A recent review by Morgan Stanley economists highlights the risk that a deceleration in U.S. population growth could reduce the nation’s capacity to expand output. The bank’s analysts point to immigration as the principal element behind the slowdown and caution that without stronger productivity gains, potential economic growth could retreat to levels seen before the COVID-19 pandemic.
Federal Census Bureau figures published in late January show U.S. population growth eased to its slowest pace since the pandemic. For the year ending in June 2025, the United States counted 341.8 million residents, an increase of 0.5% and a rise of just 1.8 million people. That was the weakest year-over-year increase since 2021, when global migration fell sharply amid travel restrictions and health measures tied to the pandemic.
In a note to clients, Morgan Stanley economists including Michael Gapen and Sam Coffin identified immigration as the "main factor" behind the deceleration in population gains. The Census gauge that produced these figures spanned the final six months of former President Joe Biden’s administration and the opening six months of the second term of his successor, President Donald Trump.
Since returning to the White House, President Trump has emphasized tighter immigration controls as a central policy objective. The administration’s tactics to achieve that goal have faced intense public scrutiny. The analysts cited recent public protests as a visible sign of that scrutiny, referencing demonstrations that followed the killings of two U.S. citizens in Minnesota by U.S. agents last month, among other shootings.
From an economic perspective, Morgan Stanley’s team warned that slower population growth should translate into reduced capacity for total hours worked by U.S. residents. They argued that unless productivity accelerates concurrently, the pace of the country’s potential output could ease below 2.0% this year.
At the same time, the analysts emphasized that immigration-driven downward pressure on potential output is occurring alongside other trends that are supporting output per hour. They pointed to faster measured productivity growth as a countervailing force that has helped sustain future expansion prospects.
Notably, the third quarter saw a sharp rise in measured U.S. worker productivity. The Labor Department reported that nonfarm productivity - a standard gauge of output per hour worked - increased at an unrevised annualized rate of 4.9% in the third quarter. That was the fastest recorded pace since the third quarter of 2023.
Morgan Stanley highlighted the role of rising investment in artificial intelligence as one component accompanying the spike in productivity, but the analysts were cautious about drawing a definitive link. They said they are not yet ready to conclude that an AI-driven productivity boom is under way and noted that "cyclical forces" could also be contributing.
"[W]e believe there are several forces at play that are currently supporting growth in output per hour, including post-pandemic cost-offsetting automation, cost pressure-driven efficiencies (which could have emerged from restrictive trade policies), an end to labor hoarding from the pandemic, and an emerging AI wave," the analysts wrote.
The note frames the outlook as a balance between a demographic constraint and productivity developments. If productivity momentum continues or strengthens - whether from automation, trade-driven efficiency improvements, the unwinding of pandemic-era labor practices, or the integration of AI - it could help blunt some of the output loss tied to slower population gains. If not, the analysts warned, the potential growth rate could moderate noticeably.
Overall, Morgan Stanley’s assessment underscores the interaction between demographic trends, public policy on immigration, and productivity dynamics in shaping near-term potential output for the U.S. economy.