Our March 2026 report on the U.S. economy and factors affecting it: Non-farm payrolls grew by 181,000 in 2025, a sharp deceleration from the 1.5 million gain seen in 2024. The unemployment rate rose from 4.1% to 4.4% over the course of 2025. A significant portion of the slowdown in job creation was due to a lack of supply, reflecting net immigration turning negative for the first time since 1935. However, the rise in the unemployment rate suggests that labor force supply was only part of the explanation for the slowdown in job growth.
Data on industry and occupational categories shed some light on what is going on in the labor market. A few sectors continued to show significant job growth in 2025 but, in almost all cases, the growth was less than in 2024. Leisure and hospitality produced 119,000 additional jobs in 2025, down from 158,000 in 2024. Healthcare and social assistance added 693,000 jobs, down from 883,000 in 2024. Employment in construction was unchanged in 2025 after growing by 176,000 in 2024.
Professional and business services, a broad category that typically sees consistent job growth, experienced declines in 2024 and 2025 of 111,000 and 126,000, respectively. Manufacturing lost 108,000 jobs in 2025 after losing 179,000 in 2024.
While job growth was decelerating, labor costs continued growing at approximately the same rate in 2025 as they did in 2024. The Employment Cost Index (ECI) for private industry workers rose 3.4% in 2025 after rising 3.6% in 2024. Adjusted for inflation, the ECI rose by 0.6% in 2025 and 0.7% in 2024. The construction sector saw a significant acceleration in labor costs, with the ECI for that sector rising by 4.0% in 2025 after a 2.4% increase in 2024. The reduction in immigrant labor supply appears to have affected that sector more than others.
How is AI affecting the economy?
The increased role of artificial intelligence has started to affect the economy as well as the composition of jobs. It is more difficult to make the case that it is affecting the overall numbers, which are more dependent on macroeconomic factors such as monetary and fiscal policy. In some ways, AI is accelerating pre-existing trends. An example would be the relative job growth rates of programmers and software developers. Computer programmers are an occupational group focused on writing and testing code based on specifications. Such jobs have been declining in the United States due to offshoring and automation. They continued declining in 2024 and 2025 and are projected by the Bureau of Labor Statistics to continue declining over the next decade.
In contrast, software developers play a broader role that encompasses the design, development and testing of software systems. After the technology sector layoffs and freezes from 2022-24, job growth in this category resumed in 2025. The Bureau of Labor Statistics projects that such jobs will growth by 16% over the next decade, faster than most categories. Job postings on Indeed as of late February for software developers have increased 12% in the past year, a significant turnaround after a period of weakness.
These forces are affecting the labor market in different ways across various parts of the country. In contrast to the rise in the national unemployment rate in 2025, the unemployment rate in California held steady. Job growth has been especially robust in the San Francisco and San Jose metropolitan areas, powered by hiring by companies at the epicenter of the AI revolution.
Artificial intelligence, immigration policy and tariff policy have worked to inject higher uncertainty into business planning. This uncertainty has induced greater caution and conservatism in the hiring plans of many businesses. “Wait and see” appears to be the corporate mantra of the day. Layoffs have been relatively low, reflected in the data for initial claims for unemployment benefits. But hiring has also been slow. This can be seen in the data on job openings, which fell 13% over the course of 2025. The result is the sluggish net job growth that we have seen in the past year and a labor market that appears to be frozen. Stay tuned for more anaysis of the economy.
