Economists and analysts are pointing to immigration as a key factor in sustaining robust job growth while simultaneously keeping inflation in check. This dynamic has created a favorable, albeit uncertain, economic situation for President Joe Biden as the November election approaches.
The U.S. economy added 272,000 jobs in May, significantly exceeding the Dow Jones forecast of 190,000, according to the latest jobs report. Concurrently, the Bureau of Labor Statistics reported that consumer prices remained unchanged in May, even showing a slight decrease on an annual basis. This unusual combination of a heated job market and cooling inflation is being attributed, in part, to increased immigration flows.
Goldman Sachs analysts highlighted this trend in a note to clients in May, stating, "Recent immigrants have flowed disproportionately into the parts of the labor force that were particularly tight in 2022, contributing to labor supply in places where it was most badly needed." The May jobs report indicated that the health care, government, and leisure and hospitality sectors experienced the most significant growth.
Mark Zandi, Chief Economist at Moody's, told CNBC, "The immigration surge poses lots of challenges to communities across the country, but it came at a very fortuitous time to help ease the labor market pressure, when the Fed was working hard to do it by interest rate hikes." Zandi also credited immigration with helping the United States maintain positive GDP growth, noting, "It has reduced the need for more rate hikes, and probably has been critical to ensuring that the economy has avoided a recession."
Federal Reserve Chair Jerome Powell acknowledged the impact of immigration on labor force supply during the central bank's recent press conference, stating, "We've seen labor force supply come up quite a bit, through immigration, through recovering participation."
A March analysis from the Brookings Institution found that higher immigration inflows have effectively doubled the number of new jobs the U.S. economy can absorb monthly without overheating. Before the pandemic, congressional forecasters predicted that in 2024, the U.S. job market would be able to safely absorb between 60,000 and 100,000 new jobs per month without triggering inflation. However, factoring in the impact of immigrants on the labor pool, Brookings researchers estimate that the 2024 U.S. job market could safely accommodate between 160,000 and 200,000 monthly job gains.
Despite these economic benefits, the political discourse surrounding immigration remains contentious. President Biden has cited both the May jobs report and steady Consumer Price Index as evidence of what he calls a "great American comeback." However, his recent executive action to increase restrictions on asylum seekers could potentially threaten the economic boost that immigration is providing.
On the other side of the political aisle, former President Donald Trump has pledged to conduct mass deportations of between 15 and 20 million unauthorized immigrants if re-elected. The potential economic impact of such a policy, should it survive legal challenges, is difficult to quantify but could be significant.
Goldman Sachs analysts suggest that while moderate fluctuations in immigration should have little impact on aggregate wage growth and inflation in the short term, "Immigration levels will, however, continue to mechanically affect the real economy, namely potential job and GDP growth."
