Morgan Stanley cuts U.S. immigration forecast, citing slower labor force growth

Morgan Stanley has revised its U.S. immigration outlook downward, projecting 800,000 immigrants in 2025 and 500,000 in 2026, which is expected to slow labor force growth to 0.5% by 2026. This reduced immigration is anticipated to lower the breakeven employment rate, requiring only 90,000 new jobs per month to maintain the current unemployment rate, and could push potential GDP growth towards 1.5%, influencing the Federal Reserve's monetary policy decisions and potentially delaying rate cuts until March 2026.

Analysis

Morgan Stanley has significantly revised its U.S. immigration outlook downwards, projecting inflows to decrease to 800,000 in 2025 from a previous estimate of 1 million, and further to 500,000 in 2026. This reduction is anticipated to directly impact the labor market by slowing labor force growth from the 1.5%-2.0% range observed in 2022-2023 to just 0.7% this year and a mere 0.5% by 2026. Consequently, the bank has lowered its estimate for the breakeven employment rate—the monthly job additions needed to maintain a stable unemployment rate—for 2025 to 90,000, down from 125,000, implying a more pronounced slowdown in employment growth will be necessary to increase the unemployment rate. The constrained labor supply is also expected to drag on long-term economic potential, with Morgan Stanley forecasting potential GDP growth could fall towards 1.5% as immigration restrictions take hold. These macroeconomic shifts are projected to influence Federal Reserve policy; the bank foresees the Fed keeping rates on hold throughout 2025, with initial rate cuts postponed until March 2026, particularly if potential tariffs exacerbate near-term inflation while unemployment remains low. This outlook also suggests a drift lower in the real neutral interest rate, reflecting a moderately negative and pessimistic perspective on key economic growth drivers.

Key Decisions for Investors

• Investors should anticipate a tighter U.S. labor market due to reduced immigration, potentially leading to sustained wage pressures and impacting corporate profitability, particularly in labor-intensive sectors.
• The projected slowdown in potential U.S. GDP growth towards 1.5% necessitates a recalibration of long-term return expectations and may warrant a portfolio tilt towards sectors with resilient demand or secular growth drivers independent of broad economic acceleration.
• Prepare for a potentially extended period of current Federal Reserve policy rates, with forecasted rate cuts not commencing until March 2026; this outlook could temper enthusiasm for rate-sensitive assets and requires careful duration management in fixed income.
• Monitor key economic indicators, especially monthly job creation relative to the revised 90,000 breakeven rate and inflation data, as these will be critical in validating or challenging the Fed's anticipated policy path and the projected economic slowdown.