The Commerce Department said Thursday that the deficit in the current account narrowed by 1.3 per cent to $118 billion in the April-June quarter, the smallest imbalance since the final three months of 2010.
The current account is the broadest measure of America's financial dealings with the world because it covers not only trade in goods but also services such as air travel and investment flows between nations.
The improvement from the first quarter, when the deficit totalled $119.6 billion, came from an increase in the surplus on services, reflecting higher payments by foreigners for travel services such as airline fares, and in the category that tracks investment flows. The surplus in services rose $45.4 billion, up from a surplus of $42.3 billion in the first quarter. The surplus on investment incomes also increased, rising to $61.1 billion in the second quarter from $52.7 billion in the January-March quarter.
These gains offset an increase in the goods deficit, which rose to $190.4 billion, up from $182.2 billion in the first quarter. The increase in the goods deficit was led by a rise in the foreign oil bill, reflecting the fact that global oil prices were climbing in the second quarter of the year in response to political unrest in the Middle East and North Africa.
The deficit in unilateral transfers, a category that covers U.S. foreign aid payments, increased to $34.2 billion in the April-June quarter from $32.3 billion in the first three months of the year, reflecting higher U.S. assistance payments in the spring.
Economists at JPMorgan Chase are forecasting that the current account deficit will increase this year to $621 billion. That would be a 32 per cent jump from last year's deficit of $470.9 billion.
The current account deficit hit an all-time high of $800.6 billion in 2006 and then shrank sharply as the 2007-2009 recession cut into demand for imports. But it began rising again after the recession ended.
Economists closely watch the current account because it is an indicator of how much the United States needs to borrow from foreigners. The current account measures not only the flow of goods and services but also investment flows and foreign aid payments.
The JPMorgan economists believe that the current account deficit as a percentage of the total economy will rise to 4.1 per cent this year and stabilize around that level in 2012. The current account represented 3.2 per cent of the economy in 2010.
While economists had been hoping that U.S. exports would continue to show solid gains in coming quarters, that forecast has been thrown into doubt by a global economic slowdown, led by weakness in the United States.
The U.S. economy has struggled this year with a spike in energy prices, supply disruptions caused by the Japanese natural disasters in March and more recently turbulent stock markets as investors have grown more concerned about the impact the European debt crisis will have on the global economy.