Podcast Summary: The Impact of Shifting Immigration Policy

Podcast Title: Thoughts on the Market
Host/Author: Morgan Stanley
Episode Title: The Impact of Shifting Immigration Policy
Release Date: February 26, 2025

Introduction

In this episode of Thoughts on the Market, Michael Gapen, Morgan Stanley's Chief U.S. Economist, delves into the repercussions of the current administration's restrictive immigration policies. He discusses how these changes could potentially slow U.S. economic growth, elevate inflation, and reshape labor markets. Released on February 26, 2025, the episode provides a comprehensive analysis of immigration trends and their broader economic implications.

The Significance of Immigration in the U.S. Economy

Michael Gapen begins by emphasizing the pivotal role of immigrants in the U.S. workforce. "Immigration is more than just the entry of foreign citizens into the US for residency. It's a complex process with significant implications for our economy," he states (00:35). As of June 2024, immigrants comprised 19% of the U.S. workforce, accounting for over 32 million people—a substantial increase from 10% in 1994.

Key Sectors Influenced by Immigrants:

• Agriculture
• Construction
• Manufacturing
• Face-to-Face Services (e.g., retail, restaurants, hotels, healthcare)

Gapen highlights that immigrants are integral to sectors that are labor-intensive and essential for economic functioning.

Surge in Immigration Post-Pandemic

The post-pandemic period saw a surge in immigration, with numbers reaching approximately 3 million per year between 2022 and 2024—more than double the historical average. This influx played a crucial role in stabilizing the U.S. economy after a period of high inflation. Gapen notes, "The 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 US Economy" (02:15).

Economic Benefits of the Immigration Surge:

• Labor Force Growth: Outpaced employment rates, helping to moderate wage and price pressures.
• Economic Demand: Increased consumer spending supported various industries.

Shift to Restrictive Immigration Policies

Under the new administration, there's been a noticeable reversal in immigration trends. Gapen observes, "Trump's policymakers are changing the rules rapidly and reversing the immigration narrative" (03:10). By the second half of 2024, border flows had significantly slowed due to measures implemented by the Biden administration, with recent reports indicating immigration rates have dwindled to near zero.

Projected Decline in Immigration:

• 2024: Decrease from 2.7 million to 1 million immigrants.
• 2025: Further decline to approximately 500,000 immigrants.

Economic Implications of Reduced Immigration

Gapen outlines several potential economic consequences resulting from decreased immigration:

1. GDP Growth Reduction:

   • 2024: Potential decrease by half a percentage point.
   • 2025: Further reduction, possibly exceeding half a percentage point.
   • "This could reduce the rate of GDP growth by about a half a percentage point this year and maybe even more next year," Gapen explains (05:00).

2. Inflationary Pressures:

   • Elevated inflation, particularly in services and wages.
   • "Slower immigration could... put upward pressure on inflation, particularly in services and to some extent overall wages," he adds (05:15).

3. Labor Force and Employment:

   • Slower immigration will lead to reduced labor force growth, impacting overall economic growth.
   • "Slower employment growth will feel soft and sluggish, but a low unemployment rate suggests the labor market itself is still tight," Gapen notes (06:00).

4. Potential for Higher Unemployment Rates:

   • Although overall unemployment may fall, the labor market may experience tighter conditions due to reduced participation.

Monetary Policy and Future Outlook

The interplay between restrictive immigration policies and monetary policy is a critical focus. Gapen suggests that tighter immigration controls could necessitate a more restrictive stance from the Federal Reserve.

Key Points on Monetary Policy:

• Potential Rate Hikes: To combat rising inflation, the Fed might maintain or even increase interest rates.
• Reduced Rate Cuts: Expectations of only one rate cut in the current year, with further cuts contingent on slower economic growth.
• "We think more restrictive immigration policies could lead to tighter monetary policy and keep the Fed on its currently restrictive stance for longer," Gapen asserts (07:20).

Conclusion

Michael Gapen concludes by reiterating the significant impact that shifting immigration policies could have on the U.S. economy. The reduction in immigration is poised to slow GDP growth, elevate inflation, and create a two-speed labor market characterized by sluggish employment growth but tight labor conditions. These factors collectively may influence the Federal Reserve to maintain a restrictive monetary policy stance for an extended period.

Notable Quotes

• Michael Gapen (00:35): "Immigration is more than just the entry of foreign citizens into the US for residency. It's a complex process with significant implications for our economy."
• Michael Gapen (02:15): "The 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 US Economy."
• Michael Gapen (03:10): "Trump's policymakers are changing the rules rapidly and reversing the immigration narrative."
• Michael Gapen (05:00): "This could reduce the rate of GDP growth by about a half a percentage point this year and maybe even more next year."
• Michael Gapen (05:15): "Slower immigration could... put upward pressure on inflation, particularly in services and to some extent overall wages."
• Michael Gapen (07:20): "We think more restrictive immigration policies could lead to tighter monetary policy and keep the Fed on its currently restrictive stance for longer."

This episode provides valuable insights into how immigration policies intertwine with economic indicators and policy decisions, offering investors and policymakers a nuanced understanding of potential future scenarios.