Thoughts on the Market: Trump 2.0 and the Potential Economic Impact of Immigration Policy

Hosted by Morgan Stanley | Release Date: February 14, 2025

Introduction to the Discussion

In the February 14, 2025 episode of Thoughts on the Market, hosted by Morgan Stanley, experts Michael Zesas and Michael Gapen delve into the implications of a potential second term for President Trump, focusing specifically on immigration policy and its broader economic ramifications. The conversation navigates through recent immigration trends, proposed policy changes, and the anticipated effects on the U.S. economy.

Pre-Trump Immigration Trends and Economic Impact

Michael Gapen begins by setting the stage with historical immigration data, highlighting the surge in immigration post-pandemic.

Michael Gapen [01:14]: "In 2022 through 2024, we saw immigration surge to about 3 million per year. So about twice as fast as we saw normally."

This significant increase, double the 20-year average of 1.5 million immigrants annually, played a crucial role in the U.S. economy's recovery from the pandemic. The influx bolstered the labor force precisely when demand for labor was high, facilitating rapid economic growth while helping to keep wages stable and inflation in check. Gapen asserts that this immigration-driven growth was a key factor in the U.S. achieving a "soft landing"—a scenario where the economy slows without triggering a recession.

Trump's Proposed Immigration Policies

As the conversation shifts to the potential implications of a second Trump presidency, the focus turns to proposed immigration policies aimed at reversing the recent trends.

Michael Gapen [02:26]: "If we are going to significantly restrict immigration flows, the risk here is that we reverse the trends that we've just seen in the previous year."

Gapen emphasizes that the Trump administration is likely to prioritize border strengthening and increased deportations as part of its immigration strategy. He references initiatives initiated by the preceding Biden administration, such as policies that began to slow immigration flows mid-last year, suggesting that Trump’s policies would build upon these measures.

Michael Zesas elaborates on the specific mechanisms through which the Trump administration might implement these changes:

Michael Zesas [03:25]: "There's stepped up deportations and removals and there's working with Mexico on border enforcement... such as the remain in Mexico policy."

The "Remain in Mexico" policy, which mandates asylum seekers to stay in Mexico while their cases are processed, represents a significant shift in border enforcement strategy. Additionally, the administration is considering imposing tariffs on Mexico and Canada contingent upon improvements in border security.

Potential Economic Ramifications

The discussion then pivots to the potential economic consequences of reduced immigration. Gapen outlines a multi-faceted impact:

Michael Gapen [07:29]: "Reduced immigration should lead to slower potential growth... potential growth should slow back towards say, 2% this year, maybe even 1 to 1.5% next year."

A decline in immigration would likely result in slower growth of the labor force, which in turn would dampen overall economic growth. Gapen explains that potential GDP growth, which currently benefits from a robust labor supply, could decrease to between 1% and 2%, down from the recent 2.5% to 3%. This slowdown would also affect employment growth rates, although the labor market would remain tight with low unemployment rates. Consequently, wages, especially in the service sectors heavily reliant on immigrant labor, may remain firm, thereby sustaining inflationary pressures.

Furthermore, Gapen suggests that persistent inflation could influence Federal Reserve policies, potentially keeping interest rates higher for a longer period to manage inflation without overheating the economy.

Uncertainties and Challenges in Assessing Impact

Both analysts acknowledge the inherent uncertainties in predicting the exact outcomes of the proposed immigration policies. Zesas points out the difficulty investors face in real-time assessment due to delayed data on immigration flows and labor market changes.

Michael Zesas [04:18]: "It will be difficult for investors... Mostly it's a data challenge here."

He notes that while official government statistics provide some insights, the lag in data reporting hinders timely analysis. Additionally, anecdotal evidence from industries like construction and hospitality may offer hints but lacks the robustness needed for definitive conclusions.

Gapen reinforces this uncertainty by suggesting a range of possible immigration flow scenarios, from a benign reduction to more severe declines, depending on the effectiveness of the administration's policies and external factors such as international relations with neighboring countries.

Long-term Economic Outlook

Looking ahead, Gapen presents a cautiously pessimistic outlook on future immigration trends and economic growth:

Michael Gapen [05:38]: "Our outlook is that immigration flows should slow below pre-Covid averages to about 1 million this year and about 500,000 in 2026."

Such a significant reduction, far below the longstanding average, would mark a stark departure from recent immigration patterns and signal a major shift in the U.S. labor market dynamics. This slowdown would not only temper potential growth but also influence consumer demand, business investments, and overall economic vitality.

Gapen underscores that the combination of reduced labor force growth and sustained low unemployment would create a "very different labor market," characterized by slower employment growth and firm wages, potentially leading to enduring inflationary trends.

Closing Insights

In concluding the discussion, Gapen highlights an often-overlooked risk for financial markets:

Michael Gapen [09:27]: "I think this is an underappreciated risk for financial markets... risks around immigration and their effect on the economy are not well understood."

He calls on investors to pay closer attention to immigration-related policies and their broader economic implications, suggesting that the potential slowdown in immigration could have far-reaching effects on market dynamics, investment strategies, and economic forecasts.

Conclusion

The episode of Thoughts on the Market offers a comprehensive examination of how a second Trump term could reshape U.S. immigration policy and, by extension, impact the economy. Michael Zesas and Michael Gapen provide insightful analyses on the potential slowdown in immigration flows, the mechanisms of proposed policy changes, and the resultant economic challenges. As the U.S. navigates these possible shifts, the episode underscores the importance of understanding immigration as a key driver of economic growth and stability.

For more insights and detailed analyses, listen to the full episode or access the survey linked in the show notes to share your thoughts.