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Tuesday, February 11, 2025

Immigration, tariff policies pose biggest economic risks, Kenan economist says

The extent to which President Donald Trump implements his campaign pledges to reverse rising U.S. immigration and impose tariffs on imports will determine whether America’s economy sputters in the coming year.

That’s the assessment of Gerald Cohen, chief economist for the Kenan Institute of Private Enterprise in Chapel Hill. Its annual forecast is especially challenging for 2025 due to “significant uncertainty about federal policy and its impacts on the economy,’’ he wrote in a recent report.

“The two biggest concerns are whether stringent immigration policy will slow job creation and whether new tariffs will raise inflation,’’ Cohen said. More broadly, the impact of federal policies on the economy tops the institute’s list of five trends critical to business leaders and policymakers.

As Trump prepares to return to the White House next week, policy missteps by his administration would threaten economic growth, according to Cohen. “The US economy begins 2025 on solid footing with healthy job creation and gross domestic product growth,’’ he said. ”Meanwhile, inflation has been coming down, although public concern and recent readings illustrate how difficult it is to get inflation all the way to the Fed’s target of 2%.’’

Trump has pledged sweeping, immediate steps following his Jan. 20 inauguration, such as shutting down the U.S.-Mexico border and increasing detention and deportation of immigrants. The administration may take a gradual approach to imposing tariffs, one of several possible scenarios for increasing revenue from China, Mexico, Canada and other U.S. trading partners.

Cohen cautioned that reducing the number of immigrants in the U.S. may result in a smaller labor pool and slowing growth of gross domestic product. Noting that imports represent 14% of GDP, the economist said “a significant increase in tariffs in the US would pass through a meaningful rise in inflation. The extent of the pass-through will be determined by many factors, such as the competitive landscape and the response of the dollar.’’

Cohen added that business and consumer confidence may strengthen, spurring spending and investments in some sectors, if the administration loosens regulations and reduces taxes on companies.

How the Federal Reserve reacts to the administration’s tariff policies represents another key issue for the coming year. Cohen said, “a series of escalating tariffs and retaliation would more resemble an inflationary trend than one-off price increases.’’

He added that “the Fed is wary of any hints of higher inflation, including recent data suggesting that inflation remains stubbornly above target. The Fed will closely monitor consumer and market-based inflation expectations for hints of any upward shift or unanchoring of inflation expectations.’’

Third, the potential for reduced immigration and the aging of the workforce increases the need for productivity growth to reach Treasury Secretary nominee Scott Bessent’s goal of 3% GDP growth, according to the institute.

“The only way to generate 3% GDP growth is to have productivity growth of more than 2.5%,’’ Cohen said. “Yet, since 2004, we have been in an era of low productivity growth, which has risen at a mere 1.6% annual rate for the past two decades.’’

Fourth, Cohen projected “slower yet still positive growth’’ for all 150 extended metropolitan areas modeled in the institute’s American Growth Project.  Areas that have built up reserves of capital in the form of skilled labor, technological infrastructure and other investments’’ are less threatened by the potential for an economic slowdown and policy risks than communities more reliant on immigration, housing trends and international trade, he said.

Finally, the institute reiterated its previous analysis that the lack of skilled workers  is “a troubling trend,’’ especially as “the pace of change and demand for skills looks to have accelerated.’’

“As technological advancement, innovation and uptake continue at a rapid clip, workforce training will struggle to keep pace, and the skills gap will expand in the near term.’’ Cohen said. Developing solutions to help close the gap is a priority for the institute this year.

 

 

 

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