Immigration Restrictions Could Slash U.S. Economic Growth by Nearly 1 Percentage Point, Federal Reserve Study Warns
The Federal Reserve Bank of Dallas released groundbreaking research on July 8, 2025, revealing that current immigration restrictions could reduce U.S. economic growth by up to 0.8 percentage points annually, with minimal impact on inflation. The comprehensive study, using economic modeling spanning seven decades, projects that declining unauthorized immigration flows will create substantial headwinds for the American economy through 2027, even as price pressures remain largely unchanged.
The research comes as net unauthorized immigration has plummeted 82 percent from December 2024 levels, falling from 105,000 to just 19,000 per month by March 2025. This dramatic decline follows the implementation of stricter border policies and increased deportation efforts by the current administration.
The Numbers Behind the Economic Warning
The Dallas Fed's analysis reveals the stark economic reality facing the United States as immigration policies tighten. Using a structural vector autoregressive model based on data from 1955 to 2019, researchers examined multiple scenarios for future immigration flows and their corresponding economic impacts.
"An unexpected increase in net unauthorized immigration raises U.S. output growth for about two years but has almost no effect on inflation," the study concluded, according to the Dallas Fed research.
The baseline scenario, which assumes interior deportations remain at current levels of approximately 87,500 per year, projects GDP growth will be 0.81 percentage points below benchmark levels in 2025. More aggressive deportation scenarios could push this figure even higher, with a mass deportation scenario potentially reducing growth by 1.49 percentage points by 2027.
These projections represent a significant economic drag. To put this in perspective, if the U.S. economy were expected to grow at 2.5 percent annually, the immigration restrictions could reduce that growth to as low as 1.7 percent under baseline scenarios, or potentially to just 1.0 percent under extreme deportation scenarios.
From Historic Surge to Sharp Decline
The current immigration landscape represents a dramatic reversal from the unprecedented surge experienced between 2021 and 2024. During this period, the Congressional Budget Office projected that 7.3 million "other foreign nationals" — unauthorized immigrants or those with quasi-legal status — were added to the U.S. population, dwarfing the pre-pandemic annual average of about 100,000.
"The U.S. experienced an unprecedented immigration surge from 2021 to 2024, driven mainly by an influx of immigrants crossing the Southwest border without visas," the Dallas Fed study noted.
This surge was unique in American immigration history. Unlike previous waves of unauthorized immigration, many post-pandemic arrivals received temporary protections, were allowed to enter the country, and were issued work permits. The foreign-born population accounted for most of the labor force and population growth during this period.
The policy reversal began in earnest in June 2024, when the Biden administration started restricting certain migrants' ability to request asylum along the southern border. The current administration has accelerated these restrictions, implementing policies aimed at stopping unauthorized immigration at the border and conducting mass deportations from the interior.
Five Scenarios Paint Different Economic Futures
The Dallas Fed researchers constructed five distinct scenarios to model potential economic outcomes, each differing primarily in the expected number of interior deportations while assuming border inflows remain near zero.
The Baseline Reality: Current deportation levels of 243 migrants per day, or 87,500 annually, represent 2.6 times the 2021-24 average. This scenario projects GDP growth 0.81 percentage points below the benchmark in 2025, declining to 0.49 percentage points below the benchmark by 2027.
High Interior Deportation: This scenario envisions interior removals gradually increasing to 437,500 per year by 2027, five times the baseline level. Economic impact would be 0.83 percentage points below the benchmark in 2025, growing to 0.84 percentage points by 2027.
Self-Deportation Wave: Perhaps the most immediate economic shock, this scenario assumes half of the 863,880 people with temporary protected status leave the U.S. before mid-2026. The front-loaded exodus would reduce GDP growth by 1.01 percentage points in 2025, though the impact would moderate to 0.45 percentage points by 2027.
Mass Deportation: The most extreme scenario projects interior removals rising to 1 million annually by 2027. While researchers note this outcome is "unlikely due to resource constraints," it would create the most persistent economic drag, with GDP growth 0.89 percentage points below the benchmark in 2025 and 1.49 percentage points below by 2027.
Border-Only Restrictions: Even without any interior deportations, simply maintaining current border restrictions would reduce GDP growth by 0.75 percentage points in 2025 and 0.38 percentage points in 2027.
Why Immigration Drives Growth, Not Inflation
The study's most striking finding challenges common assumptions about immigration's economic impact. While reduced immigration significantly dampens economic growth, it has minimal effect on inflation — a finding that contradicts political rhetoric linking immigration to price pressures.
"Inflation shows almost no response in the first few years but decreases slightly at longer horizons," the research found.
