Macro Signposts | 11 June 2024

I would like to thank Libby Cantrill, head of public policy, and Graeme Westwood, economist, for their insights and contributions to this edition.

Unless explicitly stated, views expressed do not constitute official PIMCO views.

Stricter Immigration Policies Likely to Weigh on U.S. Growth

The Biden administration's recent executive order to secure the southern border could have far-reaching economic implications. By slashing annual immigration by potentially over one million people, this policy could trim U.S. GDP by up to half a percentage point this year and heighten the likelihood of the Federal Reserve initiating a series of rate cuts later in 2024.

Issued on June 4, the order aims to cut annual immigration from 3 million people in 2023 to between 1.6 and 2.2 million, based on our analysis of the statement and data from U.S. Customs and Border Protection (CBP). It seeks to achieve this by restricting asylum eligibility for individuals who cross the southern border between ports of entry and tightening the standards for initial asylum screenings.

In our 15 November 2023 Macro Signposts, we suggested that immigration in 2023 may have bolstered U.S. GDP growth by 0.5 to 1.0 percentage points through increased consumption and government spending. The new policy, if implemented, could reduce 2024 GDP growth by 0.3 to 0.5 percentage points, lowering our forecast to 1.5%–1.7% (Q4/Q4).

The implications for U.S. inflation are more ambiguous, as immigration tends to augment both economic demand and supply. For instance, with higher immigration we might observe downward wage pressure in lower-skilled service jobs but upward pressure on rental inflation in some areas. Overall, we believe slower, below-trend real GDP growth from this policy is likely to bolster the Federal Reserve's confidence that inflation is returning to the 2% target, bolstering our view that policy rate cuts will start later this year, despite what has been a stickier U.S. inflation path year to date.

Key provisions of the executive order
The order states that once the number of migrant encounters at the southern border reaches a certain average daily threshold (2,500), the government will take "enhanced actions" to screen for asylum eligibility, which aims to increase the government's ability to quickly process the influx of people. This means fewer people will be allowed to stay within the country while they await interviews and eventual court hearings.

Daily southern border encounters between points of entry so far this year have averaged around 4,400 per day, according to CBP data, so the enhanced action will apply immediately.

Figure 1: Migrants seeking to enter the U.S., by month

Chart01

Source: U.S. Customs and Border Protection data as of April 2024

Through April of this year, border agents also reported an average of 250,000 people per month seeking to enter the U.S. at and between all U.S. points of entry (see Figure 1). Of that total, the southern border accounted for around 180,000 per month. Many of these immigrants lack legal immigrant status but claim asylum at authorized points of entry, prompting further screenings to assess their asylum claims.

Similarly, individuals who cross the border between ports of entry and are apprehended by an agent can also claim asylum. In the past, these individuals awaited initial asylum screenings in holding centers. However, after the influx of immigrants overwhelmed the system, agents started releasing these individuals into the U.S. to await court hearings, which can take years due to the currently enormous backlog of cases. During this waiting period, migrants are eligible to apply for work permits, and while waiting for these permits, individuals consume goods and services.

Under the new executive order, if agents don't believe immigrants have a strong case, they will face the "expedited removal" process, bypassing the usual "fear screening" interviews completed by government asylum officers. Immigrants can still appeal, but the appeal process goes into an expedited court review within a week. Altogether, the policy would meaningfully reduce the monthly flow of immigrants allowed to stay while awaiting asylum processing and court hearings, and could reduce overall immigration by 25% to 45%.

There are legal and logistical obstacles to implementing the new policy. Human rights advocacy groups may litigate, potentially suspending implementation. There are also current government resource constraints, although there is precedent for large numbers of expedited removals under Title 42, which limited border crossings during the COVID-19 pandemic (this order was subsequently deemed unlawful).

Impact on U.S. growth
In our 15 November 2023 Macro Signposts, we estimated that the additional immigration may have increased 2023 U.S. GDP growth by 0.5 to 1.0 percentage points (see Figure 2). Our estimate was a simple back-of-the-envelope calculation based on the estimated additional labor supply and potential associated productivity. However, looking at simple correlations between quarterly real GDP growth and the change in border encounters from the end of 2021 through the end of 2023 (see Figure 3) suggests that immigration boosted growth (and specifically both consumption and government spending growth) not only in theory but also in practice.

Figure 2: U.S. real GDP growth and estimated impulse from immigration

Chart02

Source: U.S. Customs and Border Protection, U.S. Bureau of Economic Analysis, PIMCO calculations; data as of 1Q 2024 with estimates through 3Q 2024. Real GDP growth is quarter-over-quarter, seasonally adjusted annual rates.

Figure 3: Real GDP growth measured against percentage growth in immigrants entering U.S.

Chart03

Source: U.S. Customs and Border Protection, U.S. Bureau of Economic Analysis, PIMCO calculations; data from Q4 2021 through Q4 2023. Dotted line indicates trend.

Before this month's executive order, immigration had already been slowing, partly because the Biden administration previously encouraged Mexico to limit border crossings. In our 22 May 2024 Macro Signposts, we said this could slow U.S. real GDP growth from roughly 3% in 2023 to 2% in 2024. Assuming the U.S. has sufficient logistical capacity and it withstands legal challenges, the order could result in an additional drag on U.S. real growth in the second half of this year and into 2025.

Our calculations suggest lower immigration could take 0.3 to 0.5 percentage points off our prior 2024 real GDP growth forecast – reducing it from 2% to 1.5%–1.7% (Q4/Q4). While this might not seem meaningful, it implies sequential quarterly growth could slow to a below-trend 1%–1.5% annualized pace in the second half of this year – a notable slowing from the 4.7% pace in the third quarter of 2023.

Impact on inflation
The executive order's impact on inflation is more complex. For immigration to moderate inflation, broadly speaking, it needs to add more to the supply side of the equation (labor supply, output, or productivity) than to the demand side (consumption of goods and services, including housing). While many immigrants affect both sides, many others are limited to the demand side:

The effects are likely to vary across sectors depending on the match between immigrant skills and sectoral labor demand, and the ability for sectoral supply to respond to stronger demand. For example, while there is some evidence that more labor supply eased worker shortages in the leisure services industry, elevated immigration could have driven inflationary pressures in regional rental markets where housing supply could not respond quickly.

Impact on the economy – and the Fed
We think it has been underappreciated just how much the higher level of immigration boosted U.S. real GDP growth last year. As a result, we also think it will be underappreciated how a material reduction in those flows could drag on growth this year, and into 2025.

We believe the U.S. economy is currently growing solidly, and the labor market remains healthy. However, the net effect of immigration policies could push real GDP growth below trend in the second half of 2024. While this might not have a large net impact on inflation, which we expect to remain above the Fed's target, quickly decelerating growth would likely make Fed officials more confident about lowering rates later this year, and continuing with a string of rate cuts next year.

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