Houston Updates

Tariffs and Immigration Take Control of Houston’s Economic Outlook

 

June 2025

These quarterly reports on the economic outlook for Houston are intended to be medium or longer-term projections of the Houston economy.  Unfortunately, current chaotic politics make this a difficult time to forecast, not unlike what we saw in the early stages of the pandemic. Now it will be tariffs that lead the US economy through 2025 and 2026, followed by a crackdown on illegal immigration that could bring major labor shortages that slow it over the longer term.  

The introduction of US tariffs as a new regime for world trade promises significant short-run disruptions, but damage to output and employment should not be serious. However, look for a shock to prices to be the major source of tariff damage in 2025-26.  It comes at a time when a wage-price spiral and renewed inflation could be a significant risk.

Just as the short-run disruptions of tariffs recede, the March forecast from the Congressional Budget Office (CBO) sees major labor shortages ahead by 2026-27, resulting from a long-running US baby bust combined with severe immigration restrictions.  Instead of the 125-150,000 US workers per month seen in recent years the CBO sees only 40-60,000 in our future.  Unfortunately for a fast-growing metro area like Houston – highly dependent on domestic and international immigration – importing labor has been an essential ingredient of past economic success.  The on-going immigration crackdown threatens that success.      

We have the usual high, medium, and low projections of Houston’s outlook, but this quarter they are in a different format. And they are not presented with a lot of confidence – certainly not as a tool to accurately forecast the future, but perhaps to provide insight into how alternative scenarios might affect the local economy.

• Our short-run, tariff-driven outlook for the US is taken from the Survey of Professional Forecasters (SPF) through 2026. However, the low forecast will break off in early 2026 by assuming that the CBO projections of serious labor shortages don’t wait for 2027 arrival date. 
• The medium forecast maintains the SPF’s short-term optimistic outlook through 2026 and then has the CBO’s gloomy labor shortages lifted to about 80,000 jobs monthly through 2029.  During the pandemic, for example, many workers returned to the labor force or entered for the first time in response to sharply higher wages. Or perhaps we could see guest-worker programs implemented to bring additional low-wage jobs.
• The new high forecast is essentially last year’s medium forecast, but now assuming tariffs and the immigration crackdown somehow fall by the wayside.  Perhaps, politics don’t work out as planned and stalemate brings back the old economic regime.     

The bottom line for this new reality?  Houston suffers business cycle losses along with the national economy. However, there is also direct local damages from tariffs and labor shortages that will also reach into every small and medium sized business as well – whether tied directly to the business cycle or not. 

A significant slowdown with losses of jobs and local spending will come in both the medium and low scenarios, but there is no recession.  Houston’s trend growth rate for jobs with the soft-landing scenario we enjoyed until early this year was 1.7 percent annually.  Now, this 1.7 percent becomes the high forecast, under the new medium scenario job growth falls to 1.4 percent, and the low outlook is 1.2 percent. 

How We Got Here

Our March report on the economic outlook found that both Houston and the US had successfully completed a soft-landing and returned to trend growth. This marked the end of five years of pandemic stimulus, extraordinary public spending, an inflation outbreak, and Federal Reserve efforts to fight that inflation.  The Fed now finds itself in the “last mile” of efforts to bring prices back to its two-percent target.

By the spring of 2022, both the US and Houston had added back all the huge job losses to the lockdown period, and at the same time the Federal Reserve began to aggressively raise interest rates to fight inflation.  These rate increases were widely expected to bring a mild recession or at least a major slowdown.

Instead of the expected quick elevator down for the US economy, it turned into the long three-year escalator ride seen in Figure 1. The March report details this slow decline that was cushioned by over two trillion dollars in accumulated consumer savings from the stimulus.  After major annual revisions to the payroll employment data in March and following recoveries from Hurricane Beryl in Houston and Milton in Florida, payrolls in the US found solid trend growth while Houston fell a few thousand jobs below trend. 

A New Approach to the Forecast

We seemed set last quarter to resume healthy economic growth driven by the business cycle, but the return of Donald Trump to the White House brought a different plan.  Major new policy initiatives brought new tariff barriers and a crackdown on illegal immigration, and together they redefine the economic outlook. We need some new tools and definitions as a result.

