The Economic Stakes of President Trump’s Immigration Policy

Summary

Podcast Summary: "The Economic Stakes of President Trump’s Immigration Policy"

Podcast Information:
Title: Thoughts on the Market
Host/Authors: Michael Gapen and Sam Coffin, Morgan Stanley
Episode: The Economic Stakes of President Trump’s Immigration Policy
Release Date: June 13, 2025

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Introduction

In this episode of Thoughts on the Market, Morgan Stanley's Chief U.S. Economist, Michael Gapen, and Senior Economist, Sam Coffin, delve into the economic ramifications of President Trump’s stringent immigration policies. The discussion centers on the impact of immigration reform on the U.S. labor market and its subsequent influence on Federal Reserve policy.

Recent Immigration Data: Border Encounters and Interior Removals

Michael Gapen opens the discussion by addressing recent administration data on border encounters and interior removals.

• Decline in Border Encounters:

  "What we saw at first was border encounters falling sharply to 30,000 a month from 200 or 300,000 a month last year. It was perhaps a surprise that they fell that sharply."
  — Sam Coffin [01:07]

• Challenges in Interior Removals:
  The administration's targets for interior removals have fallen short. While the goal was to remove 500,000 individuals annually (approximately 1,500 per day), current figures indicate only a third to half of that target is being met.

  "They'd been targeting maybe 500,000 per year in removals, 1,500 a day, and we're hitting a third or a half of that pace."
  — Sam Coffin [01:33]

Escalation in ICE Enforcement

The underperformance in interior removals appears to be prompting increased ICE raids. Gapen suggests that these escalations are a direct response to the administration's unmet removal targets.

• Increased Funding for ICE:
  The House budget reconciliation bill proposes an additional $155 billion for ICE, representing a significant boost over the current budget. This funding is allocated equally between stricter border enforcement and expanding ICE operations through new agents and enhanced operations.

  "It would be about a fivefold increase in funding."
  — Sam Coffin [02:08]

Impact on Visa Programs: CHNV Parole and TPS

The conversation shifts to two critical visa programs affected by the administration’s immigration controls: the CHNV parole program and Temporary Protected Status (TPS).

• CHNV Parole Program:
  This program has allowed approximately 500,000 Cubans, Haitians, Nicaraguans, and Venezuelans to enter the U.S. on parole. Following a recent Supreme Court ruling, the administration can now revoke these paroles.

  "We expect now that those 500,000 are probably removed from the country over the next six months or so."
  — Sam Coffin [03:21]

• Temporary Protected Status (TPS):
  About 800,000 individuals currently hold TPS. The administration plans to revoke approximately 600,000 of these statuses imminently, leading to deportations of a few hundred thousand within this year and the remainder the following year.

  "The result is net immigration probably falling to 300,000 people this year."
  — Sam Coffin [04:19]

Implications for Population Growth and Labor Force

The reduction in immigration is poised to significantly slow population growth and, by extension, labor force expansion.

• Declining Population Growth:
  Pre-pandemic population growth was at 0.5–0.75% annually. During peak immigration periods, this rate surged to approximately 1.25%. With current policies, expected population growth is projected to decrease to between 0.3% and 0.4% over the next few years.

  "Population growth before the pandemic was running half to three-quarter percent per year... it accelerates one, one and a quarter percent during the years of the fastest immigration."
  — Sam Coffin [04:34]

Labor Market Effects and Unemployment Rate Projections

The stagnation in labor force growth has direct implications for the unemployment rate and overall labor market health.

• Payroll Growth and Unemployment:
  Last year’s payroll growth of approximately 200,000 per month kept the unemployment rate steady. This year, payroll growth has slowed to 160-170,000 per month, maintaining the unemployment rate at 4.2%. With further reductions, payroll growth is expected to decrease to around 70,000 per month.

  "So much slower payrolls to hold the unemployment rate flat."
  — Sam Coffin [05:10]

• Unemployment Rate Projections:
  As payroll growth continues to wane, the unemployment rate is anticipated to inch up to 4.3% by year-end and potentially rise to 4.8% by the end of the next year.

  "We also expect weak payroll growth of about 50,000 a month, but the unemployment rate rising somewhat more to 4.8% by the end of the year."
  — Sam Coffin [06:45]

Potential Growth and Economic Outlook

Slower immigration is expected to exert downward pressure on the U.S. economy's potential growth.

