WOW! I am so glad you posted this, because Baxter is the same way. I've had him since he was seven weeks old. He is now nine months old. EVERY time I take him out to pee/poop and someone is walking nearby, he starts barking like crazy! And if I pick him up, he'll stop, or also, like you said, let the person pet him, he calms down!
Now, when he gets around little kids, he gets mean! I'm wondering if he was abused as a puppy... but for example, my neighbor has two little girls and they came over to see Baxter because, of course, he was barking at them. She bent down, attempting to pet him, but he got MEAN, like growling mean!! I was holding him on the ground too and he was still acting mean! I didn't know what to do!
I don't know why they are doing this, but I am in the same boat as you are Lia! I love him to death, and he is the sweetest thing to me, just not so much strangers!