This report accepts the macroeconomic consequences of tariffs on the US economy from several sources: short-run assessments are from the Survey of Professional Forecasters (SPF) and the Yale Budget Lab (YBL), and long-term limits on job growth via immigration restrictions are from the Congressional Budget Office. 

We have relied on the consensus outlook from the SPF in numerous past reports. The summary results of the YBL are added because they provide an often-used tool to deal explicitly with trade, tax and other policy issues.  We will use these results as an alternative look at the macroeconomic consequences of tariffs, but The Survey of Professional Forecasters will remain as the primary forecasting tool.

Tariffs turn out to be the main short-term influence on employment and output. Apart from near-term chaotic disruptions, their effects turn out to be modest on output and employment. Tariffs play a more important role in pushing prices up sharply for the next several quarters.  By mid-2026 and into 2027, sharp restrictions on illegal and low-wage immigration become the greater issue.  Restricting immigration quickly turns into sharp limits on job growth in the United States, steering the economy toward major job shortages and strong upward pressure on wages.     

We can’t make a neat split between tariffs and immigration in our forecast, but we need to make a different distinction that is often used in regional economics – and important to our modelling process.  What drives Houston’s employment over the business cycle? Both US employment and oil-related jobs are the two key variables, and they reach Houston with an ability to influence the basic drivers of its economy, i.e., the economic base or export base is the set of firms and industries that produce Houston’s regional exports.  Also called the primary sector, it is these regional exports by industries such as mining, manufacturing, transportation, or tourism that bring new income into the metro area and provide expansion and growth. 

And the meaning of these regional exports needs to be carefully qualified – especially given our tariff discussion – as we are not talking only about international sales.  Regional exports are sales to any destination outside the limits of the metro area and can be made across the state, into the rest of the nation, or across the world.  

We will talk later about Houston’s remarkable population and job growth, along with the importance of immigration and attracting outside labor in maintaining that high growth.  Since 1999, Houston’s payrolls have grown about 1.7 percent per year, which compares to US payrolls growing only near one percent annually. The basic regional exports driven by the US economy account for about 0.7 percent of that 1.7, while oil and gas drive another 0.2 percent. The remaining 0.8 percent is the inherently local non-basic jobs that trail the export sales.  Retail, bars and restaurants, routine community medical care, and many personal services fit here.

Anytime we try to forecast Houston over the business cycle, it is a matter of computing the impact of oil and the US economy on the economic base.  Then non-basic industries will automatically follow, based perhaps on a multiplier.

But now, once the base damages are calculated, the non-basic companies also still feel tariffs and worker shortages in the same way as the export base.  They still follow but with their own local distortions: they now must deal with shortages and disruptions to the supply chain, they or their customers will pay new taxes, and they deal with higher costs and prices.  Mostly smaller firms than the basic exporter with their jobs in manufacturing, mining, or transportation, they are often more reliant on low-wage labor that can be caught up in the immigration restrictions.  We need to account for these secondary damages apart from our usual assumption that they automatically follow the local economic base.   

This model fully accounts for the number of non-basic jobs created or about half of total  job growth. These jobs are partly driven by multipliers from the basic/exporter jobs, but other factors weigh in heavily to achieve Houston’s history of rapid growth: organic and rapid local population growth, the Texas Growth Formula with less regulation and lower taxes, moderate housing costs, and heavy State investment in basic infrastructure like roads and highways.  A separate calculation is made in this report to handle this damage to non-basic industries.¹

Where we are finally headed is summarized in the table below that describes a high (H), medium (M), and low (L) forecast of the annual growth in Houston jobs. This is the same H,M and L discussed in opening paragraphs: a low built largely around a pessimistic outlook for the timing and depth of labor lost to immigration restrictions; a high that is the moderate forecast for the soft landing expected only a few months ago; and a medium that compromises on labor force losses by assuming some form of legal entry for low-wage workers.    

We will later divide the forecast differences into that part driven by cyclical damage to the economic base, and into non-basic losses that occur locally due to tariffs and worker shortages. For example, in 2028 the losses will be 22,800 jobs from high to low, with 12,000 lost to the export base and 10,800 locally.

There is no recession in this forecast, but a significant slowdown compared to expectations of steady growth just a few months ago. Houston’s past rapid growth was already at risk primarily because of its growing dependence on high levels of immigration – domestic, legal and illegal.  These risks are growing and have been pulled forward in time.       

