Immigration Implications

My eldest daughter has been working on a school project which draws influences based on where your family comes from. While I grew up in Singapore, my parents both come from Mauritius (an island in the Indian Ocean off the coast of South-East Africa), and so I have been helping her on the weekends look at photos of things synonymous with Mauritius like the dodo or their colourful flag, and we have discussed how and why her ancestors migrated from China to Mauritius (I always go with the line of “who wouldn’t want to jump out and stay for a bit after seeing a beach island paradise filled with coconut trees after so many days cramped on a boat!”).

Migration into the US has been a topic to reflect on in recent months and ahead of elections, partly because it has been intertwined with the discussions around the jobs market and inflation. Data from the Congressional Budget Office (CBO) earlier this year now suggests much higher levels of immigration into the US than previously forecast a year ago, as illustrated by the dark grey bars in the chart below. Specifically, the CBO recently estimated that net immigration to the US was actually 2.6 million in 2022 and 3.3 million in 2023, compared with an average of 900,000 people per year in 2010-2019., sharply higher than their own estimates just a year ago.

This adds further uncertainty over the complexion of the labour force and employment data. Could the easing in wage growth at the same time as minimal increases in unemployment partly be explained by the surge in immigration? Longer-term, potential economic growth is partly driven by changes in the labour force and their productivity, but more challenging demographic trends (more about this another weekend), means that immigration is also having more meaningful impacts on growth. Greater immigration may have also helped support consumer spending. In this regard, the US has been and continues to be well positioned relative to other major economies.

Industries like leisure and hospitality have seen a recent sharp retracement in wage gains, converging towards other areas of the economy, and from US Census bureau data we know this is an area with an estimated much higher proportion of immigrants as part of the workforce. This would support the idea that recent increases in US immigration have been helping to cool inflation. Various FOMC members have recently ?referenced the role of immigration in helping to rebalance the labour market.

But if that is the case, then what does that mean if Trump re-enters office? During Trump’s first term, immigration did not stop but it certainly slowed and was happening at a much lower pace than seen under Biden. Surveys like the American Community Survey indicate this was mainly Mexican immigration slowing down under Trump’s rule. His proposed imposition of trade tariffs on all trading partners and 60% tariffs on China, and the likely subsequent retaliatory action that would bring, would surely result in a more inflationary backdrop. A recent Gallup survey shows that immigration is the most important topic for voters currently, so in the run-in to the elections we may even see Biden look to slowdown the pace of immigration.

Of late the growth inflation trade-off in the US has been favourable, and it would seem partly helped by the pick-up in immigration. Longer-term, the natural rate of increase in the US working age population has been shrinking, so any sharp slowdown in immigration would have meaningful repercussions on potential growth and short-term r* (the neutral rate of interest that would prevail when the economy is at full employment and stable inflation), which could also have implications for Fed policy.

I have heard in market discussions that upcoming US elections bring two known quantities in both Presidential candidates, and therefore limited uncertainty, which is true in some ways. Yet I wonder if elections will coincide with a backdrop where base effects for inflation become tougher and policy changes impacting immigration could have more macro-economic repercussions than many investors are contemplating right now.

Bernie’s weekend eats – Kol, Marylebone

Not your typical Mexican, this is more modern Mexican in a fine dining setting, focused on using fresh British produce. Chef Santiago Lastra previously worked at Noma and has been able to deliver on his vision, winning a Michelin Star in 2022 a short while after opening. All the tacos are made from scratch in-house, and are always elevated with some amazing protein like octopus or langoustine. In London it is almost impossible to find a Tamal, but they don’t disappoint here with some creative versions. The menu is a tasting menu so just sit back and enjoy the beautiful dishes delivered to your table but make sure you order one, or even three, of their house Margaritas first (I love their Mezcal version). These literally are the best Margaritas I have ever drunk. While easier these days than when it first opened, booking a table on short notice can be difficult, so for a more relaxed meet-up I sometimes go downstairs to Mezcaleria, their bar where you can find a bunch of small plates alongside a whole bunch of Mezcal based cocktails.