(The Hill) — Major technology companies have cut thousands of jobs since the start of 2024 as the rise of artificial intelligence (AI) and interest rates upend the tech sector.

While the U.S. job market remains remarkably strong on the whole, tech companies have cut nearly 40,000 jobs in the first two months of 2024, according to Layoffs.fyi.

Just last week, Cisco announced plans to lay off about 4,250 employees, while PayPal said last month that it would cut about 2,500 jobs.

Microsoft also said it would lay off around 1,900 workers in its gaming unit in late January, shortly after eBay announced that it would cut about 1,000 jobs.

“A lot of this is really the shift and spend toward the AI revolution, which is the biggest tech trend we’ve seen since the start of the internet in 1995,” said Wedbush Securities analyst Dan Ives. 

A year of explosive growth in AI is likely a key factor in the latest layoffs, experts told The Hill, as companies invest in developing the transformative technology.

“Every product division … is experimenting with how to incorporate AI into their business model and their products and their functions,” said Daniel Keum, an associate professor of management at Columbia Business School.

“That’s why you’re seeing they’re letting go some of the developers that are not related to AI, and they’re hiring new talents and people with expertise on AI,” he continued, adding, “You’re seeing a lot of reorientation, reprioritizing, repositioning across the board.”

Following the launch of the popular AI-powered ChatGPT tool in November 2022, tech companies have raced to develop and release their own AI models and tools. Google launched its AI chatbot Bard last February, while Meta released its open-source model Llama 2 for research and commercial use in July.  

The tech sector has also been hit hard by whiplash from years of near-zero interest rates and boon in demand during the COVID-19 pandemic.

Interest rates, which the Federal Reserve raised to a two-decade high over the past two years, have posed a particular challenge for tech companies since they typically represent a riskier investment, said ZipRecruiter chief economist Julia Pollak.

“Investors can go elsewhere and get a safer, higher return, and [they’re] less eager to sit around waiting for experimental investments to pay off,” she said.

Higher interest rates also strengthen the U.S. dollar, making it more difficult for tech companies to break into foreign markets, Pollak noted.

“For most tech companies, they actually generate a majority of their revenue abroad, and international growth is their biggest opportunity,” she added. “Many tech companies have basically saturated the US market.”

Just a few years ago, tech companies faced a “uniquely favorable financial environment,” when interest rates sat around 0 percent and people were stuck on their phones and computers amid the pandemic, Pollak said.

Between 2015 and 2019, employment in tech-related industries was growing at a compound annual rate of about 4.5 percent, according to U.S. Bureau of Labor Statistics (BLS) data analyzed by Pollak. 

From April 2020 to April 2022, as the country recovered from the pandemic, this rate surged to about 7 percent.

“It made sense for [tech companies] to grow like mad during the pandemic and that sort of accelerated the growth that probably would have happened over a longer period,” Pollak said.

Daniel Zhao, lead economist at Glassdoor, described this as “pandemic over-hiring.”

“There were many companies in the tech sector that bet on pandemic-era trends that haven’t ended up paying off,” Zhao told The Hill. 

“Ultimately, it’s just not sustainable to grow your workforce as rapidly as we’ve seen tech grow over the last few years, if the economy is going to end up being slower than expected and if some of those pandemic trends don’t really end up bearing out,” he added.

Zhao suggested that the recent layoffs in the industry are largely a response to this trend.

“I think this year there’s still a continuation of that ‘year of efficiency’ mantra that you heard [Meta CEO] Mark Zuckerberg espouse, where companies are trying to trim their workforces after a few years of very aggressive hiring,” he said.

This explosive growth in tech employment leveled off in 2022 and 2023, falling to 6 percent and then 0.7 percent.

During that period, the industry made significant cuts. Tech companies cut more than 50,000 jobs in November 2022 and nearly 90,000 jobs in January 2023, followed by another 40,000 in February 2023. 

Ives noted that many tech companies, like most economists, expected an economic downturn in 2023 that never materialized.

“A lot of tech companies, they went into 2023 expecting a hard landing and a category five economic storm,” Ives said. “And then when they came out from under their beds, and looked out the window, the sun was shining.”

Instead, the U.S. economy appears on track for a so-called soft landing. Inflation, which peaked at a 40-year high of 9.1 percent in June 2022, has since fallen to 3.1 percent as of January. 

At the same time, the economy has remained surprisingly resilient, with unemployment remaining below 4 percent and job growth continuing to blow past expectations.  

“I think it’s a Pillsbury Doughboy soft landing,” Ives added. “Unless you have a telescope from a planetarium, it’s hard to find the recession.”

As inflation continues nearing the Fed’s target of 2 percent, the central bank has held interest rates steady in recent months, signaling that it may have finished its aggressive rate hike campaign and sparking optimism about potential rate cuts. 

The stock market is “ahead of the game” and has already “rebounded substantially,” improving the fortunes of many tech companies, which have seen employment tick back up in recent months, Pollak noted.

Ives said he believes the industry is largely done with cuts and is in the early days of a new bull market that will last until 2026.

“I believe tech, you’re going to see massive hiring in waves, especially in this soft, no landing backdrop,” he said. “But a lot of that investment, it’s going to be growth initiatives, and a lot of it’s going to be around AI because the AI revolution is hitting the shores of tech.”