The Tariffs

A tariff is a simple percentage tax levied on the value of foreign goods as they enter their home country.  It may be imposed on one country or many, on one good or many.  The taxing country collects the tariff, but it is simply passed through as a price increase to the domestic buyer.  Revenue collection is automatic and entirely comparable to the State Comptroller collecting local sales tax at the cash register. 

Why a tariff?  They are usually designed to promote domestic production over the purchase of foreign goods. For example, the Trump Administration wants to protect domestic manufacturing for national security, to eliminate unfair trade practices, and to bring better-paying jobs back to the US.  Raising the prices of foreign competition compared to US companies might be one way to make domestic goods more attractive than foreign rivals.  

Tariffs cannot be seen as a partisan issue, with both political parties repeatedly showing themselves unable to resist them, often using them as a political payoff to key industries or constituencies.  

• Richard Nixon briefly used an across-the-board tariff of 10%.
• Jimmy Carter taxed foreign shoes.
• Ronald Reagan set “voluntary restraints” against Japanese auto makers.
• George W. Bush put tariffs on domestic steel and Obama on tires from China.
• The first Trump administration taxed solar panels, steel, aluminum, and washing machines.  Heavy China-specific tariffs dwarfed the others.  Biden kept many of the China tariffs.

Donald Trump seems to be motivated by much broader and more ambitious goals that aim to improve the US economy, and he is a true believer in their success.  Economists also can be accused of being true believers but in completely rejecting tariffs as a policy that has repeatedly failed over the last hundred years. This report carefully outlines and follows the economic perspective.    

In Econ 101, we learn that there can be real advantages for the home country of imposing a tariff on another, and in this simple case of two countries and one good we can solve for the optimal tariff to achieve that goal.  However, the next chapter of the same textbook tells us that this goal can fall apart with multiple goods, multiple countries, or especially if retaliation arises against the home country. The tariffs dissolve into a negative sum game with no winner.

A recent study of the impact of the Trump Administration’s 2018 round of tariffs² found they match most of the expectations from the textbooks: there were major disruptions to supply chains; the federal government collected about $14 billion from consumers, almost all of this cost was paid as an almost immediate pass-through of costs to business and consumers; businesses and consumers also paid an additional $1.4 billion/month tax for the drag or dead-weight losses incurred by tariffs.  Most past studies of tariffs show some sharing of tariff costs with the countries subject to tax, but this study found nothing paid by foreign partners.          

Macroeconomic Impact of Tariffs on the US Economy

To assess the impact of tariffs on the US economy we used two recent reports relevant to Trump tariff policy.  The Survey of Professional Forecasters (SPF) was published on May 16 and the Yale Budget Labs (YBL) on May 12, with both reporting the on-going effects of tariffs. YBL used a tool called a computable general equilibrium model that is particularly appropriate to the assessment of trade and tax issues. These results come after the large concession from the administration on the size of US reciprocal tariffs on China.    

The consensus forecast from the Survey of Professional Forecasters is the usual tool we have relied on in several past reports to estimate the short-term US outlook.³ The SPF forecast shows that employment remains strong through the second quarter, weakening only moderately in the second half of this year to 80-90,000 jobs, and then making a strong recovery through 2026.

Figure 2 shows several projections forward of monthly job growth into 2026 and beyond reflecting soft-landing conditions before the tariffs (SLd), a much lower SPF1 forecast that cuts to directly using the CBO outlook number, an SPF2 outlook that improves with better tariff performance and higher levels of US employment from legal entry and some for low-wage labor. There is also a tariff-focused forecast from the Yale Budget Laboratories (YBL)   

The low SPF1 forecast does not show the same very strong 2026 recovery from tariffs as the SPF publication itself, and it then joins with a longer-term projection of lower job growth from the Congressional Budget Office (CBO).⁴ Because of the long-running baby bust in the US and the Trump crackdown on immigration, the SPF1/CBO forecast is for only 58,000 jobs per month in 2026 and 46,000 in 2027.  This compares to the base pre-crackdown expectations of trend payroll growth closer to 135,000 per month.      

SPF2 assumes moderation in losses both in the short- and long-term.  The short-run SPF2 now has the full and substantial 2026 tariff recovery from the SPF publication included in the 2026 outlook.  Plus, it assumes that – like the pandemic – a very tight labor market and rising wages can pull many voluntarily unemployed workers back into the labor market.  Or perhaps by 2026 there is Congressional action on some legal low-wage immigration to relieve some of the most serious labor shortages.  Relief remains limited compared to the pre-tariff era and the Base forecast.  The illegal immigration issue is discussed in more depth later in the report.

