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Investing.com -- Morgan Stanley has lowered its U.S. immigration outlook, warning that reduced inflows will tighten the labor market and drag on long-term economic growth.
In a research note, the bank said it now expects immigration to total 800,000 in 2025, down from 1 million previously, and just 500,000 in 2026.
“Low immigration means slower population and labor force growth,” Morgan Stanley (NYSE:MS) wrote. “It also pulls potential growth and the neutral rate lower.”
The bank now projects labor force growth will slow from 1.5%-2.0% in 2022 and 2023 to just 0.7% this year and 0.5% in 2026.
Slower labor force growth lowers the so-called breakeven employment rate—the number of new jobs needed to keep the unemployment rate steady.
Morgan Stanley cut its estimate for 2025 to just 90,000 jobs per month, down from 125,000 previously.
“Low immigration implies a sharp slowdown in the breakeven employment rate,” analysts wrote. “A sharp slowdown in employment is needed to push the unemployment rate higher.”
Despite signs of economic cooling, the firm expects the Federal Reserve to stay on hold in 2025, with cuts starting in March 2026.
“If tariffs push near-term inflation higher while the unemployment rate stays low, the Fed is likely to remain on hold,” Morgan Stanley said.
The forecast also implies weaker long-run growth. “We think [potential growth] could fall further toward 1.5% as immigration restrictions take effect,” the note said.
As a result, Morgan Stanley now sees the real neutral interest rate drifting lower.