Our economists Michael Gapen and Sam Coffin discuss how a drop in
immigration is tightening labor markets, and what that means for
the U.S. economic outlook and Fed policy.
Read more insights from Morgan Stanley.
----- Transcript -----
Michael Gapen: Welcome to Thoughts on the
Market. I'm Michael Gapen, Morgan Stanley's Chief U.S. Economist.
Sam Coffin: And I'm Sam Coffin, Senior
Economist on our U.S. Economics research team.
Michael Gapen: Today we're going to have a
discussion about the potential economic consequences of the
administration’s shift in immigration policies. In particular,
we’ll focus much of our attention on the influence that
immigration reform is having on the U.S. labor market. And what
it means for our outlook on Federal Reserve policy.
It's Friday, June 13th at 9am in New York.
So, Sam, news headlines have been dominated by developments in
the President's immigration policies; what is being called by, at
least some commentators, as a toughening in his stance.
But I'd like to set the stage first with any new information that
you think we've received on border encounters and interior
removals. The administration has released new data on that
recently that covered at least some of the activity earlier this
year. What did it tell you? And did it differ markedly from your
expectations?
Sam Coffin: What we saw at first was border
encounters falling sharply to 30,000 a month from 200,000 or
300,000 a month last year. It was perhaps a surprise that they
fell that sharply. And on the flip side, interior removals turned
out to be much more difficult than the administration had
suggested. They'd been targeting maybe 500,000 per year in
removals, 1500 a day. And we're hitting a third or a half of that
pace.
Michael Gapen: So maybe the recent
escalation in ICE raids could be in response to this, right? The
fact that interior removals have not been as large as some in the
administration would desire.
Sam Coffin: That's correct. And we think
those efforts will continue. The House Budget Reconciliation
Bill, for example, has about $155 billion more in the budget for
ICE, a large increase over its current budget. This will likely
mean greater efforts at interior removals. About half of it goes
to stricter border enforcement. The other half goes to new agents
and more operations. We'll see what the final bill looks like,
but it would be about a five-fold increase in funding.
Michael Gapen: Okay. So much fewer
encounters, meaning fewer migrants entering the U.S., and
stepped-up enforcement on interior removals. So, I guess,
shifting gears on the back of that data. Two important visa
programs have also been in the news. One is the so-called CHNV
Parole Program that's allowed Cubans, Haitians, Nicaraguans, and
Venezuelans to enter the U.S. on parole. The Supreme Court
recently ruled that the administration could proceed with
removing their immigration status.
We also have immigrants on TPS, or Temporary Protected Status,
which is subject to periodic removal; if the administration
determines that the circumstances that warranted their
immigration into the U.S. are no longer present. So, these would
be immigrants coming to the U.S. in response to war, conflict,
environmental disasters, hurricanes, so forth.
So, Sam, how do you think about the ramping up of immigration
controls in these areas? Is the end of these temporary programs
important? How many immigrants are on them? And what would the
cancellation of these mean in terms of your outlook for
immigration?
Sam Coffin: Yeah, for CHNV Paroles, there
are about 500,000 people paroled into the U.S. The Supreme Court
ruled that the administration can cancel those paroles. We expect
now that those 500,000 are probably removed from the country over
the next six months or so. And the temporary protected status;
similarly, there are about 800,000 people on temporary protected
status. About 600,000 of them have their temporary status revoked
at this point or at least revoked sometime soon. And it looks
like we'll get a couple hundred thousand in
deportations out from that program this year and the
rest next year.
The result is net immigration probably falling to 300,000 people
this year. We'd expected about a million, when we came into this
year, but the faster pace of deportation takes that down. So,
300,000 this year and 300,000 next year, between the reduction in
border encounters and the increase in deportations.
Michael Gapen: So that's a big shift from
what we thought coming into the year. What does that mean for
population growth and growth in the labor force? And how would
this compare – just put it in context from where we were coming
out of the pandemic when immigration inflows were quite large.
Sam Coffin: Yeah. Population growth before
the pandemic was running 0.5 to 0.75 percent per year. With the
large increase in immigration, it accelerated 1-1.25 percent
during the years of the fastest immigration. At this point, it
falls by about a point to 0.3-0.4 percent population growth over
the next couple of years.
Michael Gapen: So almost flat growth in the
labor force, right? So, translate that into what economists would
call a break-even employment rate. How much employment do you
need to push the unemployment rate down or push the unemployment
rate up?
