By Mike Dolan
LONDON (Reuters) – With fears of a U.S. recession wiped away and financial markets bulled up on the growth trajectory again, an immigration fillip is playing a key role – and may even prove disinflationary to boot.
Likely one of the hottest of hot button issues in this year’s White House election, upward revisions to U.S. immigration estimates have economists and investors rethinking the economic and inflation outlooks yet again.
Resulting higher growth forecasts and likely easing of labor supply bottlenecks speak to some of a potential holy grail for the economy.
But the new estimates also sharpen the edge of November’s election outcome where President Joe Biden and likely challenger Donald Trump are clearly at loggerheads on how to handle the issue.
In its long-term economic and fiscal projections released last month, the U.S. Congressional Budget Office (CBO) flagged rising net immigration as mainly responsible for a forecast 5.2 million increase in the workforce over the next 10 years — adding some $7 trillion to economic output and $1 trillion to tax revenue.
The non-partisan budget referee took from its 30-year demographic projections in January, where it revised up its estimate of net immigration compared with a year earlier by some 8.3 million people for the six years through 2026.
The changes mean it now reckons the overall labor force will be 2.6% larger in 2053 that it assumed only a year ago. And as declining fertility rates would have seen the national headcount decline otherwise, net immigration is now expected to account for all the expected population growth from 2040 onwards.
While the politicians argue over the whys and wherefores of that jump in migrant numbers, the economic impact is already highly significant.
In a paper released last week, Brookings economists Wendy Edelberg and Tara Watson reckoned the CBO revisions – which show 3.3 million net immigrants last year compared to the 1 million projected pre-pandemic – can help explain the surprising strength of consumer spending and overall growth since 2022.
But they also said the new numbers suggest the labor market could run hotter than previously thought without fueling wage and inflation pressures.
“For 2024 we estimate sustainable employment growth will be between 160,000 and 200,000, approximately double the sustainable level that would have occurred in absence of the pickup in immigration according to the pre-pandemic projections,” they wrote.
Morgan Stanley’s Chief U.S. economist Ellen Zentner tallies with that and reckons payroll gains of about 200,000 per month are now consistent with an unchanged unemployment rate.
“The new 2023 data suggest we can add immigration as an explanation for faster-than-expected growth and disinflation last year, raising the possibility of faster potential growth in the next several years,” she wrote.
“This isn’t just about the normalization of supply chains.”
CLAMPDOWN?
The re-painted picture has obvious ramifications for both the Federal Reserve’s interest rate deliberations as well as for investors gauging both that and ‘sustainable’ growth and investment returns of the long term.
And renewed vigor in Wall St stocks at record highs may not solely be about the artificial intelligence frenzy after all.
JPMorgan economists point out that the CBO does show net immigration of foreign nationals returning close to historical norms after 2026. But they admit the recent boost in numbers quickly feeds into faster labor force expansion, even if not all immigrants are immediately granted work authorization.
And that’s what bumps the CBO’s economic growth outlook to an average 2.0% per annum over the decade from 1.9% seen previously – with a beefed up labor supply permitting disinflation to continue without crimping growth.
Higher potential growth sees inflation settling about 2.2% after 2026, according to the CBO, around where financial markets’ long-run inflation expectations also seem to coagulate.
And it raises the return on capital. Ten-year Treasury yields are painted in at around the current 4.1% by 2034 too, to put a ‘real’ rate of 1.9%.
But JPMorgan’s team quibble with some of the CBO’s long-range forecasts – on productivity and unemployment forecasts for example – and think its debt-to-GDP assumptions are too low, due in part to a likelihood of tax cut extensions from here.
And so despite the long-term growth lift, their concern about mounting government debt piles remains.
“The question is not whether the U.S. will face a moment of reckoning on government debt but rather when it will happen and how painful the necessary adjustment will be,” they wrote.
More immediately, the immigration issue now spins into the hustings and how voters will view the stance of both presidential candidates later this year.
This week’s 2025 budget proposals from Joe Biden included his unfulfilled request last year for $13.6 billion in emergency funds for U.S.-Mexico border enforcement – to pay for more Border Patrol agents, asylum officers and immigration judges.
For his part, former President Trump wants to reprise his 2016-2020 hardline position and has promised to crack down on illegal immigration and restrict legal immigration if elected.
What seems clear now is that the economic fallout from the differing stances could be large – affecting how long the recent immigration trends continue at this pace.
Pointing out that Border Patrol encounters were up 16% in the three months through January compared to a year earlier, Morgan Stanley said this could either be evidence of migrant flows accelerating or a temporary surge due to the election.
“Election-year politics might cause a clampdown on immigration – as might a new president,” it concluded.
The opinions expressed here are those of the author, a columnist for Reuters.
(Writing by Mike Dolan; Editing by Susan Fenton)
Comments