The U.S. current account balance has had a remarkable turnaround over the past eight years. In mid-2006 the deficit peaked at about $858 billion, or more than 6 percent of gross domestic product. Since then, it has plunged to $325 billion, or less than 2 percent of GDP. What happened?
One popular explanation is shale oil. After all, the U.S. now exports more oil to the rest of the world than it imports from the Organization of Petroleum Exporting Countries -- something that hasn't happened in more than four decades.
But oil turns out to have been relatively unimportant, since the collapse in net oil imports by volume was canceled out by the huge increase in prices.
I broke down the total change in the current account balance since 2005 into four categories: net trade in petroleum and petroleum products, net trade in all other goods, net trade in services, and everything else.
Two forces stand out: an increase in net exports of services and a massive improvement in the dividend and interest payments we get from the rest of the world relative to the dividends and interest payments we pay to overseas investors.
About a third of the total improvement in the net services balance came from tourism and passenger fares. Revenue from foreign visitors has almost doubled since 2005, while U.S. spending abroad has only grown by about a third. Coming in second place were royalty fees on intellectual property, while financial services excluding insurance came in third. Together, those three categories explain about 76 percent of the total increase in net exports of U.S. services.
The odd thing, though, is what has happened to income payments. In 2005, Americans owned $2 trillion fewer assets abroad than foreigners held in the U.S. and collected about $68 billion in net income. By the end of 2013 foreigners owned $4.7 trillion more U.S. assets than Americans held abroad, yet we managed to earn $258 billion more on our investments than we paid out to the rest of the world. The implication is that Americans are better investors (on average) than people in other countries, and have improved over time.
What's the secret? Americans tend to buy high-paying equity stakes while overseas investors buy debt, often low-yielding U.S. Treasury bonds.
Shale is becoming increasingly important, however. Since the start of 2012, the current account deficit has narrowed by $158 billion, of which $133 billion came from an improvement in the oil trade balance.
(Matthew C. Klein is a writer for Bloomberg View. Follow him on Twitter at @M_C_Klein.)
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