RPT-COLUMN-Reversing US immigration set to grab market attention: Mike Dolan

By Mike Dolan

LONDON, July 17 (Reuters) - While markets have been obsessed with U.S. tariffs since April, they may gradually shift focus to an arguably bigger economic issue: worker shortages from halted immigration and rising deportations.

Financial markets continue to be swayed by the Trump administration's often erratic tariff announcements, which is understandable given that these policies can affect the inflation outlook and the interest rate calculus.

But tariffs aren't moving markets like they did three months ago, and that's partly because cause-and-effect is proving hard to nail down.

A case in point is this week's forensic examination of June inflation reports for any sign of tariff 'passthrough' to prices.

Some price categories did rise, supporting the argument that tariffs will prove inflationary, but the overall reading remains broadly in line with expectations, due to falling energy prices and other factors. This puts the Federal Reserve in a tough spot, with inflation still above its 2% target and uncertainty about whether any price rises will be persistent or just 'one-offs'.

The picture remains as clear as mud and may take many months to clear up.

On the other hand, the potential impact of President Donald Trump's other signature policy, clamping down on undocumented immigration, is getting easier to forecast.

Economists widely expected the administration to curb new immigration, as inflows were already slowing sharply before the election. But what has surprised many is the speed and scale of deportations as well as the unprecedented spending planned to ramp up these efforts in Trump's recent fiscal bill.

Earlier this month, the U.S. Department of Homeland Security said it will terminate deportation protections for thousands of Hondurans and Nicaraguans living in the United States.

That will end Temporary Protected Status (TPS), as of September, for some 72,000 Hondurans and 4,000 Nicaraguans who have had access to this legal categorization since 1999. The administration has already moved to end TPS for 348,000 Venezuelans and 521,000 Haitians, as well as thousands from Afghanistan and Cameroon.

FROM HALT TO REVERSE

JPMorgan economists Joseph Lupton, Michael Feroli and Abiel Reinhart reckon the immigration surge that flattered the country's growth in recent years will now go into reverse, with these latest policy changes expected to cause roughly 1.1 million workers to lose their legal status.

The resulting loss of labor, about 0.8% of total employment, creates serious downside risk to U.S. GDP growth in the second half of this year, they suggest. And the rising number of detentions makes it less likely that the 'informal economy' will be able to pick up the slack.

Indeed, the loss of legal status could remove some 117,000 workers per month from the economy this quarter, rising to a monthly decrease of 150,000 in the final quarter.

"In our year-ahead outlook, we assumed that immigration would grind to a halt but that outright deportations would not pose a material threat," the JPMorgan team wrote. "This view is being challenged given the coming large losses in labor supply from recently immigrated workers."

Apollo chief economist Torsten Slok chimed in earlier this week, pointing out that if 3,000 unauthorized migrants are deported every day, the labor force will decline by 1 million this year.

That drop, he wrote, would cut the labor force participation rate by 0.4 percentage points, slashing the unemployment rate as well as job growth and increasing wage inflation, especially in sectors such as construction, agriculture, leisure and hospitality.

"In short, deportations are a stagflationary impulse to the economy, resulting in lower employment growth and higher wage inflation," Slok wrote.

One American Enterprise Institute paper he cited said the changes could actually result in net migration outflows and reduce GDP growth by 0.3–0.4 percentage points this year, with monthly payroll growth near zero or negative in the next few years.

Last month, Barclays also flagged the potential evaporation of payroll growth over the next 18 months, based on the dramatic changes in migration and the rapidly ageing American-born workforce.

Much like tariffs, the immigration changes have yet to register a material impact on economic activity, with the deadlines for many of the status cutoffs still a few months away.

But unlike the hazy understanding of the effect tariffs will have on inflation and growth, it's becoming crystal clear how the administration's migration policies will impact worker availability. Markets will thus likely shift their focus considerably in the coming months.

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