Immigration Policy: Wage Shock Ahead?

It’s been over a week since the US Elections and we’re finally settling into the idea of President Trump 2.0. As with every new administration, we want to gauge the possible outcomes of the policy mandates and we’ve been discussing some of that even before Trump was elected.

The good thing about Trump’s campaign has been the very vocal announcements of various policy measures that he wishes to put forward. If we know anything about Trump, he presents more as the CEO of the US, and is very decisive. He knows what he wants, and he will do anything to try and get it. Most business leaders are like that. It’s the quality that leads them to success. But, this often means ignoring the counsel of others, which may not always end well.

There are four broad pillars of the Trump 2.0 Policy that we are aware of based on campaign speeches:

• Tariffs
• Immigration
• Taxes
• Deregulation

Today, we look at Immigration…

The Trump administration is expected to focus on border control and reduce regulations, with executive orders potentially targeting undocumented immigrants. However, organizing mass-scale deportation involves logistical and financial challenges. This means the immediate implementation of deportation will not be likely, and overall levels will take some time to increase.

Interestingly, if you look at the track record under various administrations, Trump’s previous term actually had far fewer deportations than during Obama’s term, which saw levels of between 300,000 to 500,000 undocumented workers being removed.

There are about 11.7 million undocumented immigrants in the United States, according to the last count and there’s no doubt that a large portion of this population contributes to the workforce for lower wages than normal. The biggest impact of forcefully removing workers will lead to higher wages and probably lower unemployment, as citizens fill these roles and demand higher salaries.

This is true of restricting migration as well, which could be a more immediate outcome of the policy changes. This could decrease the workforce by an additional 65,000 per month, in addition to the current reduction of 65,000 per month that is already taking place because of President Biden’s recent policies. Again, this could also put a strain on the workforce, and increase wages.

The most immediate and likely direct impact of Trump’s policies will be immigration. The reduction in the workforce, and replacement of those workers with citizens, will lead to an increase in baseline wages for companies, increasing costs.

Wages have already increased in the past couple of years, and the deceleration in wage growth has been key to the Fed’s inflation fight. These increases could lead to a wage spiral, which is the most challenging kind of inflation.

The bottom line:

• Company costs could increase leading to lower earnings
• Unemployment rates could decrease as more people fill the roles of undocumented workers
• Rising wage levels could contribute to higher and stickier core inflation

Closing Thoughts - No Cuts for You

The idea of stagflation has returned, i.e., a slowdown in growth with an acceleration in inflation. We have to consider that a Red Sweep may not automatically give Trump everything he wants, but we can make a safe bet that it will at least mean that a recession will be avoided. The US Economy could actually achieve a soft landing.

That being said, we are now contending with the idea that the Fed may drastically slow down rate cuts. The December cut is being called into question, as are the 4 cuts for next year. Finally, Fed Chair Powell laid the groundwork for that during his speech this past week, and the market is taking him seriously.

If the economy can remain afloat, and there is no recession on the horizon, the Fed can easily get away with cutting just twice next year. They may very well consider skipping the first couple of meetings in 2025, to see how policies are shaped under the new administration before resuming their rate-cutting path forward.

All this means that we may be in for a more bumpy ride than expected. Equities still have a path higher but, it won’t be the easiest or smoothest path.

Have a safe trading week out there!

None of the above is investment or trading advice. For more information visit www.macrovisor.com