By Tyler Mondres
Recent immigration estimates from the Congressional Budget Office help answer questions that have left many economists scratching their heads. What is supporting surprisingly robust employment growth? How much must the labor market slow to curb inflation? And how are households sustaining such strong consumer spending?
A report from the Hamilton Project argues upwardly revised immigration data for 2023 helps explain some of these trends. In January, the CBO estimated that net immigration for 2023 was 3.3 million, up significantly from its pre-pandemic projection of 1 million.
Before the pandemic, forecasters projected that the economy could sustainably accommodate employment growth of 60,000 to 130,000 per month in 2023 without stoking inflation. Last year, nonfarm payrolls increased by an average of 251,000 a month — two to four times higher than the sustainable pace. As a result, many concluded that the labor market was expanding at a rate inconsistent with price stability.
After incorporating recent immigration estimates, though, Wendy Edelberg and Tara Watson argue that the economy in 2023 could have sustainably accommodated higher employment growth without inducing inflation, anywhere from 160,000 to 230,000 per month. This pace is expected to slow to 160,000 to 200,000 a month in 2024, well above the pre-pandemic forecast of 60,000 to 100,000.
While these new estimates narrow the gap between monthly job gains and the “sustainable pace,” they suggest that tightness in the labor market is still contributing to inflationary pressures. In the first quarter of 2024, the economy added 276,000 jobs per month. To meet the sustainable pace calculated by the authors, monthly gains would need to drop to 121,000 to 175,000 for the remainder of the year.
The new immigration numbers also help explain the surprising strength of consumer spending, the engine of economic growth. The authors estimate that “immigration accounted for roughly $48 billion in personal income … in 2023 and will account for roughly $76 billion in 2024.” Real consumer spending, which was 1.2 percent in 2022 and 2.7 percent in 2023, was boosted by an estimated 10 and 20 basis points, respectively. Through spending, immigrants are estimated to have boosted economic growth 0.1 pp in both 2022 and 2023. Real GDP grew 0.7 percent in 2022 and 3.1 percent in 2023.
The contribution to real consumer spending and economic growth is modest but adds another piece to the puzzle explaining recent economic trends. The authors argue that immigration has likely produced little additional pressure on aggregate prices or wages because it has resulted in both greater production and greater consumer demand. However, they provide four examples of how immigration may have had sector-specific inflationary effects.
Higher immigration flows likely induce firms to purchase additional equipment for their employees. For example, additional office chairs, phones and computers for office workers. Government spending on public amenities also likely increases in communities that see net immigration. More students, for instance, would require states to hire more teachers. There is also likely a mismatch between the goods and services that immigrants produce and the ones they consume — which in the short term would be disinflationary for some sectors and inflationary for others. Finally, higher immigration should result in higher rental housing demand, placing pressure on rents.
Edelberg and Watson’s analysis of new immigration data helps shed some light on areas of the economy that have continued to perplex economists. It helps partially explain the surprising resilience of both the labor market and consumer spending over the past two years. It also suggests that the economy can support a faster pace of employment than previously believed without affecting the Federal Reserve’s goal of bringing down inflation.