The Yale Budget Labs’s tariff model⁵ is a completely different approach to modeling than the consensus outlook from the SPF.  Their computable general equilibrium model is a policy tool explicitly designed to deal with policy problems like taxes and trade. It has roots in the input-output tables of 80 years ago, but today’s models can include price changes and require balance between prices and the real economy. On the other hand, the detailed elasticities and other data requirements can be formidable and sometimes lacking.   

The YBL forecast does not see the complete tariff recovery of SPF2, but it looks more like the SPF1 results until 2026. Then the dead-weight damage from tariffs continues to weigh heavily on the YBL forecast from the negative sum game triggered by retaliation and counter-retaliation. The immigration crackdown is not considered in the YBL model results shown here – you only see the work of tariffs in both the short- and long-run.    

YBL in the short run looks much like the low SPF1 through 2025-26, and like the beefed up SPF2 in the longer run. The long-run number of YBL jobs turns out interesting, but likely irrelevant here since SPF2 provides similar long-run numbers.  We don’t use YBL much from this point forward, but only because we get a cleaner low with SPF1 and a cleaner high with SPF2.   

Tariffs, Price Pressures, and Fed Policy

Recent estimates from the YBL for the US are for an effective tariff rate of 17.8 percent with  $2.3 trillion in revenue collected in taxes over the next 10 years. Price increases result primarily from the implementation of the tax which will be quickly passed through to consumers and businesses. Figure 3 shows the pre-tariff results from the February SPF, the post-tariff May SPF, and YBL.      

The current tariff and immigration policy puts the Fed on the horns of a policy dilemma. While the forecast price increases are worrisome, they should be one-time, short-lived events.  But we are still trying to finish off the 2021-22 inflation outbreak, and consumers and workers are well trained in demanding wage increases to offset rising costs.  If the Fed ignores the prices increases, it could trigger a wage-price spiral.  Should it raise rates? Or as tariffs and labor shortages slow down the economy, perhaps policy should move to cut rates and stimulate the economy. So far, The Fed says its only decision is to wait and see.  

Figure 4 shows the Fed’s policy rate – the PCE deflator with the volatile food and oil sectors removed.  The left side of the figure shows 12-month changes that the Fed says good policy requires. Looking at the three-month changes on the right side of the figure, the remaining volatility in the data volatility shows why one year makes good sense.

Notice the initial rapid decline in inflation in 2022-23 thanks to higher interest rates but then followed by a slowdown that indicates little progress on prices over the past 12 months.  Sometimes called the Last Mile Problem, it has been a common feature of past policy efforts to return to a two-percent price target, and it sets up the policy dilemma explained above.    

Where is inflation headed? You have a range of choices. (Figure 5) Consumers are always the pessimists in any poll if asked how high inflation is or where it is headed. And the University of Michigan’s recent consumers survey was no exception, projecting year-ahead inflation at  5.1 percent and 4.1 over the next 5-10 years.

A post-Liberation Day edition of the Survey of  Professional Economists sees 3.5 percent inflation next year and prices that never make it back to target until after 2027. Financial markets estimate the 5-to 10- year inflation rate built into Treasury Inflation Protected Securities at around 2.3 percent, but again with no visible return to a two-percent target.  

How will the Fed react? They have been quite determined and deliberate in saying that they will wait for further events before moving rates.  The markets were initially skeptical but currently seem to be buying into the plan.  Figure 6 shows a forecast of the federal funds rate calculated by the Atlanta Fed, and based on the COMEX futures market, international swaps, and other financial variables. Currently, the policy rate is four percent and is projected to be cut twice before the end of 2027:  25 basis points at the end of this year and another 25 in June 2026. Maybe the current economic turmoil and uncertainty generated by Trump fiscal policy have made patience an obvious choice.   

Tariff Impact on Houston: Cyclical Losses in a National Slowdown

We forecast Houston payroll employment because it is the most timely and detailed data set by industry and available for the metropolitan area.  Personal income and gross product, for example, are published for Houston in some detail but only annually and following a substantial time lag.  How are Houston payrolls affected by tariffs and immigration restrictions?  Following the lead of our normal business cycle forecast, we begin by forecasting Houston payroll jobs using oil-related employment and US payroll employment as the forecast variables.   

