Hiring Has Slowed Down. Government Policies Are the Main Reason.

Workers crossed the street near the Education Department headquarters in Washington, D.C., shortly before the start of the government shutdown. (Al Drago/Bloomberg)

Key Points

• The average monthly job growth significantly decreased from 123,000 (January-April) to 30,000 (June-August), with 22,000 jobs added in August.
• A decline in immigration, reducing monthly payroll gains from 90,000 to 40,000, is a primary factor in the hiring slowdown.
• Federal budget cuts led to a 97,000 reduction in federal employment by August, with 15,000 jobs shed in August alone.

Changes in federal policies are behind a dramatic slowdown in hiring that is increasingly raising concern among economists, Federal Reserve officials and investors.

The economy added an average of 123,000 jobs a month from January through April, according to data from the Bureau of Labor Statistics. But that has fallen to an average of just 30,000 each month from June to August, with only 22,000 positions added in August.

While the release of September employment data has been delayed due to the government shutdown, the economy is likely adding fewer jobs each month than are needed to keep the unemployment rate more or less steady.

According to Elsie Peng, an economist at Goldman Sachs, the biggest factor behind the recent stagnation in hiring is a decline in immigration. But government cuts, the growing use of artificial intelligence, and uncertainty around the effects of tariff policy and economic risks have also played leading roles. All told, these factors have resulted in a pullback of 100,000 job gains a month, Peng calculates.

The White House pushed back on that narrative on Tuesday. “President Trump’s economic agenda has tamed Joe Biden’s inflation crisis, delivered real wage growth, and secured trillions in investments to make and hire in America,” White House spokesman Kush Desai said in an email to Barron’s. “This same policy agenda unleashed historic job, wage, and economic growth in President Trump’s first term, and Americans can rest assured that as this agenda continues to take effect in President Trump’s second term, the best is yet to come.”

Net immigration into the U.S. has fallen from about three million at its peak in 2023 to an estimated annualized pace of 500,000 this year due to reductions in the number of asylum seekers and other immigrants granted entry. Peng estimated that the contribution from immigration to the monthly payroll gains has fallen from about 90,000 positions a month at the start of the year to 40,000 in August.

In industries where unauthorized immigrants make up more than 10% of the workforce, such as agriculture, construction, and hospitality, payroll growth has fallen from a gain of 20,000 a month in January to a drop of 10,000 positions in July, Peng estimated.

All that may be relatively comforting, Peng says, because it indicates the hiring slowdown isn’t related to a dramatic, permanent shift in demand for staff. “This suggests that part of the recent job growth slowdown is due to a less concerning slowdown in labor supply growth,” she wrote in an analysis published Monday.

Goldman Sachs isn’t alone in calling out the effects of higher immigration restrictions on the labor market. Apollo Global Management’s chief economist, Torsten Sløk, noted earlier this month that the growth rate in the foreign-born labor force has been “significantly weaker than normal,” with predictable results for employment. “Fewer people looking for jobs means fewer people get hired,” Sløk wrote.

But not all of the recent slowdown has been driven by a smaller supply of workers. Budget cuts to federal agencies have reduced federal employment this year by 97,000 as of August, according to the BLS. In August alone, the federal government shed 15,000 jobs.

The federal budget cuts have spilled over into the private sector to some extent as well, with spending on contracts down across several agencies and industries, Peng said.

While the adoption of AI has had only a limited effect on the overall job market so far, with few companies reporting layoffs, the technology has reduced the need for hiring in some areas, Peng reports. She estimates that in industries where AI is heavily used, it has lowered monthly job growth by 10,000 jobs a month relative to prepandemic levels.

Employment in the technology sector is down 90,000 from its peak in 2023, calculates Joseph Politano of Apricitas Economics. That is significant considering that tech jobs grew by 300,000 during the post-Covid boom in 2022 and given that the sector generally contributed about 150,000 positions a year before the pandemic, Politano writes.

Concerns over the impact of higher tariffs and the strength of the U.S. economy have also had an impact, likely prompting employers to be more cautious about hiring. Peng found, however, that those effects have been fairly limited so far. Industries hurt by tariffs, such as transportation, wholesale trade, retail trade, and machinery manufacturing, have only slowed hiring slightly since President Donald Trump’s tariff announcement in early April.

The transportation and warehousing sector, for example, added 21,300 jobs in January, compared with 3,600 positions in August, according to the BLS data. In retail trade, monthly payroll growth slowed from 35,700 at the start of the year to just 10,500 in August.

Most economists expect that payroll growth will likely remain weak through the rest of the year. The federal government shutdown is only the latest negative factor.

Write to Megan Leonhardt at megan.leonhardt@barrons.com