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April 13, 2006 2:56 p.m. EDT


ECONOMIC FORECASTING SURVEY

Illegal Immigrants and the Economy

Undocumented Workers Reduce the Wages
Of Low-Income Workers; But How Much?
By TIM ANNETT
April 13, 2006 2:56 p.m.

Economists broadly agree that illegal immigrants put pressure on the paychecks of lower-income U.S. workers with whom they compete for jobs. But the economists differ on the extent of the impact.

Nearly 80% of economists who responded to questions about immigration in the latest WSJ.com forecasting survey said they believe undocumented workers have an impact on the bottom rung of the wage ladder. Twenty percent believe the impact is significant, while 59% characterize the effect as slight. The remaining 22% said there is no impact.

Illegal immigration has become a front-and-center issue in Washington over the past month as hundreds of thousands of people have taken part in street demonstrations around the country demanding changes in immigration laws. So far, Congress has come to a stalemate on the issue.

Lawmakers disagree on how to transform undocumented workers into legal workers and how much emphasis to put on tightening border security. Efforts to reach a compromise faltered last week but work is expected to resume when Congress returns from its Easter recess later this month.

Nicholas S. Perna, an independent economist based in Ridgefield, Conn., noted that "the impact on wages is spread across a lower-income group." The highest concentration of illegal immigrant workers in 2005 were found in lower paying jobs such as housecleaning, food manufacturing and farming, according to Pew Hispanic Center.

Part of the reason for the disagreement among economists is because the phenomenon is difficult to measure. For instance, there is little agreement on just how many illegal immigrants are in the U.S. -- estimates range from 11 million to 20 million -- and by definition, illegal workers lie largely outside the bounds of conventional economic data.

About half of the economists said the presence of illegal immigrant workers has slightly reduced the overall rate of inflation in the economy, while 8% said the inflation rate has been reduced significantly. But 41% said they believe undocumented workers have had no impact at all on inflation.

On balance, nearly all of the economists – 44 of the 46 who answered the question – believe that illegal immigration has been beneficial to the economy. Most believe the benefits to business of being able to fill jobs at wages many American workers won't accept outweigh the costs.

David Wyss, chief economist at ratings agency Standard & Poor's, said he believes that undocumented workers have been a net positive. But, he said, "That doesn't mean there are no negatives, particularly for state health and education costs."

Housing Outlook

Elsewhere, economists gave their assessments of the U.S. housing market. Some reports on home sales and home prices early this year have hinted at weakness, adding to fears that the long boom in the market may be coming to an end.

The economists said they believe that home-price appreciation will slow sharply. They predict that the national average price of existing homes will rise 4.12% in 2006 from 2005 as measured by the Office of Federal Housing Enterprise and Oversight's closely watched house-price index. The index rose 13% in 2005. None of the economists predicted double-digit gains, and five predicted that home prices would remain unchanged or decline.

The slowdown in housing will have an impact on readings on overall economic growth. While residential construction added 0.41 percentage point to 2005's gross domestic product growth of 3.5%, the economists, on average, believe housing will subtract 0.14 point in 2006. Gross domestic product is the broadest measure of the economy.

Rising mortgage rates have helped damp the housing market. The average rate on 30-year conventional mortgages nationwide climbed to 6.49% this week, according to Freddie Mac, the highest level since July 2002. The economists forecast that the average mortgage rate will reach 6.68% at year-end.

The consensus view among economists is that the Federal Reserve will boost its target for the benchmark federal-funds rate once more – by 0.25 point to 5% -- and then keep the target there for the balance of the year. The fed-funds rate is what banks charge each other for very short-term loans and its level helps set a wide range of interest rates.

Long and Short of It

Long-term interest rates, as measured by the bond-market trading in the 10-year Treasury note, have begun to climb sharply recently, trading around 5%. For months after the Fed began its interest-rate raising campaign in 2004, long-term rates failed to respond – and even declined for a period of time.

The economists were asked how the Fed should respond to the advance in long-term rates. Just under half said the central bank should raise short-term rates less than they would have if long-term rates hadn't begun to climb -- because the rise in long-term rates will restrain economic growth. Fifteen percent said the Fed should raise rates more because they believe the rise in long-term rates reflects an improving outlook for the global economy.

"On long-term rates, the baton is being passed from [Fed Chairman Ben] Bernanke to the bond market," Mr. Perna said. "The Fed doesn't have to do as much if some of the heavy lifting is done by the bond market." The economists believe the yield on the 10-year note will be just above 5% at year-end.

Against this landscape, forecasts for economic growth were little changed in the latest survey. The economists believe growth in the first quarter was at a 4.6% annual rate. But they expect a decided slowdown over the course of the year, with GDP growth easing to 3.3% in the second quarter and to about 2.9%, on average, over the second half. The Commerce Department will release its first reading on first-quarter growth on April 28.

Among other findings in the survey:

• Nearly two-thirds of the economists said "no" when asked whether John Snow has been an effective Treasury secretary. Mr. Snow's future has been the subject of much speculation in Washington. Some of the economists said that Mr. Snow was too much of a pitchman for the White House and not enough of a policy maker. Still, Lou Crandall of Wrightson ICAP allowed that being Treasury secretary is "a thankless job."

• Forecasts for inflation were bumped higher amid a surge in oil prices. The consumer-price index is expected to increase 3.2% in May and 2.5% in November, on average, up from 3% and 2.3%, respectively, when economists were surveyed in March. The revised forecasts, though, are still lower than the 3.6% year-over-year increase that was reported in February, which is the most recent reading available. The economists expect the price of futures on light, sweet crude to reach $63.63 a barrel on the New York Mercantile Exchange by June, and to reach $61.15 in December. Both forecasts were increased from the March survey.


Write to Tim Annett at tim.annett@wsj.com5