Houston payrolls have grown faster than the rest of the country for decades, averaging two percent annually since at least the early 1990s.  In recent years, local job growth has slowed, but only to about 1.7 percent per year and remains much faster than the one percent rate for US payrolls. 

Recall from our earlier discussion (pp. 4.5): that the key drivers of the local economy are US  payrolls and oil-related jobs that influence the economic base: the follower non-basic jobs like retail or local services trail the base jobs; we can partitions growth of 1.7 percent into 0.7% from the US, 0.2 percent from oil, and the remaining 0.8 percent from non-basic expansion. 

Our usual forecast for Houston job growth begins with US payrolls and oil-related jobs as the chief drivers, and we are normally interested strictly in how external business cycle events drive Houston. We use the four alternative US employment scenarios in Figure 2: the pre-tariff soft-landing, a low and high combination of the SPF short-run tariffs and long-run CBO immigration crackdown, and a tariff-only YBL outlook.  We leave the oil sector unchanged at $65 per barrel because it is largely exempt from oil-related tariffs, as is most of the rest of the world.       

Figure 7 shows the impact on Houston jobs from our four US outlook scenarios.  The SLd or Soft-landing outlook is for 58,700 jobs over the period from 2025Q1 to 2029, i.e., the annual average 1.7 percent rate. 

 

The year-by-year changes shown are measured from the fourth quarter to fourth quarter.  The Survey of Professional Forecasters shows a nice rebound in early 2025, only a modest slowing through this year, but a slower 2026.   After 2026, the SPF1 and SPF2 forecasts are dominated by the immigration crackdown.  The Yale outlook differs with a specific and long-running slowdown because of tariffs. Remember that the Yale outlook does not contain immigration restrictions – only losses from tariffs. These longer-term losses reflect negative and dead-weight losses from retaliation and counter-retaliation in the trade war.   

The losses in jobs so far are significant but fewer than 10,000 jobs per year, and better than expected.  It is a modest slowdown and certainly not a recession.  BUT we are not through with the forecast.  Beyond the impact of the external US tariffs and immigration on Houston, we need to consider the large number of inherently local non-basic or secondary jobs. These many local establishments in retail, food and drink, clothing, furniture, toys, etc. will certainly find themselves paying the import tax. Local services may be less directly affected, but even services require basic material to keep up their repair and maintenance, photo shop, day care or nursing home supplies, custom decorating or picture framing materials, etc.  We will add these non-basic jobs later in the report and find that they at least double the damage seen so far. 

Legal and Illegal Immigration into Houston

A looming shortage of US workers is a serious economic issue.  As discussed earlier and shown in Figure 2, the Congressional Budget Office estimates that by combining only current legal immigration plus the weak US demographics of a long-standing baby bust we will soon see monthly job growth fall by half or more from recent levels.

We have long relied on legal immigration into the US for skilled workers and for family reunification.  And while no one supports the risks associated with illegal immigration, low-wage labor and associated skills have become a severe pinch-point in our high-skill workforce.  Construction, general repair, nursing homes, and many consumer services provide just a few obvious examples of the need.  Legal low-wage immigration is already widely used in agriculture, for example, with 310,000 H-2a visas issued in 2023 for temporary agricultural works.   

However, we currently find our two main political parties failing to deal with the issue and instead have turned illegal immigration into a political football.  The first Trump Administration began in 2019 by sealing the border, building a border wall, and implementing its “Stay in Mexico.” policy. A new Biden Administration reacted by opening the border wide in 2021, only to begin closing it quickly by 2024 when it  found itself on the wrong side of a key election issue.  The new Trump administration has again moved aggressively to seal the border, restore the “Remain in Mexico” policy, and reverse or cancel most Biden-era protective status programs. It ultimately aims to deport 1,200 to 1,500 illegal aliens daily.

The illegal entry policy under Biden almost certainly included far too many drug dealers and human smugglers.  However, an important by-product of the process was a very large number of new workers. Early this year, there were seven million people in the US under some form of protective status, up from one million in 2012 and 2.5 million in 2021. The ideal solution for the economy (if not for the politicians) would be to develop legal programs to screen for honest workers with badly needed skills.         

