The real supply shock killing the economy isn’t tariffs or China—it’s the disappearing immigrant labor force

President Donald Trump’s decision to mobilize California National Guard troops in response to ongoing immigration protests underscores the economic fallout of his administration’s hardline immigration policies, especially amid a significant drop in foreign-born labor.

Protests erupted in Los Angeles on Friday after federal agents—armed and outfitted in military-style gear—conducted a raid on a clothing wholesaler. The operation was just the latest in a growing series of high-profile crackdowns on businesses suspected of hiring undocumented workers.

Coinciding with the raid, the Labor Department released its May jobs report, revealing a shrinking U.S. workforce—largely driven by a historic drop in foreign-born workers. This marks the most significant back-to-back decline in immigrant labor participation since the COVID-era disruptions of 2020.

Economists are taking notice. According to a Deutsche Bank report analyzing U.S. Customs and Border Patrol data, encounters at the Southwest border have plummeted to 12,000 per month since Trump took office—down from a monthly average of 200,000 during the Biden years between January 2022 and June 2024.

“While everyone is focused on the impact of tariffs, the real story for the U.S. economy is the collapse in immigration: down more than 90% compared to the run rate of previous years, equivalent to a slowing in labour force growth of more than 2 million people,” wrote George Saravelos, head of FX research at Deutsche Bank.

“This represents a far more sustained negative supply shock for the economy than tariffs,” Saravelos added.

Trump, who has repeatedly argued that weaker job growth justifies interest rate cuts, may find that his immigration policies complicate the Federal Reserve’s decision-making. The central bank, already cautious about the inflationary risks posed by Trump’s escalating tariff agenda, now faces an additional labor-supply shock.

With immigration collapsing, the U.S. economy no longer needs the same level of hiring to maintain employment stability. Average payroll growth has already declined to 124,000 jobs per month in 2025, down from 250,000 last year. Still, the unemployment rate has remained steady at around 4.2% since summer 2024.

Morgan Stanley estimates that the break-even rate for monthly job growth—the amount needed to keep unemployment unchanged—will fall to 90,000 by year-end. That’s a sharp decline from 170,000 today and 210,000 in 2024, as both deportations and a slowdown in immigration cut into the labor pool.

This demographic squeeze could have wider economic repercussions.

Deutsche Bank warns that the decline in immigration could further weaken the U.S. dollar, already pressured by the Trump administration’s aggressive protectionist policies.

“Last year we were writing that the U.S. was benefiting from a goldilocks mix of high employment growth and low wages precisely because of high immigration numbers,” Saravelos noted. “If recent immigration trends continue, it must follow that over the course of the year the reverse will happen. As the 2022 energy shock showed, a negative supply shock is not good news for a currency.”

Note to our readers: The information in this article is based on verified reports from independent financial research institutions, the U.S. Department of Labor, and Customs and Border Patrol data. All quotes and economic figures have been fact-checked to maintain transparency and accuracy.

Sources - 

https://www.nytimes.com/2025/06/07/us/trump-immigration-raids-workplaces.html

https://www.bloomberg.com/news/articles/2025-06-06/collapsing-immigration-makes-us-jobs-data-harder-to-read-for-fed

https://fortune.com/company/morgan-stanley/