A recent study from the Federal Reserve Bank of Dallas projects that the Trump administration’s tightened immigration policies and increased deportations may reduce U.S. economic growth by nearly 1 percentage point in 2025, with potentially deeper impacts by 2027 under a mass deportation scenario.
A 1 percentage point drop in GDP is considered significant, especially in developed economies like the United States.
A 1% decline in GDP translates to a substantial reduction in the overall value of goods and services produced in an economy.
For example, 1% of the US GDP is over $150 billion.
This can negatively affect various sectors and individuals through decreased income, investment, and trade.
The findings highlight the significant role immigration plays in sustaining U.S. labor force growth and economic output, particularly as the nation faces a cooling economic trajectory.
The Dallas Fed study, led by economists including Pia Orrenius, models several scenarios of reduced immigration through 2028.
Under a baseline scenario, which assumes a decline of about 2.4 million unauthorized immigrants, annual GDP growth is expected to drop by 0.8 percentage points in 2025 compared to projections from the Congressional Budget Office.
This reduction stems largely from a sharp decline in border crossings, which accounts for 93% of the projected economic hit, rather than deportations alone.
In a more severe “mass deportation” scenario, where 1 million immigrants are removed annually through 2027, the study estimates GDP growth could fall by nearly 0.9 percentage points in 2025 and a staggering 1.5 percentage points by 2027.
With economists already forecasting U.S. growth to slow to 1.5% in 2025 from nearly 3% in 2023 and 2024, these policies could push growth perilously close to stagnation.
The study notes that immigration restrictions are unlikely to significantly affect inflation, as labor shortages may drive up wages and input costs in key sectors like construction, agriculture, and logistics, offsetting any deflationary pressures.
This is particularly critical in industries like construction, where undocumented workers make up well over 25% of the workforce.
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Policy Changes & Public Reaction
Following President Donald Trump’s election, immigration at the U.S.-Mexico border has plummeted, and deportation efforts have intensified.
The administration has ended programs like the CHNV humanitarian parole for Cubans, Haitians, Nicaraguans, and Venezuelans, stripping work authorization from up to 528,000 individuals.
Additionally, policies blocking new refugee admissions and limiting work opportunities for international students on Optional Practical Training (OPT) and STEM OPT programs have further reduced the foreign-born labor force, which has already declined by 735,000 since January 2025.
These measures, coupled with a $150 billion budget infusion for immigration enforcement approved by Congress, signal a historic expansion of deportation efforts.
The Federal Reserve Board Chair Jerome Powell has cited these policies as a key factor in slowing economic growth, emphasizing their impact on labor force dynamics.
The reduction in immigration is already creating labor shortages in critical industries.
In Los Angeles, for instance, Immigration and Customs Enforcement (ICE) raids have driven workers into hiding, hampering efforts to rebuild after devastating wildfires.
Sectors like agriculture and food processing face rising costs due to diminished labor availability, which could ripple through supply chains and increase prices for consumers.
U.S. Agriculture Secretary Brooke Rollins announced a controversial plan on Tuesday, July 8, 2025, to address potential labor shortages in the agricultural sector by encouraging 34 million “able-bodied adults” on Medicaid to take up farm work.
Economists warn that the labor force contraction could complicate the Federal Reserve’s efforts to interpret economic data.
A smaller workforce may lead to lower job growth numbers, potentially misread as weakening demand rather than a policy-driven supply issue.
This dynamic could challenge the Fed’s ability to calibrate interest rate decisions, especially as inflation remains above the 2% target amid trade and immigration policy shifts.
The Dallas Fed’s findings align with analyses from institutions like the American Enterprise Institute (AEI), which estimates a 0.3% to 0.4% GDP reduction in 2025 due to immigration policies, with further downward pressure on labor force growth.
Posts on X reflect growing concern, with users citing the study to highlight risks of inflation and labor shortages in key industries.
However, some economists caution against overreacting to slower job growth.
Jed Kolko, a former Commerce Department economist, noted that a smaller labor force may simply reflect policy changes rather than economic weakness, urging a recalibration of how job data is interpreted.
Meanwhile, critics like Mark Zandi of Moody’s Analytics warn that declining data quality could exacerbate uncertainty, especially as the U.S. navigates tariff increases and immigration restrictions.
As the U.S. economy braces for slower growth, the Dallas Fed study underscores the critical role of immigration in sustaining economic vitality.
With labor force participation already strained, the loss of foreign-born workers could deepen challenges for businesses and policymakers.
The Federal Reserve faces a delicate balancing act: managing inflation without stifling growth in an economy increasingly shaped by restrictive immigration policies.
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