Across all scenarios, inflation effects remain modest, ranging from about 15 basis points above the benchmark in 2025 to between 5 and 21 basis points higher in 2027. These minimal price impacts stand in stark contrast to the substantial growth effects.
The research reveals that residential investment primarily drives the short-term increase in GDP growth from immigration, while nonresidential investment and consumption contribute to longer-term growth responses. This suggests that immigrants not only fill labor shortages but also create demand for housing and other goods and services that stimulate broader economic activity.
Border Controls Drive Most Economic Impact
Surprisingly, the study found that reduced immigration inflows at the border, rather than deportations, account for most of the negative economic effects. Border restrictions alone account for 93 percent of the projected reduction in GDP growth in the baseline scenario.
This finding has significant policy implications. It suggests that even without aggressive interior enforcement, simply maintaining current border restrictions will create substantial economic headwinds. The research indicates that the economic benefits of immigration flow primarily from new arrivals rather than from the existing unauthorized population.
Historical Context and Methodological Rigor
The Dallas Fed's analysis draws on an unusually comprehensive historical dataset, using annual data from 1955 to 2019 to construct its economic model. Researchers chose 1955 as their starting point because it followed the implementation of the 1952 Immigration and Nationality Act and avoided the disruptions of world wars and the Great Depression.
The study's methodology builds on insights from previous research showing that migration responds to economic conditions with a delay, and that factors such as home country conditions and unexpected changes in immigration enforcement play crucial roles in driving migration patterns.
"The contemporaneous correlation between net unauthorized immigration and U.S. recession dates is -0.09 and statistically insignificant, consistent with net flows' insensitivity to U.S. economic conditions in the same year," the researchers noted.
This finding supports their methodological approach of treating immigration flows as predetermined with respect to U.S. macroeconomic conditions within the same year, allowing for more accurate modeling of cause-and-effect relationships.
Enforcement Challenges and Resource Constraints
The study acknowledges significant practical limitations to implementing aggressive deportation policies. Immigration and Customs Enforcement (ICE) has historically fallen short of its numerical targets, and interior removals have always been low compared to border removals.
However, ICE has received unprecedented funding increases under the current administration's spending plan, with resources allocated to hire more agents, expand detention capacity, and fund state and local law enforcement partnerships.
The American Immigration Council has suggested that the mass deportation scenario envisioned in the study is unlikely due to resource constraints, including personnel, funding, and detention space limitations.
Broader Economic Research Supports Findings
The Dallas Fed's conclusions align with other recent economic research on immigration's impact. A Brookings Institution analysis estimated that a low-immigration scenario with negative net immigration would reduce real GDP growth by 0.4 percentage points in 2025.
Similarly, a Peterson Institute working paper projected that a mass deportation scenario removing 1.3 million unauthorized immigrant workers would lower real U.S. GDP by 2.7 percent from 2025 to 2028.
These consistent findings across different research institutions and methodologies strengthen confidence in the Dallas Fed's projections and suggest a broad consensus among economists about immigration's positive economic effects.
Caveats and Uncertainties
The researchers acknowledge several important limitations to their analysis. The predicted effects carry high uncertainty, with large error bands that include zero in many cases. The model estimates are based on historical data that may not fully capture post-pandemic economic relationships.
"The economy has evolved significantly over this period and since the pandemic. As a result, the historical relationship between variables such as migration and GDP may not adequately capture their relationship in the postpandemic period," the study cautioned.
Additionally, the research only examines unauthorized immigration effects, which may differ significantly from legal immigration impacts. Time-varying effects and other nonlinearities could bias estimates in unknown directions.
Policy Implications and Future Outlook
The study's findings carry profound implications for economic policy and political debate. The research suggests that immigration restrictions, while potentially achieving policy goals related to border security and law enforcement, come with significant economic costs that policymakers must weigh.
"There is good reason to be concerned that immigration policies that lead to a reduction in net unauthorized immigration relative to historical trends, all else equal, are likely to significantly lower real GDP growth relative to the counterfactual," the researchers concluded.
The timing of these findings is particularly significant as the U.S. economy faces multiple challenges, including concerns about long-term growth potential, labor shortages in key sectors, and demographic changes that could affect future economic dynamism.
The research also highlights the complex relationship between immigration policy and economic outcomes, suggesting that the debate over immigration should include careful consideration of macroeconomic effects alongside other policy priorities.
As the current administration continues implementing its immigration agenda, the Dallas Fed's analysis provides a crucial economic framework for understanding the potential consequences. The study's projections extend through 2027, offering policymakers and the public a roadmap for anticipating how current immigration policies might shape America's economic future.
The research ultimately underscores a fundamental economic reality. In an era of demographic change and global competition for talent, immigration policy decisions carry far-reaching consequences that extend well beyond border security to touch the very foundations of American economic growth and prosperity.