Sam Coffin: Yeah, so last year – I mean, we
have the experience of last year. And last year about 200,000 a
month in payroll growth was consistent with a flat unemployment
rate. So far this year, that's full on to 160,000-170,000 a
month, consistent with a flat unemployment rate. With further
reduction in labor force growth, it would probably decline to
about 70,000 a month. So much slower payrolls to hold the
unemployment rate flat.
Michael Gapen: So, as you know, we've taken
the view, Sam, that immigration controls and restrictions will
mean a few important things for the economy, right? One is fewer
consuming households and softening demand, but the foreign-born
worker has a much higher participation rate than domestic
workers; about 4 to 5 percentage points higher.
So, a lot less labor force growth, as you mentioned. How have
these developments changed your view on exactly how hard it's
going to be to push the unemployment rate higher?
Sam Coffin: So, so far this year, payrolls
have averaged about 140,000 a month, and the unemployment rate's
been going sideways at 4.2 percent. It's been going sideways
since – for about nine months now, in fact. We do expect that
payroll growth slows over the course of this year, along with the
slowing in domestic demand. We have payroll growth falling around
50,000 a month by late in the year; but the unemployment rate
going sideways, 4.3 percent this year because of that decline in
breakeven payrolls.
For next year, we also have weak payroll growth. We also expect
weak payroll growth of about 50,000 a month. But the unemployment
rate rising somewhat more to 4.8 percent by the end of the year.
Michael Gapen: So, immigration controls
really mean the unemployment rate will rise, but less than you
might expect and later than you might expect, right? So that's I
guess what we would classify as the cyclical effect of
immigration.
But we also think immigration controls and a much slower growth
in the labor force means downward pressure on potential. Where
are we right now in terms of potential growth and where's that
vis-a-vis where we were? And if these immigration controls go
into place, where do we think potential growth is going?
Sam Coffin: Well, GDP potential is measured
as the sum of productivity growth and growth in trend hours
worked. The slower immigration means slower labor force growth
and less capacity for hours. We estimated potential growth
between 2.5 and 3 percent growth in 2022 to 2024. But we have it
falling to 2.0 percent presently – or back to where it was before
COVID. If we're right on immigration going forward and we see
those faster deportations and the continued stoppage at the
border, it could mean potential growth of only 1.5 percent next
year.
Michael Gapen: That’s a big change, of
course, from where the economy was just, you know, 12 to 18
months ago. And I'd like to circle back to one point that you
made in bringing up the recent employment numbers. In the May job
report that was released last week, we also saw a decline in
labor force participation. It went down two-tenths on the month.
Now, on one hand that may have prevented a rise in the
unemployment rate. It was 4.2 but could have been maybe 4.5
percent or so – had the participation rate held constant. So
maybe the labor market weakened, and we just don't know it yet.
But you have an idea that you've put forward in some of our
reports that there might be another explanation behind the drop
in the participation rate. What is that?
Sam Coffin: It could be that the threat of
increased deportations has created a chilling effect on the
participation rate of undocumented workers.
Michael Gapen: So, explain to listeners
what we mean by a chilling effect in participation, right? We're
not talking about restricting inflows or actual deportations.
What are we referring to?
Sam Coffin: Perhaps undocumented workers
step out of the workforce temporarily to avoid detection, similar
to how people stayed out of the workforce during the pandemic
because of fear of infection or need to take care of children or
parents. If this is the case, some of the foreign-born population
may be stepping out of the labor force for a longer period of
time.
Michael Gapen: Right. Which would mean the
unemployment rate at 4.2 percent is real and does not mask
weakness in the labor market. So, whether it's less in migration,
more interior removals, or a chilling effect on participation,
then the labor market still stays tight.
Sam Coffin: And this is why we think the
Fed moves later but ultimately cuts more. It's a combination of
tariffs and immigration.
Michael Gapen: That's right. So, our
baseline is that tariffs push inflation higher first, and so the
Fed sees that. But if we're right on immigration and your
forecast is that the unemployment rate finishes the year at 4.3,
then the Fed just stays on hold. And it's not until the
unemployment rate starts rising in 2026 that the Fed turns to
cuts, right. So, we have cuts starting in March of next year. And
the Fed cutting all the way down to 250 to 275.
Well, I think altogether, Sam, this is what we know now. It's
certainly a fluid situation. Headlines are changing rapidly, so
our thoughts may evolve over time as the policy backdrop evolves.
But Sam, thank you for speaking with me.
Sam Coffin: Thank you very much.
Michael Gapen: And thanks for listening. If
you enjoy the show, please leave us a review wherever you listen
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today.
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