The recession, so far

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Surely by now you’ve heard the great news that that the recession is over. That’s a relief, huh? It’s good to know things can now start getting back to normal, especially in the legal marketplace — all this talk of major change was making us nervous.

I don’t know about you, but the relentless good cheer of the imminent economic recovery (in North America, at any rate) feels a little forced to me. Most of the people talking about “green shoots” either badly need you to start spending money on their stuff again, or compulsively need to believe that everything’s going to be okay in order to maintain their day-to-day composure. The outlines of our self-reassurance industry have rarely been more clear.

Technically, a recession occurs when GDP declines for two or more consecutive quarters. By that definition, the current recession may indeed be ending, as consumer spending slows or even stops the rate of economic deceleration in some jurisdictions. But the opposite of “recession” is not “prosperity.” When economists use the word “recovery” to describe the immediate future, think of it the same way you’d think of recovery from heart surgery — long, slow, gradual, and prone to the risk of painful setbacks.

That risk is magnified in our current situation, because the bulk of recovery so far has come from an unprecedented amount of government spending that will end shortly, at which point consumers and businesses will be on their own. And lest we forget, consumers (especially in North America) are still saddled with enormous amounts of debt and have switched their focus from spending to saving. Not only are we not out of the woods yet, I’m not convinced we’ve even begun heading out of the forest.

It’s against this backdrop that we need to interpret reports such as this one: a study by Hildebrandt that “suggests law firm economics may be stabilizing.” An index that tracks demand for legal services, lawyer productivity, billing rates and direct and overhead expenses at large and midsize US law firms moved upwards slightly in the second quarter of 2009. That sounds great, until you look more closely at the results and see that, in the words of Buzz Lightyear, we’re not really flying; we’re falling, with style.

Demand for legal services and productivity both remained weak during the second quarter compared to one year earlier but those drop-offs were not as large as they were during the first quarter. For example, productivity was down by 11.5 percent during the first quarter and just under 9 percent during the second quarter. Demand for transaction work including corporate, mergers and acquisitions and capital markets was still far below where it was during the second quarter of 2008 but was flat or slightly up compared to the first quarter of 2009.

These are not results to set one’s financial heart racing. So if demand is still mostly flat or down, how is that law firms’ economic outlooks are improving? Here’s the rub:

The biggest element helping law firms compensate for low billing rate growth, slow demand and low productivity was that their cost-cutting measures were paying off, according to the report. For the first time in the four-year history of the index, both direct expenses and overhead expenses at law firms declined. Direct expenses, which primarily refers to compensation, were down by nearly 2 percent compared to the second quarter of 2008. “Much of this has been achieved through headcount reduction along with adjustments in compensation structures,” the report said.

So law firms’ fiscal fortunes are rebounding primarily because they fired a lot of people and froze or cut the salaries of those who remained. That’s not what I’d call a green shoot.

I just got back from a week in Dublin,  and I can tell you this: in Ireland, and in much of Europe generally, no one’s talking about recoveries and buying opportunities. The recession there is bad: institutions, businesses and individuals are all hurting, and there aren’t many signs of a turnaround. While in Dublin, I picked up the August 2009 issue of the IBA’s International Bar News, and read an article about law firms titled “Survival of the fittest”:

Jonathan Fagan, director of Ten-Percent Legal Recruitment, believes that while ten per cent of solicitors and legal executives in the United Kingdom have been made redundant already, ‘another five to ten per cent are under threat of redundancy, or have had their conditions changed or hours reduced’. He adds that ‘the headline figures produced by the media are probably inaccurate, as most of the cutbacks are with the smaller players on the high street, rather than the big boys in London and other cities’. …

Figures produced by the Solicitors Regulation Authority also show that smaller, community-based firms, including legal aid firms, are particularly vulnerable in the economic downturn. Plans by the UK government, for example, to make small firms bid for legal aid contracts, and the requirement for contracts of a stipulated minimum size, are likely to cause further harm, particularly in such areas of law as housing, mental health and debt.

This underlines what I think is an overlooked aspect of the economic situation: consumer legal spending, which is the backbone of most lawyers’ practices worldwide, is extremely vulnerable right now. Heavily indebted households likely will put off even low-cost legal purchases, banks in still-questionable health will lend to people less frequently, and government support for legal aid programs will continue to shrink. The corporate world is farther advanced in the deleveraging process than is the consumer world, but both have a whopping amount of debt still to unwind, and purchasing lawyers’ services does not top anyone’s priority list.

We’ve heard talk of recessions shaped like U’s, V’s, W’s and L’s, but I’m inclined to think this recession will look more like a square-root symbol: a sharp drop, a slight rise, then a long plateau well below the previous high-water mark. If the word “malaise” springs to your mind, that’s not a bad description of what’s likely to come. It might be wise to temper your expectations of the economic environment, and of the likelihood that lawyers can “get back to normal” anytime soon.

And remember: the recession didn’t cause all this upheaval in the legal services marketplace — it just exposed, magnified and accelerated it. Whenever and however the recession ends, “normal” for the legal profession is already gone.

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One Response to “The recession, so far”

  1. Richard Granat

    The impact of the recession on solos and small law firms is even more brutal and the data on this impact is harder to identify and collect. Hildebrandt’s focus is on large law firms – big law – solos and small law firms are not on their radar screen.
    When the economy moves out of this recession, the legal profession will not be the same.

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