We assume for now that such programs may not happen over the next four years.  As discussed earlier, the SPF1 forecast assumes the CBO projections of only 40-60,000 new US jobs per month (Figure 2) turns into reality. The SPF2 forecasts provide modest relief by assuming that rising real wages can bring new workers out of the existing labor force, or that perhaps small incremental steps might be taken legally to loosen immigration restrictions.   

Houston’s population growth has been perennially among the fastest growing of US metropolitan areas, expanding since 1990 at a 2.0 percent annual rate compared to 0.9% for the US.  Houston has slowed marginally and only twice over the decades, during the 1980s oil bust and through the pandemic. (Figure 8)

It is important to note that demographers as a profession have looked at the coming US internal population slowdown and many times have predicted that Texas will follow.  They have been repeatedly disappointed and embarrassed as Texas’ growth continued at high levels.  The question now is whether tariffs and the immigration crackdown can finally do the job.

Domestic migration can swing widely from year to year, along with Houston’s volatile business cycle.  The natural rate of increase – birth minus death – peaked in 2001 at near 80,000 and has now fallen back to near 50,000 in recent years.  But international migration has become a steady local contributor at 25-40,000 jobs annually, although the end of the fracking boom and the pandemic brought setbacks even there.   

But a steadily falling natural rate (birth minus death) puts growing pressure on Houston’s population gains, and it puts pressure on international and domestic immigration to help maintain that strong history.  The Census does not distinguish legal and illegal immigration and – considering the current shut-down of the southern border and a growing deportation program – it is important to know more about illegal entry into Houston. Can Houston continue its history of extraordinary growth without the illegal entry that is now at risk?  

We used some back-of-the-envelope calculations to estimate the role of illegal immigration in Houston and to convert it into a larger local labor force.  (Figure 9) The estimates are described in a short note at the end of the paper, but they are crude and probably bias the estimated split between legal and illegal entry in favor of more legal.  After 2009, we see only scattered indications of much illegal entry until we reach the Biden years.  Ultimately, however,  Houston’s Census  numbers speak for themselves in telling us of the large role played by illegal entry from 2022-24.

The left side of Figure 9 shows Houston’s labor force and total employment.  Total employment is a broader definition than the usual payroll definition that includes only workers protected by unemployment insurance. Total employment adds the self-employed to payrolls.  If we then add the number of unemployed to total employment, we define the total labor force. 

For many low-wage immigrants, self-employment is a key entry-point to the workforce, e.g., low-skill construction, landscaping, elder care, lawn care and minor repair are common examples.  The numbers are shown year-by-year through the pandemic.  We see both the collapse of jobs during the lockdowns, followed by very rapid recovery to pre-COVID levels by early 2022.  That still left the US and Houston economies two years behind with zero net growth in 2020-21.  The years 2022-24 were met with a need for five years of growth to get back on track – and they did so.  Look back at Figure 1.

Over this five-year period, our rough estimates say 48.5 percent of the jobs added to the local labor force came from international migration – 20.4 percent legal and  27.9 percent illegal. We also see that another 17.8 percent of labor force growth was from domestic migration, jointly accounting with international for almost exactly two-thirds of the total. Apparently, all this migrant labor was absorbed by job growth, as today the unemployment rate sits at a healthy 4.3 percent. 

I think our lesson is that maintaining Houston’s continued high rates of job growth, as measured either as total jobs or just payrolls, requires ever-growing amounts of outside labor.  There is little doubt that any stringent cutoff of access to additional outside labor, as described by the CBO/SPF2 scenario, means a solid drop in Houston’s job growth could be just ahead of us.

Put It All Together

In Figure 7, we estimated the business cycle impact of tariffs and possible immigration limits on Houston job growth, comparing the result in our high (SLd), medium (SPF2) and low (SPF1) forecasts. We will skip past the Yale (YBL) forecast from this point forward because the SBL1 and SBL2 forecasts simply give us a cleaner contrast between high and low.  YBL did serve as a warning that the tariff damage may be worse and longer lasting than our professional forecasters think.

The job losses in Figure 7 from the business cycle only are relatively light at 10,000 per year out of 60-65,000.  It is a modest slowdown and far from recession. But we have not yet included the non-basic damage that was briefly mentioned in the text following Figure 7.  The non-basic companies will feel tariffs in much the same way they affect the exporter base. They will deal with shortages and disruptions to the supply chain, they or their customers will ultimately pay these new taxes, and they face higher costs and prices.  Often smaller than the basic exporter with jobs in manufacturing, mining, or transportation, they will likely be more reliant on low-wage labor that is caught up in immigration restrictions. 

