Should investors care about ICE raids?

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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

Trumpian initiatives must affect at least one of three things to cut through to markets: economic growth, the rate of inflation, or firm profitability. Sure, the erosion of institutions should arguably impact market lizard brain, but there’s no box in a DCF model marked suspension of habeas corpus or rule of law.

So while the squishy human part of investors may have views on ICE raids and promises of mass deportations, the reptilian side that operates the trade blotter has largely ignored them.

New research from Pia Orrenius, Grace Ozor, Madeline Zavodny and Xiaoqing Zhou published by the Dallas Fed supports the case that investors should start caring with their wallets. The economic impact of a combination of collapsing border crossing and deportations, they estimate, could be huge.

As non-farm payrolls day reminds us each month, the state of the labour market is important to investors. And ignoring prospective immigration flows — authorised or not — looks eccentric. In fact, according to the National Foundation for American Policy, immigrant workers account for almost 90 per cent of labour force growth since 2019.

Net unauthorised immigration to the US surged under President Biden, with the CBO projecting that 7.3mn unauthorised immigrants were added to the US population between 2021-24:

Following Trump’s inauguration, net inflows came to a juddering halt. What does the sudden drop mean, and what happens to GDP and inflation if Trump’s dreams of mass deportations become a reality?

To answer this question, the Dallas Fed researchers built a structural vector autogression model of the relationship between net inflows and macro variables — a fancy way to untangle relationships and causation — using data going back to the 1950s. They then threw a bunch of deportation scenarios at the model. The results are interesting.

In their baseline scenario, net unauthorised immigration is basically zero — with border crossings offset by interior expulsions. But Trump’s plan — often repeated on the campaign trail — goes far further than net zero. He has committed to deport millions of undocumented migrants.

So the Dallas Fed built two scenarios for interior deportation. Their ‘high’ interior deportation scenario sees removals gradually increase to 1,200 each day by the end of 2027. Their ‘mass’ deportation scenario sees a million people a year being ejected by 2027 — or 2,737 per day. Borrowing and adapting a great chart from MainFT’s story on the ICE dragnet, we can see quite how the recent pace of arrests stacks up against the Dallas Fed deportation scenarios:

Not every arrest will result in deportation, but you get the picture.

What are the economic impacts of deportations according to the Dallas Fed’s model? Not great.

Inflation is unch to higher in all scenarios. But the high interior deportation scenario knocks 0.8 percentage points off both 2025 and 2027 GDP. And the mass deportation scenario reduces 2027 growth by a whopping 1.5 percentage points. That’s an enormous hit.

But hold on, why is the *baseline* forecast smacked down 0.8 percentage points? It turns out that all Dallas Fed scenarios are calibrated against the CBO’s demographic projections. And the CBO’s was required to reflect the laws and policies in place in November 2024 when it made its projections. And so the Dallas Fed’s baseline ‘no change from here’ forecast is quite a shock versus CBO. In other words, the Dallas Fed is saying that damage to economic growth is already in the pipe.

Some caveats.

First, we’re talking about model outputs. Models can be fun, and are sometimes even useful. They are maybe the best tools we have to guess what will happen in the future. But it would be astonishing if a model turned out to capture perfectly everything going on in our messy world. So some caution is needed when looking at the results.

Second, the Dallas Fed model is trained on over seventy years of data. Models with lots of data tend to be better than those with sparse data, but the relationship between inputs and outputs may have changed radically over recent years — meaning that relationships established on ancient data may have little relevance to current times.

Third, we’ve no idea how successful Trump will be on his promise to deport millions. While he has secured crazy-high levels of funding for ICE — and ICE have not been sitting on their hands — Trump needs a big accelerations arrests and deportations to hit his targets. While reasonable people will differ on the likelihood of this, investment bank analysts who’ve looked closely at the question seem mostly sceptical that Trump will get there.

In a note titled ‘Only a Modest Labor Market Hit from Immigration Crackdown (So Far)’ Goldman Sachs’ see only a modest labour market hit from the immigration crackdown. And they forecast no real pick-up in deportations — although do highlight risks to their forecasts from the suspension of student visa interviews and termination of the Temporary Protected Status for Venezuelan migrants.

In their deep-dive research note into US immigration dynamics at the start of July, analysts at Barclays built a detention-based model to forecast monthly interior deportations, and reckon that ‘a further rise in deportations is unlikely’ despite Stephen Miller setting a quota for ICE to arrest 3,000 people a day. They explain:

ICE continues to face capacity limits, and significant court backlogs are slowing the removal process. While additional funding through the budget reconciliation bill could help relieve these pressures, any effect would likely be gradual.

Moreover, Barclays hints that pushback from industry leaders facing labour shortages may see Trump chicken out continue to nuance his policy.

The most concerned analyst we’ve found so far is JPMorgan’s Joe Lupton, who put out a note last Friday highlighting the risk to second half GDP growth from Trump immigration policies. On top of the jump in ICE detainments, Lupton examines plans to phase out the CNHV (China, Nicaragua, Haiti, and Venezuela) Parole Program and the Temporary Protected Status — which he calculates have collectively provided legal status to 1.8mn new immigrants. JPM estimates that 1.1mn of these are employed — and so make up 0.8 per cent of the US total workforce.

Losing 0.8 per cent of the workforce would be a big deal, and JPM imply that such an eventuality would risk pulling their already very weak GDP forecast into negative territory were it to transpire. But they also qualify this concern with doubts on the feasibility around execution. A lot depends on how many workers who lose their legal status are able to shift to the informal sector, and how much ICE is able to prevent this shift.

Still, the overall drag on GDP levels could be quite large. And according to Lupton, this is under-appreciated by the market.

How big a deal this all turns out to be for market lizard brains should become clear as it impacts non-farm payrolls towards the back-end of this year and through 2026. In the meantime there’s something for both reptiles and humans in MainFT’s stunning visual story looking inside the booming business of detention.