. Humpage is a senior economic advisor specializing in international economics in the Research Department of the Federal Reserve Bank of Cleveland. His research focuses on the international aspects of central-bank policies and has appeared in the International Journal of Central Banking, the International Journal of Finance and Economics, and the Journal of Money, Credit, and Banking. Recently, Dr. Humpage co-authored a history of U.S. foreign-exchange operations.

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Meet the Author

Michael Shenk |

Research Assistant

Michael Shenk

Michael Shenk was formerly a research assistant in the Research Department of the Federal Reserve Bank of Cleveland. His work focused on international topics and housing-market indicators.


Economic Trends

The Ups and Downs of Current-Account Deficits

Owen F. Humpage and Michael Shenk

After reaching a record deficit of nearly $825 billion (annual rate) or 6½ percent of GDP in the fourth quarter of 2005, the U.S. current–account deficit has since narrowed. By and large, our current–account balance reflects trade patterns, with a deficit indicating that the United States imports more goods than it exports. The connection between current–account deficits and trade patterns, however, does not mean that Americans spend too much and save too little. Maybe America is just a good place to invest.

Over the past 25 years, different underlying developments have contributed to the U.S. current-account deficit. Some of these developments reflected trade decisions; some reflected investment decisions. Between 1995 and 2002, for example, the U.S. current–account deficit rose from roughly 2 percent of GDP to slightly more than 4 percent of GDP because of an influx of global savings. America was a good place to invest. As foreigners sought dollar–denominated investments in the United States, they bid up the dollar’s exchange value. The dollar appreciated on a real (inflation adjusted) basis, raising the foreign–currency prices of U.S. goods, lowering the dollar prices of foreign goods, and thereby shifting worldwide demand away from U.S. goods and services. This pattern seemed to end with the dot–com bust in 2001.

The U.S. current–account deficit, however, continued to grow as a percent of GDP until it reached its 2005 high. This expansion reflected strong U.S. aggregate demand growth after the 2001 recession. As U.S. residents bought foreign goods and services, they supplied dollars to the exchange market and bought foreign currencies. The dollar depreciated on a real basis against the currencies of our major trading partners. The dollar’s depreciation increased the attractiveness of investing in the United States, but trade decisions were the driving force.

Beginning in 2005, foreign investors became increasingly reluctant to hold dollar–denominated assets. As investment flows into dollar assets slowed, the dollar depreciated on a real basis. The depreciation shifted world demand, which at the time was going gangbusters, to U.S. products. The current–account deficit narrowed to just below 5 percent in the first three quarters of 2008. Once again, investment decisions held sway.

All–encompassing explanations for the various levels of the U.S current–account deficit, like “Americans spend too much,” rarely offer much traction. Current–account and exchange–rate patterns reflect myriad and changing economic decisions.