Our forecasting model fully accounts for the number of non-basic jobs created.  They make up nearly half of total job growth that averages 58,700 jobs per year from 2025 to 2029.⁶ These jobs are partly driven by multipliers from the basic/exporter jobs, but other factors weigh in heavily to account for Houston’s history of rapid growth: organic and rapid local population growth, the Texas Growth Formula that brings less regulation and lower taxes, moderate housing costs for a major metro, and heavy State investment in basic infrastructure like roads and highways. 

Figure 10 below shows our usual high, medium and low forecasts with both basic and non-basic losses included. The peak losses in the medium basic-only forecast were only 6,100, but by adding the non-base losses the peak reaches 16,100.  For the low basic-only forecast the peak losses are 12,200 jobs, but adding non-basic losses they increase to 27,600.   Our forecast is still only a slowdown and not a downturn, but the slowdown has become a more serious drag on the economy.

Figure 11 summarizes our forecast for Houston employment.  The high forecast looks much like our March forecast for Houston – except that it was then the medium forecast.  It reflected the post-pandemic soft-landing and a return to long-run trend growth expected at the time.  The new forecasts generally have limited short-term tariff damages, and any longer-term tariff issues are dwarfed by the demographic and labor losses of the immigration crackdown in 2026-27 and after.

The low forecast accepts the CBO’s demographic losses that cut monthly US employment growth by over half to 48.000 by 2027. Demographers have been waiting for the US baby-bust to catch up with Texas growth projections for some time but have been repeatedly disappointed by the workings of the Texas Growth Formula and high levels of both domestic and international immigration.  The question now is whether this will be the time that immigration crackdowns make the basic domestic demographics matter again. 

The intermediate forecast assumes that wage rates will rise with sharp limits to available labor and add to the US labor force.  Or perhaps some political compromises can be reached to bring legal low-wage labor into the county. US employment is assumed to rise to a steady 78,000 monthly workers through 2029 and supports Houston growth.      

The local payroll growth rate from 2025Q1 to 2029Q4 is 1.6 percent for the high forecast, 1.4 for the medium forecast, and 1.1 for the low. Our medium outlook in March was 1.7 percent over the same time-period. 

Note on Estimates of Houston’s Recent Legal and Illegal Immigration

The figures seen in Figure 7 rely on estimates – partly pure assumption, some with an only partial factual basis, and often an extrapolation of US results into Houston data. Even so, the extraordinary numbers involved in recent illegal immigration make them impossible to ignore.     

• US legal immigration can be divided into family reunification and work visas that are justified by a need for skilled labor.  A look at the history of total international migration into Houston in Figure 5 shows that during those years when there is little local domestic immigration, the total internal activity tended to bottom out near 25-30,000.  If visas for skilled labor were also scarce during these pull backs of domestic workers, then the 25-30,000 figure mostly would be family reunification.
• We assume local family reunification is 25,000 and we know that in normal times US skilled worker visas are typically one-third of the family reunification total or up to 12,250.  We assume that we first fill the quota for family reunification completely before filling skilled labor, and we fill both before adding any illegal workers.  This creates a bias toward legal workers in the mix of legal versus illegal, although the international total remains unchanged. 
• In the US, about 55 percent of those holding green cards for family reunification also apply for a work permit. Skilled workers also bring family members, and about two-thirds of these apply for work. We assume that we can apply these same percentages in Houston.
• According to the Hamilton Project at the Brookings Institution, we can typically apply the same two-third rate of conversion to US Illegal migrants as well.  We use the same share in Houston. Again, according to the same source, green cards can be issued within a year for most migrants, except for those with visas for temporary protective status (TPS). These workers (about 45 percent of the total illegals in 2024) needed to wait for a full year before applying.  The 2024 TPS immigrants lost their opportunity for a work permit when President Trump took office.  The 2024 work numbers are adjusted for the affected 45 percent of TPS visa holders.
• The number of domestic migrants into Houston that bring their family, join the labor force, and take local jobs is unknown.  I assume a conversion rate of 55 percent, like that used for international family reunification.     

Written by Robert W. Gilmer, Ph.D.

June 2025

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