If you're wondering why so many U.S. Federal Reserve officials are remaining hawkish despite slowing growth, consider how the dramatic drop in immigration and the graying of America are impacting the unfolding labor market picture.
Often overlooked by markets focused on the latest news about tariffs, geopolitics and energy markets, curtailing illegal immigration, a signature policy of President Donald Trump, is now starting to move the needle on the U.S. jobs outlook.
The flow of migrant workers into the U.S. has effectively halted over the past year. The pace was already slowing sharply before the election but has ground to a near halt along with the rise in deportations this year. Couple that with the steadily aging population of existing workers, and it looks like a labor crunch could be on the horizon.
Economists at Barclays tracking these trends reckon that 'potential' non-farm private payrolls growth - or the level of extra jobs that can be created without leading to worker shortages - could fall to less than 10,000 per month by the end of next year from more than 100,000 today.
They estimate that potential job growth will fall to about 60,000 within the next six months, slowing potential economic growth to only 1.4-1.6% year-on-year through next year from just over 2% now.
These numbers are pretty stark when considering that average monthly private payrolls growth has been around 172,000 over the past two years.
Meanwhile, Barclays says it expects the effects of population ageing to "intensify very soon", putting even more downward pressure on jobs growth.
The combined impact of the two forces is "about to create significant and persistent headwinds to potential growth in the labor force and economic activity," it said.
The ingredients used to make the forecast are sobering.
FLATLINING PAYROLL POTENTIAL
U.S. immigration surged over the past three years, adding a net 3-4 million to the U.S. population. The roughly 2 million new workers are four times the annual rate of the immediate pre-pandemic years. These were mostly asylum-seeking or 'humanitarian' cases given temporary authorization to live and work in the U.S.
In fact, over the past two years, Barclays estimated that about three quarters of average monthly private jobs gains of almost 180,000 were filled by migrant workers.
But since last summer, net inflows of humanitarian migrants have fallen to nearly zero. And, on top of that, the Barclays tracker estimated current deportations to be running at about 10,000 a month.
On the flipside, U.S. census projections expect the population to decline by about 50,000 in 2026 and 100,000 in 2027. The aging of the population should also cause the labor force to shrink by about 360,000 this year and next, accelerating thereafter.
Tweaking the underlying assumptions leads to different outcomes, of course, but Barclays' central conclusion is that potential payroll growth should essentially flatline in the coming years, weighing on potential GDP growth.
Morgan Stanley also revised down net immigration estimates to a near halt this year and next, although it expects higher payroll 'breakevens' of 70,000 in 2025 and 2026.
FED HEADACHE
For the Fed, an unfolding economic slowdown, compounded by a demand hit from trade war uncertainties, may be arguments for easing policy now.
Trump clearly thinks it should move immediately to slash rates, and his appointees to the Fed board, Michelle Bowman and Christopher Waller, are both now advocates of easing sooner rather than later.
But if worker shortages are the problem, then that creates a very different problem for the Fed. In that scenario, the Fed's full employment mandate would not be at risk, but wage pressures could aggravate still above-target price inflation.
With tariff hikes already fogging up the inflation horizon, it's therefore not surprising that seven Fed policymakers anticipate keeping the central bank's main borrowing rate steady through the rest of this year at least.
A hit to the labor force then could cause growth to slow, even as the employment rate stays low and inflation pressures simmer.
Fed inertia may be warranted if that transpires.
The opinions expressed here are those of the author, a columnist for Reuters
Often overlooked by markets focused on the latest news about tariffs, geopolitics and energy markets, curtailing illegal immigration, a signature policy of President Donald Trump, is now starting to move the needle on the U.S. jobs outlook.
The flow of migrant workers into the U.S. has effectively halted over the past year. The pace was already slowing sharply before the election but has ground to a near halt along with the rise in deportations this year. Couple that with the steadily aging population of existing workers, and it looks like a labor crunch could be on the horizon.
Economists at Barclays tracking these trends reckon that 'potential' non-farm private payrolls growth - or the level of extra jobs that can be created without leading to worker shortages - could fall to less than 10,000 per month by the end of next year from more than 100,000 today.
They estimate that potential job growth will fall to about 60,000 within the next six months, slowing potential economic growth to only 1.4-1.6% year-on-year through next year from just over 2% now.
These numbers are pretty stark when considering that average monthly private payrolls growth has been around 172,000 over the past two years.
Meanwhile, Barclays says it expects the effects of population ageing to "intensify very soon", putting even more downward pressure on jobs growth.
The combined impact of the two forces is "about to create significant and persistent headwinds to potential growth in the labor force and economic activity," it said.
The ingredients used to make the forecast are sobering.
FLATLINING PAYROLL POTENTIAL
U.S. immigration surged over the past three years, adding a net 3-4 million to the U.S. population. The roughly 2 million new workers are four times the annual rate of the immediate pre-pandemic years. These were mostly asylum-seeking or 'humanitarian' cases given temporary authorization to live and work in the U.S.
In fact, over the past two years, Barclays estimated that about three quarters of average monthly private jobs gains of almost 180,000 were filled by migrant workers.
But since last summer, net inflows of humanitarian migrants have fallen to nearly zero. And, on top of that, the Barclays tracker estimated current deportations to be running at about 10,000 a month.
On the flipside, U.S. census projections expect the population to decline by about 50,000 in 2026 and 100,000 in 2027. The aging of the population should also cause the labor force to shrink by about 360,000 this year and next, accelerating thereafter.
Tweaking the underlying assumptions leads to different outcomes, of course, but Barclays' central conclusion is that potential payroll growth should essentially flatline in the coming years, weighing on potential GDP growth.
Morgan Stanley also revised down net immigration estimates to a near halt this year and next, although it expects higher payroll 'breakevens' of 70,000 in 2025 and 2026.
FED HEADACHE
For the Fed, an unfolding economic slowdown, compounded by a demand hit from trade war uncertainties, may be arguments for easing policy now.
Trump clearly thinks it should move immediately to slash rates, and his appointees to the Fed board, Michelle Bowman and Christopher Waller, are both now advocates of easing sooner rather than later.
But if worker shortages are the problem, then that creates a very different problem for the Fed. In that scenario, the Fed's full employment mandate would not be at risk, but wage pressures could aggravate still above-target price inflation.
With tariff hikes already fogging up the inflation horizon, it's therefore not surprising that seven Fed policymakers anticipate keeping the central bank's main borrowing rate steady through the rest of this year at least.
A hit to the labor force then could cause growth to slow, even as the employment rate stays low and inflation pressures simmer.
Fed inertia may be warranted if that transpires.
The opinions expressed here are those of the author, a columnist for Reuters
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