Key Information for the U.S. Trading Day

All eyes are eagerly awaiting the release of the consumer price index by the Labor Department at 8:30 a.m. Eastern, against the backdrop of ongoing debate about the Fed’s potential rate cuts.

Taking a broader perspective, an intriguing argument is emerging suggesting that illegal immigration might be a hidden factor supporting the robustness of the economy while simultaneously tempering inflation.

Wendy Edelberg and Tara Watson, both affiliated with the centrist think tank The Brookings Institution, are set to publish a paper advancing this notion. They dissect recent Congressional Budget Office estimates, revealing that the most significant population shift is within the category termed “other nonimmigrants,” encompassing individuals beyond lawful permanent residents and temporary visa holders.

This group includes around one million individuals eligible to seek asylum or other immigration relief, as well as over 800,000 individuals granted humanitarian parole from nations like Ukraine and Haiti. Edelberg and Watson categorize these as “likely stayers” – individuals engaged in the economy who may or may not remain permanently in the U.S.

Before the pandemic, sustainable employment growth, without fueling inflation, ranged between 60,000 and 140,000 jobs per month, projected to decrease to 60,000 to 100,000 due to population aging. However, Edelberg and Watson suggest that with the added labor pool, the economy could have absorbed between 160,000 and 230,000 new jobs monthly last year without exacerbating inflation, with the current capacity between 160,000 and 200,000 new jobs per month. Despite last month’s addition of 275,000 jobs, signaling a still-too-rapid pace, it’s less excessive than it could have been.

The economic ramifications are significant: an anticipated tenth of a percentage point increase in GDP this year, translating to approximately $73 billion in consumer spending and $76 billion in personal income, adjusted for inflation.

Gerard MacDonell of Front Harbor Macro Research views the new paper as “somewhat dovish.” He notes that if potential GDP growth is higher and the employment growth speed limit is increased, recent economic strength becomes less alarming. However, market implications may not be as pronounced, as investors are skeptical that current employment growth is significantly surpassing its limit.

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