• GDP Potential:
  Previously estimated between 2.5% and 3% from 2022-2024, potential GDP growth is now projected to decrease to around 2.0%, potentially falling further to 1.5% next year if current immigration trends continue.

  "We have it falling to about a point to 0.3%, 0.4% population growth over the next couple of years."
  — Sam Coffin [04:55]

Labor Force Participation and Chilling Effects

A notable decline in labor force participation was observed in the May job report, which may indicate underlying weaknesses in the labor market not immediately reflected in unemployment statistics.

• Chilling Effect on Undocumented Workers:
  The threat of increased deportations may discourage undocumented workers from participating in the labor force, causing a hidden contraction in labor market engagement.

  "It's possible that undocumented workers are stepping out of the workforce temporarily to avoid detection..."
  — Sam Coffin [08:36]

  This potential withdrawal could mean that the reported unemployment rate of 4.2% is masking deeper labor market vulnerabilities.

Federal Reserve Policy Implications

The interplay between immigration policy and economic indicators is expected to influence the Federal Reserve's actions regarding interest rates.

• Delayed Fed Response:
  With immigration controls contributing to slower labor force growth and subdued unemployment rate increases, the Fed may postpone discussions of interest rate cuts until 2026, contrary to earlier predictions of cuts starting in March of the following year.

  "This is why we think the Fed moves later, but ultimately cuts more. It's a combination of tariffs and immigration."
  — Sam Coffin [09:28]

  "Our baseline is that tariffs push inflation higher first... the Fed just stays on hold and it's not until the unemployment rate starts rising in 2026 that the Fed turns to cuts."
  — Michael Gapen [09:36]

Conclusion

Michael Gapen and Sam Coffin conclude by acknowledging the fluid nature of the current immigration policy landscape and its evolving economic implications. They emphasize the importance of monitoring policy developments closely, as changes could significantly alter economic forecasts and Federal Reserve strategies.

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Notable Quotes:

• Sam Coffin [01:07]: "What we saw at first was border encounters falling sharply to 30,000 a month from 200 or 300,000 a month last year. It was perhaps a surprise that they fell that sharply."

• Sam Coffin [02:08]: "It would be about a fivefold increase in funding."

• Sam Coffin [03:21]: "We expect now that those 500,000 are probably removed from the country over the next six months or so."

• Michael Gapen [09:36]: "Our baseline is that tariffs push inflation higher first... the Fed just stays on hold and it's not until the unemployment rate starts rising in 2026 that the Fed turns to cuts."

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This comprehensive summary encapsulates the critical discussions from the podcast episode, providing insights into how President Trump’s immigration policies are reshaping the U.S. economy, labor market dynamics, and Federal Reserve policies.

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 shift in immigration policies. In particular, we'll focus much of our attention on the influence that immigration reform is having on the US labor market and what it means for our outlook on Federal Reserve policy. It's Friday, June 13th at 9:00am 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 30,000amonth from 2 or 300,000amonth 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 US and stepped up enforcement on interior removals. So. 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 US 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 US Are no longer present. So these would be immigrants coming to the US 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 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 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 expect 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 half to three quarter percent per year. With the large increase in immigration, it accelerated one, one and a quarter percent during the years of the fastest immigration. At this point it falls by about a point to 0.3%, 0.4% 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 200,000amonth in payroll growth was consistent with a flat unemployment rate. So far this year that's fallen to 160, 170,000amonth, consistent with a flat unemployment rate. With further reduction in labor force growth, it would probably decline to about 70,000amonth. 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. 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 140,000amonth and the unemployment rate's been going sideways at 4.2%. 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 to around 50,000amonth by late in the year, but the unemployment rate going sideways 4.3% this year. Because of that decline in break even payrolls for next year. We also have weak payroll growth. We also expect weak payroll growth of about 50,000amonth, but the unemployment rate rising somewhat more to 4.8% 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 is 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% growth in 2022-2024, but we have it falling to 2.0% 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% next year.

[Michael Gapen]

That's a big change, of course, from where the economy was just 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 and went down 2:10 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% 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% 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. Thank you very much and 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.

[C]

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