Our Chief U.S. Economist Michael Gapen discusses the possible
economic implications of restrictive immigration policies in the
U.S., highlighting their potential effect on growth, inflation
and labor markets.
----- Transcript -----
Welcome to Thoughts on the Market. I’m Michael Gapen, Morgan
Stanley’s Chief U.S. Economist. Today I’ll talk about the way
restrictive immigration policies could potentially slow U.S.
economic growth, push up inflation, and impact labor markets.
It’s Wednesday, February 26th, at 2pm in New York.
Lately, investors have been focused on the twists and turns of
Trump’s tariffs. Several of my colleagues have discussed the
issue of tariffs from various angles on this show. But we think
the new administration’s immigration policy deserves more
attention.
Immigration is more than just the entry of foreign citizens into
the U.S. for residency. It's a complex process with significant
implications for our economy. According to the Bureau of Labor
Statistics, as of June 2024, 19 per cent of the US workforce was
made up of immigrants – which is over 32 million people. This is
a significant increase from 1994, when only about 10 per cent of
the workforce was foreign-born. Immigrants tend to be employed in
sectors like agriculture, construction and manufacturing, but
also in face-to-face services sectors like retail, restaurants,
hotels and healthcare.
Immigration surged to about 3 million per year after the
pandemic. In fact, immigration rates in 2022 to 2024 were more
than twice the historical run rate. This surge helped the US
economy to "soft land" following a period of high inflation. It
boosted both the supply side and the demand side of the U.S.
economy. Labor force growth outpaced employment, which helped to
moderate wage and price pressures.
However, Trump’s policymakers are changing the rules rapidly and
reversing the immigration narrative. Already by the second half
of 2024, border flows were slowing significantly based on the
lagged effects of steps previously taken by the Biden
administration. Under the new administration, news reports
suggest immigration has slowed to near zero in recent weeks.
In our 2025 year-ahead outlook, we noted that restrictive
immigration policies were a key factor in our prediction for
slower growth and firmer inflation. We estimate that immigration
will slow from 2.7 million last year to about 1 million this year
and 500,000 next year. The recent data suggests immigration may
slow every more forcefully than we expect.
If immigration slows broadly in line as we predict, the result
will be that population growth in 2025 will be about 4/10ths of 1
per cent. That’s less than half of what the U.S. economy saw in
2024. The impact of slower immigration on labor force measures
should be visible over time. For the moment though, there is
enough noise in monthly payrolls and the unemployment rate to
mask some of the labor force effects. But over three or six
months, the impact of slower immigration should become clearer.
In terms of economic growth, if immigration falls back to 1
million this year and 500,000 next year, this could reduce the
rate of GDP growth by about a-half a percentage point this year
and maybe even more next year, and put upward pressure on
inflation, particularly in services, and to some extent overall
wages. Slower immigration could pull short-run potential GDP
growth down from the 2.5-3.0 per cent that we saw in recent years
to 2 per cent this year, and 1-1.5 per cent next year.
On the other hand, the unemployment rate might fall modestly as
immigration controls reduce the number of households with high
participation rates and low spending capacity. This could lead to
tighter labor markets, moderately faster wage growth, and upward
pressure on inflation. So we think we are looking at a two-speed
labor market. Slower employment growth will feel soft and
sluggish. But a low unemployment rate suggests the labour market
itself is still tight.
Given all of this, we think more restrictive immigration policies
could lead to tighter monetary policy and keep the Fed on its
currently restrictive stance for longer. All of this supports our
expectation of just one cut this year and further rate cuts only
next year after growth slows.
Thanks for listening. If you enjoy the show, please leave us a
review wherever you listen and share Thoughts on the Market with
a friend or colleague today.
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