Number: RL33186
Title: Is the U.S. Current Account Deficit Sustainable?
Authors: Marc Labonte, Government and Finance Division 
Abstract: America's current account (CA) deficit (the trade deficit plus net income payments and net unilateral transfers) has been rising as a share of gross domestic product (GDP) since 1991. The CA deficit reached a record high of 6.1% of GDP in 2005, where it remained in 2006. The CA deficit is financed by foreign capital inflows. Many observers have questioned whether such large inflows are sustainable and expressed concern about the economic impact should foreign capital inflows decline rapidly. Some fear that a rapid decline in the CA deficit could cause a recession because, presumably, a decline in the CA deficit would trigger a sharp drop in the value of the dollar and a rise in interest rates (which could lower asset values). However, economic theory and empirical evidence suggest that the most likely scenario is a slow decline in the CA deficit, which would not greatly disrupted economic activity because production in the trade sector would be stimulated.
Pages: 12
Date: December 3, 2007