Texas is experiencing a slowdown in job growth, while its southern border cities face potential budget strain as trade and immigration policies under President Donald Trump take hold.

The Federal Reserve Bank of Dallas found an immigration crackdown is likely contributing to the triple-A-rated state's weak job growth, which has slipped below its 2.1% annualized rate from 2014-2024 to 1.5% last year and a projected 1.2% based on data through August 2025.

Moody's Ratings reported that "some local governments on the U.S.-Mexico border will begin to experience slowing economic activity and potential budgetary stress due to increased trade tensions and stricter immigration enforcement policies."

Texas and Mexico are not separate economies for most practical purposes, according to Raymond Robertson, director of the Mosbacher Institute for Trade, Economics, and Public Policy at Texas A&M University.

"The labor markets are very integrated. The product markets are integrated. Production is very, very integrated," he said. "The tariffs are slowing down parts production and delivery. So that actually is a big problem."

In 2024, Texas was the largest state exporter, sending $455 billion of goods to other countries, with Mexico, its biggest trading partner, receiving 27% of the exports, according to the Office of the U.S. Trade Representative. Exports accounted for 17.3% of Texas gross domestic product in 2023 and supported an estimated 1.2 million jobs in 2022.

Mexico was also the state's top source for imports with $157.5 billion in goods received in 2024, according to the Texas Economic Development & Tourism office.

The removal of undocumented migrants or making it harder or expensive to obtain visas to work in the U.S. will have a cascading effect, according to Robertson.

"Immigration just contributes, on net, to economic growth," he said. "That's just whether it's because of the complementarities or whether it's because of the increase in demand, or if it's because of services that people are buying."

In its Oct. 17 report, the Dallas Fed said immigration policy changes come as Texas businesses have become more dependent on immigrant workers.

"Findings from the Dallas Fed Texas Business Outlook Surveys suggest immigration policy changes will negatively affect the ability to hire and retain foreign-born workers at one in five Texas businesses this year," the report said. "Among surveyed firms, 13% reported already experiencing a negative impact from policy changes."

It added that nearly 60% of firms affected by immigration policies said they were unable to hire qualified workers because of the lack of work permits or legal status, while 49% noted fewer foreign-born job applicants.

Texas initiated its own crackdown on undocumented migrants during the Biden administration and subsequently partnered with the Trump administration.

Starting in 2022, Texas Gov. Greg Abbott transported more than 119,000 migrants from the southern border to six "sanctuary cities" in other states. In January, the Republican governor directed the state's public safety department to deploy tactical strike teams to support the Trump administration's efforts to locate and arrest criminal illegal immigrants in the state.

Texas accounted for the largest share at 23.2% of arrests by U.S. Immigration and Customs Enforcement in the first five months of Trump's second term in office, CBS News reported in July.

In an Oct. 21 report, Moody's said some Texas cities with greater reliance on economically sensitive revenue from sales tax or international bridge tolls are more susceptible to budgetary shocks from declines in trade or border crossings.

Southern border communities in Texas and other states have seen a slowdown in sales tax collections.

"Sales tax collections were up about 4% through June 2025 from a year earlier, but have slid to just 1% up through September," the rating agency said. "We expect sales tax revenue to decline or remain flat at best given U.S. border economies' high reliance on cross-border retail trade, with Mexican shoppers accounting for upward of 40% of all retail sales."

The Texas cities of Eagle Pass and McAllen face "outsized exposure to budgetary shocks" as sales tax and international bridge toll revenue make up 45% and 40% of revenue, respectively, according to Moody's.

McAllen's bridge toll revenue through July was down about 3% from the prior year, while revenue performance for other Texas cities with international bridges collecting southbound tolls is near level with the prior year, Moody's noted.

"If Eagle Pass experienced a 10% drop in sales tax and bridge revenue, the city would face a roughly 4% budget gap," the report said. "McAllen's strong reserves, at over 60% of revenue, provide ample cushion to absorb short-term budget gaps."

Officials from the two cities did not respond to requests for comment.

In September, S&P Global Ratings downgraded Eagle Pass a notch to A-minus with a negative outlook, citing a limited local economy supported by the international bridge system's revenue from cross-border trading, along with a "recent history of insufficient internal controls as demonstrated by various audit findings."

Moody's downgraded the Texas border city of Pharr last week to Baa1 from A3, while affirming an A3 rating and stable outlook for its international toll bridge system ahead of the sale this week of $17 million of tax and revenue certificates of obligation, as well as $14.36 million of toll revenue bonds to finance remaining construction for a major expansion of the bridge to Reynosa, Mexico.

For the downgrade, Moody's cited "a significant decline in reserves" for the city of nearly 80,000 that has an economy driven by international trade supporting its revenue.

The A3 rating for Pharr's toll bridge reflects the "expectation that the bridge system will continue to generate high operating margins to maintain adequate metrics after transfers to other funds," according to Moody's.

"The Pharr International Bridge System, along with the other international bridges, face high near-term uncertainties surrounding changes in federal trade policy, which has contributed to some month-over-month volatility during 2025," Moody's said in a report. "Thus far, (Pharr) bridge revenue is up 3.67% fiscal year-to-date through July 2025 (10 months)."

S&P on Monday cited Pharr's trend of operating deficits when it affirmed the city's A-plus rating and negative outlook.

"The city is reliant on bridge system transfers to the general fund, and these transfers are expected to decline in fiscal 2026, placing more emphasis on officials to reduce general operating expenditures," S&P said.

Laredo, Texas, is looking at a potential toll increase for its international bridge system, where fiscal 2025 commercial crossings were down 1.2% compared to fiscal 2024.

Trade through international bridges with Mexico helped to propel the state's international trade to more than $547.9 billion in total value of commodities in 2024, more than 51.5% of the state's trade value, the Texas Comptroller's Office reported in October.