The controversial and unexpected ally of the Fed’s ‘soft landing’: an immigration ‘tsunami’

The Fed has found an unexpected ally in one of the most controversial and hottest spots in the country. Experts are pointing to immigration as a decisive factor that would have allowed inflation to be eased and private consumption kept ‘on fire’. Two of the big keys to explain the ‘soft landing’ who is trying to launch the central bank and who makes a lot of money. In the year 2023, the United States will experience one of the largest immigration waves in memory, according to the latest estimates from Congress. Only among those who have obtained a ‘permanent visa’ has there been an increase of almost 1.1 million people entering the country permanently.

This increase represented a step forward compared to the million new Americans who have come from abroad in 2022 and a powerful jump compared to the 740,000 in 2021 and the 707,000 in 2020. This same year, the highest numbers since 2018 have been recovered. Despite that the recent statistics of new permanent licenses represent a return to normal figures, experts have focused on the figures as a whole (including temporary workers or all types of migration modalities) with the Department of Homeland Security denouncing that more than 2.5 million migrants They crossed the southwest border illegally.

This has caused a net immigration of more than 3.3 million people. A very noticeable difference compared to the historical average, since in the last decade it was only 919,000 per year, on average. The estimate of the US Federal Congressional Office (CBO) is that these high arrival figures will remain unchanged in 2024 and then collapse closer to their historical figures (at 1.1 million annually). ). Although the future is full of uncertainty, with elections that pit Trump against Biden and where this is, precisely, one of the core themes.

In a recent report by the Brookings Institution, it was explained that this record increase has been a decisive factor in defining the ‘soft landing’ that is being attempted by the Fed. “Although the figures remain uncertain (due to illegal immigration) this large increase in immigration has been fully reflected and explains a good part of the strength of the economy from 2022″ comments Wendy Eldelberg, analyst at the firm.

“The increase in the labor force (through these arrivals) has allowed employment to grow rapidly without an increase in inflationary pensions” Furthermore, “it is likely that this increased immigration is causing a greater growth in consumer spending, a great bulwark of US economic resistance (in the face of higher rates) and whose strength has surprised analysts.”

The most notable factor would have been, without a doubt, inflation. Greater job creation It is equivalent to higher salaries and, therefore, an increase in the CPI. Brookings calculations indicate that the US labor reserve allowed for the generation of between 60,000 and 140,000 jobs before the pandemic. without causing price increases. The arrival of immigrants has critically enhanced this range, allowing, according to their estimates, the country to now be able to absorb up to 230,000 new jobs per month without generating inflation, thanks to the fact that, by increasing the workforce, wage increases cool down.

“The 2023 data make it clear that we can add immigration as a clear explanation for growth and disinflation”

That is, the rise in immigration “doubles the capacity to create employment without inflation.” A point of view with which Morgan Stanley agreed. In her latest report Ellen Zenthner commented that “the 2023 data makes it clear that we can add immigration as a clear explanation of growth and disinflation faster than expected.

Jerome Powell himself and the Fed have repeatedly pointed out the need for further ‘cooling’ in the labor market to adjust a dangerous relationship between the ‘supply and demand of workers.’ “History teaches us that a return sustainable to the 2% inflation target will require somewhat lower growth and a weakening of the labor market,” Powell explained in his speech before the economic club of New York, in December 2023. To ‘temper’ this labor market, it was not only necessary to ‘cool demand’ but also greater supply through immigrants can be a key factor.

In a press conference after the rate decision that month, Powell spoke directly about immigration. “Until now there has been a fairly severe imbalance between supply and demand, there was a time when you couldn’t find people (after the pandemic) especially because the arrival of immigrants stopped.” Now with “the return of immigration to pre-pandemic levels wage growth has been moderating, reducing the gap.”

In any case, job creation has been much stronger than the limits offered by Brookins, with net creation of 350,000 non-agricultural payrolls in January. This has translated into an increase in salaries of 5.72% in January compared to the same month of the previous year. Throughout 2023, month by month, Bureau of Labor Statistics (BLS) always showed progress in them of between 5.5% until touching 7%. In this way, Brookings analysts say that a greater supply of workers who have settled in the US from abroad, the contribution to salaries and, therefore, to inflation, would have been much more sensitive.

“Although it is a hot political issue, No doubt about it“, they defend from LaDuc Capital. “Immigration has absolutely helped prevent inflation from getting out of control and has reduced it.” “It is unquestionable that the extension of immigration has been important in reducing inflation,” said Betsey Stevenson, expert from the University of Michigan, in a recent report.

Alec Phillips, an economist at Goldman Sachs, explained in mid-2023 that “there has clearly been a disproportionate contribution from immigrants to the relaxation of the labor market.” In the report in which it concluded this, Goldman Sachs noted that “the increase in green cards and work visas has reached the highest levels in years and They have added 40,000 workers more than expected every month.

“The greatest lack of workers has occurred in sectors historically supported by the immigrant population”

George Mason University explained in a recent report that beyond alleviating general labor shortagesbut “the greatest lack of workers has occurred in sectors historically supported by the immigrant population, such as hospitality, construction and leisure, which account for a fifth of the country’s jobs.”

Although not all economists agree and there are some who defend that the ‘massive’ arrival of workers, although it is alleviating inflation, is only doing so in a residual way. This is what Steven Camarota, an expert from the Center for Immigration Studies, says, stating that in the fourth quarter of 2023 immigration The supply of workers has increased by 2.07% (3.3 million in total). “It’s hard to see how a 2% increase can do much to lower prices through wages.”

Regarding consumption, the bastion of US economic strength, Brookings experts point out that the increase in population through immigrants increased the same by 0.2% in 2023, a figure that they expect to be maintained in 2024. “Immigrants have a greater propensity to spend and remittances suggest that they maintain a savings rate below 4%.”

This ‘tsunami’ of immigration, whether or not it contributes to the fight against inflation, is already at the center of the debate after the confirmation of Donald Trump and Joe Biden as candidates of their respective parties. “Are millions and millions of people who are coming to our country“former President Donald Trump said during a rally in South Carolina. “The biggest victims are African Americans, Hispanic Americans, Asian Americans… Their hourly wages are decimated.”

In fact, this issue is so at the center of the battle for the White House that, according to the latest Harvard survey, it has already become the country’s main concern above, precisely, inflation. According to the study, 35% of respondents mentioned immigration as the main problem affecting the US and 68% of those surveyed stated that policies in this regard should change towards a more restrictive approach.