By
Derek Hamilton
August 20, 2025
The Trump administration continues to make many economically important changes, including tariffs, government
spending,
taxes, and regulation, among others. Immigration policy changes have become a significant political issue, resulting
in
economic ramifications. We have written about immigration in the past and thought it prudent to highlight this
important
topic again, which seems to have been overshadowed by tariffs.
The chart below shows border encounters at record lows recently. Other data suggests a higher number of people
detained
for immigration violations, which has historically led to higher deportations, suggesting net immigration is slowing,
even if legal immigration is unchanged.
Immigration plays an important role for investors in two major ways.
Potential GDP attempts to estimate the maximum level of an economy’s output without creating
inflation and it tends
to
be an anchor for actual GDP growth, which can vary throughout an economic cycle.
In its simplest form, potential GDP is the sum of labor force growth and productivity growth, which can be influenced
by
several factors, including spending more on capital investment, education, and technological innovation. However,
labor
force growth is generally driven by working-age population growth (age 16-65), which is heavily dependent on
immigration
in the US.
Slower net immigration suggests softer population growth, and therefore slower potential GDP growth.
Wage growth is typically a function of supply and demand for workers. As the supply of workers
relative to demand
shrinks, the labor market tightens, and wage growth usually accelerates. The unemployment rate continues to bounce
around the lowest level in decades, indicating the labor market is relatively tight. If net immigration slows and
remains weak, then the labor market could tighten further, potentially resulting in faster wage growth.
Sustained lower net immigration could slow the pace of economic growth over time, impacting corporate revenues. In
addition, tighter labor markets from lower immigration could raise the cost of labor for companies doing business in
the
US. Of course, higher productivity growth from technological innovation, including AI, could provide an important
offset. We believe this will be an important area to watch.
Sources: Macquarie, Macrobond, US Department of Homeland Security.
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