Global equities series: Immigration, the Federal workforce, and US labor markets

This is the third of an eight-part series that covers the themes and challenges facing global equities in the second Trump administration. Part 1 covers the impact of an America-first world order while Part 2 looks at Trumpism's issues. In Part 3 we delve into immigration, the Federal workforce and US labor markets. Part 4 unpacks deregulation, oil demand and inflation pressures. Part 5 covers the US fiscal policy, debt and deficit and Part 6 looks at foreign economic policies and trade concerns. In Part 7 we deep dive into geopolitics and geoeconomics and Part 8 unpacks portfolio diversification in America-first global equity markets.

Team Trump, especially the newfangled “Department of Government Efficiency”, aims both to curb immigration and to trim what they see as a gargantuan US federal government in terms of workforce, share of national output and regulatory overreach. Yet the data show that immigration drives US labor force growth; the federal workforce is small vs. history, population growth and especially other countries. Still, we would expect the dynamic US economy and markets to respond favorably to significant deregulation and improved government efficiency. That said, we believe serious immigration restrictions or reversals would limit potential growth through both the supply and demand sides of the economy – key strengths of the US compared to other large, high-income countries, so we would expect significant efforts to turn the tide of illegal immigration, but not so much legal immigration.

Immigration has driven almost all US labor force growth in recent decades, which implies that reaching 3% real growth would require remarkable, sustained increases in productivity unless legal immigration is allowed to continue. Meanwhile, US direct federal primary (non-interest) spending is only about 15% of GDP, with another 5% in federal-state fiscal transfers (plus another 10% of GDP in separately funded state/local government spending).

The small share of federal spending in GDP and federal employees in the civilian workforce likely will limit the radicalism of reform that could disrupt the labor market. Still, there is in our view always room to improve efficiency and productivity. Even limited success may well mean higher equity prices with possibly somewhat higher interest rates and bond yields.

Investment Risks

The value of investments and any income will fluctuate (this may partly be the result of exchange-rate fluctuations), and investors may not get back the full amount invested.