Near-record population growth in the U.S. in 2024--led by a surge in immigration--boosted the economy. But stricter curbs on illegal immigration by the incoming administration and a likely slowdown in legal immigration could lead net immigration levels this year to fall to the 2017-2019 average.

As a result, immigration, one of the most important factors in the U.S. economy in the last couple of years, will likely become a headwind to growth. Based on trend productivity growth of 1.5%, the economy's growth potential is likely going to be closer to 2%, from over 2.5% the last couple of years.

The U.S. Census Bureau defines net immigration as the difference between the number of people entering the U.S. and the number of people leaving the U.S. in a given year. It is a component of population change, along with births and deaths.

Net Immigration Accounts For A Substantial Share Of Population Growth

Record growth in net immigration underlies the demographic strength.  The U.S. population grew by nearly 1.0% between 2023 and 2024, according to the new Vintage 2024 population estimates released by the U.S. Census Bureau on Dec. 19, marking the highest growth rate recorded over a 12-month period since 2001 (see chart 1). Net international migration accounted for nearly 84% of the population growth in 2024. In the last three years, 85% of population growth came from net migration, a much higher share than the average 35% during 2001-2019.

The number of net immigrants in 2024 was about 4.1 million higher than it would have been if the pace from 2022-2024 had reverted to the 2001-2019 average. Even when eliminating the shortfall in immigration that occurred due to COVID-19, the total number in 2024 is about 3.2 million higher.

The undercounting of recent immigrants in the CPS raises important questions about the reliability of key economic indicators, like labor productivity and the employment-to-population ratio. Alexander Bick of the St. Louis Fed shows, in recent research, that the potential for upward bias in productivity growth caused by the undercounting of recent immigrants is unfounded ("The Recent Surge in Immigration and Its Impact on Measured Productivity Growth," 2025). Separately, Mr. Bick also finds results that imply that the impact on the employment rate may have been minimal from a statistical standpoint ("The Recent Surge in Immigration and Its Impact on Unemployment," 2025).

Chart 1

Chart 2

In per capita terms, the U.S. economy grew 2.0%, on average, during 2023-2024 (last two years of the Biden administration), weaker than the 2.3% average growth of 2018-2019 (Trump's first administration, before the pandemic and following tax cuts).  Real GDP growth, without adjusting for population growth, was just about the same during the two time periods, at approximately 2.8%.

Rising Labor Productivity And Employment Rate Will Be Key To Offset Declining Population Growth

If net immigration levels this year were to fall to the 2017-2019 average of approximately 750,000, the country is likely going to see the slowest population growth on record outside of the pandemic.  Assuming the country's natural population growth stays about the same as the last two years (as births outnumbered deaths by nearly 519,000 between 2023 and 2024), population growth is likely to slow meaningfully--to 0.4% in the next few years from 1.0% last year. This growth rate would be the slowest population growth since the early 1950s--with the exception of 2021, during the COVID-19 pandemic.

As a result, it will weigh on labor supply growth. Almost all of labor force growth since 2019 had come from the foreign-born population (the share of which climbed to near 19% by 2023) (see chart 3).

A decline in immigration will likely constrain economic growth this year.  To compensate for the smaller annual contribution (50 basis points smaller) from population growth, labor productivity and the employment rate would need to rise (see the appendix). We suspect there is scope for the employment rate (employment-to-population ratio) among the U.S.-born population to climb this year following a small decline last year (see chart 4). But it's unlikely that an increase will offset the drag from slower immigration given the economy is already operating near full employment.

Chart 3

Chart 4

Lower net immigration will constrain labor supply growth in the coming years, which will hit the labor-intensive sectors with meaningful shares of immigrant labor.  It will put further pressure on an already declining labor participation rate (due to increasing share of retirees). Data from the Bureau of Labor Statistics suggests construction is the most exposed (see table)--especially with additional resources that will be needed for reconstruction after the Los Angeles area wildfires. The leisure and hospitality sector and the agricultural sector are also more exposed than average.

According to Burning Glass Institute, a labor market research firm, workers who are lacking legal status and are at risk of deportation also tend to be concentrated in these sectors (and in states such as California, Texas, and Nevada).

While probably less of a risk, immigration restrictions for so-called "high-skilled" workers could exacerbate shortages in knowledge-intensive sectors such as information technology services, professional services, and high-tech manufacturing. Disruption in such industries requiring "high skills" (see chart 5) would be counterproductive to enhancing economywide competitiveness.

Chart 5

Chart 6

The inflationary impact is not straightforward because immigration boosts both demand and supply.  Unauthorized immigration is the reason aggregate demand and aggregate supply both have surprised to the upside. It has helped the economy grow at near 3% while also allowing for labor market tightness to recede.

Research from the National Bureau of Economic Research suggests labor contributions from unauthorized immigration boost supply more than demand because the workers are underpaid compared with authorized immigrants of similar productivity level ("The Earnings of Undocumented Immigrants," George Borjas, 2018). That said, our sense is that deportations would likely be disruptive for the sectors that rely most on unauthorized immigration, including agriculture, food processing, and construction.

The prospect of higher wage growth, together with food and construction inflation, potentially at the same time as import tariffs, could boost prices in goods-producing sectors. At the margin, this would be another reason the Federal Reserve could keep interest rates higher than would have been the case otherwise. To the extent that slower immigration weighs on longer-run potential growth, it points to a lower real neutral interest rate eventually.

Appendix: Modified Growth Accounting Framework

A modified version of a simple growth accounting framework can demonstrate the impact of slowing working-age population growth on an economy's long-run economic performance.

Here we break down real GDP into its two primary contributions: GDP per employed person, and share of employed persons in the population and population growth.

GDP = (GDP/hrs worked)*(hrs worked/number of employed)*(number of employed/population 16+)*population 16+

(Notice that the non-GDP terms cancel out in the above equation.)

Or, simplifying the above equation gives:

GDP = (GDP/number of employed)*(number of employed/population 16+)*population 16+

GDP = GDP per employed (or labor productivity) * employment rate * working age population

Transforming the above equation in log differences on both sides, which recasts the multiplicative factor into an additive relationship, gives the contribution of each component (in percentage points) to GDP growth.