Macro Signposts |12 February 2025
U.S. Labor Market Faces Tighter Immigration Policy
The U.S. labor market has been a pillar of economic strength in the post-pandemic era, largely due to a swift economic recovery – and a surge in immigrant workers. However, immigration has slowed significantly since June 2024, when the Biden administration tightened asylum eligibility. This trend is expected to continue under the Trump administration. A closer look at recent Trump administration policy announcements has us concerned about the risk of a more material slowing in U.S. labor markets that could also weigh on overall growth, although the implications for inflation and the unemployment rate are likely to be much less pronounced.
At the Federal Reserve, officials have signaled they expect to be on hold until they see clearer indications that inflation is moving back toward their 2% target after progress stalled last year. The resilience of the U.S. economy entering 2025, the downward adjustment already made in the fed funds rate, and the heightened policy uncertainty that according to Fed officials has raised inflation risks on net have all contributed to the Fed's shift in its forward guidance to a watch-and-wait approach.
The economic implications of the immigration policy announcements present a conflicting set of signals for the Fed. Indeed, the Fed would likely be alert to any material downshift in labor market activity and real GDP growth as signals that downside economic risks have grown. However, with inflation likely to remain sticky, and with a muted potential impact on the unemployment rate, there are real questions as to how the Fed would respond. Overall, we suspect that the loss of economic momentum later this year could be a catalyst for the market to price the risk of more cuts even if the Fed's eventual reaction is somewhat more muted.
Immigration and the U.S. economy
Over the past few years, we've highlighted how immigration has had a meaningful and likely underappreciated impact on the U.S. economy (see the 15 November 2023 Macro Signposts: "Immigration: a Remedy for Inflation?"). Immigrants have raised the U.S. population by 2.5 million to 3 million annually from 2022 through 2024, and an estimated 60% of these individuals have secured jobs in that time. Our analysis suggests that this raised the monthly average net job gains by about 100,000 and raised real GDP growth by about 0.5 to 1.0 percentage points, which amounted to near-term potential growth of 2.3%–2.8% annually, compared with the Fed's 1.8% long-run median estimate.
Immigration also likely drove the differing counts of net employment gains between the two U.S. labor market surveys (household and establishment) over the past few years. Indeed, before the additional migrants were included in the revised household population data in January 2025, the household survey was undercounting total job creation by around 2.2 million. The establishment survey better captured the influx in real time.
The positive labor market and real GDP growth impact likely occurred with very little aggregate impact on inflation, because a surge in immigration boosted both labor supply and demand. Having said that, we see evidence of elevated shelter inflation in the cities where immigrant populations increased most dramatically (New York, Los Angeles, Chicago, etc.), while wage inflation in specific sectors – construction, food, and accommodation – may have moderated (see 25 June 2024 Macro Signposts: "Could Declining Immigration Ease U.S. Shelter Inflation?").
Cloudier outlook ahead
Tighter U.S. immigration policy could not only moderate the economic effects of higher immigration seen over the past few years, but potentially reverse some of them.
Since the Biden administration's June 2024 executive order to secure the southern border, migrant flows have fallen from a roughly 250,000 monthly pace to below 90,000. However, given the backlogs in processing worker permits, we haven't seen a corresponding slowdown in immigrants applying for work permits, the government granting them, or individuals flowing into the U.S. labor market – factors that have likely delayed or to some degree mitigated the impact on real GDP and payroll growth that we've previously discussed (see the 11 June 2024 Macro Signposts: "Stricter Immigration Policies Likely to Weigh on U.S. Growth").
Trump administration policies could change that, raising the risk of a more imminent labor market slowdown. Federal authorities are enforcing stricter immigration laws in several major cities, scrutinizing work permits, and shutting down key features of the CBP One app, which allows migrants to schedule virtual asylum appointments. Last week the Trump administration announced it has removed Venezuela from the Temporary Protected Status (TPS) program, which could revoke an estimated 500,000 work permits in April and September when the current programs are set to expire. Efforts to further slow or stop the processing of asylum claims and applications for work permits for the approximately 1 million asylum-seekers whose applications are pending could affect reported job growth relatively soon.
Complicated risks for the economy
Policies to further restrict immigration could reduce monthly payroll growth materially, in our view. Average monthly payroll gains were 180,000 in 2024, of which we estimate 100,000 were related to elevated immigration. We could also see the 2.5% real GDP growth pace in 2024 downshift to 2% in 2025 as the boost from immigration fades.
Counterintuitively, these policies might not raise the unemployment rate as much as we would normally expect. Immigration affects both labor demand and supply, and immigrant populations tend to have structurally higher levels of unemployment due to temporary jobs and labor market churn. The influx of immigrants likely contributed to the moderate rise in the U.S. unemployment rate since mid-2023. Thus, the unemployment rate may not rise much from its current level, barring a bigger economic disruption.
Also, in contrast to commentators who frequently suggest that slower immigration could push inflation higher, our view is that a weaker labor market and slower growth may have little impact on aggregate inflation. Shelter inflation is likely set to slow, but wage inflation could pick up in sectors that rely heavily on an immigrant workforce.
Implications for the Fed
Immigration has provided an underappreciated boost to the U.S. economy over the last several years, and changes in immigration policy now present risks of a more meaningful slowing. Inflation, which remains above the Fed's target, may see limited net impact, which all else equal would tend to keep the Fed cautious about additional rate cuts.
However, a slowing labor market, combined with generally higher policy uncertainty under the Trump administration, could raise near-term perceptions of downside economic risks, and potentially prompt the market to price in more Fed rate cuts. The Fed, looking to strike a balance among the many risks and uncertainties facing the U.S. economy, may ultimately be less reactive to the downside growth risks than usual, but that might not stop the markets from pricing them.
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