On Friday, the U.S. Bureau of Labor Statistics (BLS) released the latest set of jobs numbers for the U.S. employment market. On the same day, our sister business Peer Monitor released the 2012 third quarter Peer Monitor Index (PMI). Together, these numbers paint a cautious picture for the U.S. legal sector for the rest of 2012 and going into 2013.
The final set of economic figures before today’s presidential election were released on Friday. The BLS October employment figures show that the national employment rate remained almost unchanged from the previous month, at 7.9%. October also saw a modest increase in jobs for the month – 171,000 jobs were added. The figures provided both presidential candidates with rhetorical tools for last-minute campaigning in what is likely to be a close election. While the report was better than expected, enabling President Obama to tout continued job creation and improvement in the unemployment rate, Mitt Romney can claim the job growth remains too slow over the course of the President’s first term.
In terms of legal industry employment, Thomson Reuters News & Insights has analyzed BLS’s job numbers for the U.S. legal sector, reporting that the sector gained 600 jobs during the month of October. BLS also revised the numbers for September, from 1,000 new jobs added to 1,300. The revision, along with the more modest October gain, means that legal sector employment is now at its highest level since July 2009, representing some good news for the sector.
Falling demand, realization and productivity
However, the legal job growth came despite a fall in the Hildebrandt Institute’s Peer Monitor Economic Index (PMI), which declined by one point to 50 in Q3. This is the second straight quarterly decline in the PMI. The index is a composite score measuring change in the factors affecting law firm profitability such as billing rates, demand, productivity and expenses and indicates the economic state of the U.S. legal market.
Demand for legal services fell 0.8% in the quarter, with almost all practice areas affected. Labor & Employment, up 2.5%, was the only major practice area that saw elevated demand. Demand levels in both Litigation and Corporate work were down 1.3% and 1.0%, respectively.
While demand levels were flat among AmLaw 200 ranked firms, the mid-sized segment fared better. For the second successive quarter, mid-sized firms had the highest relative performance of any size segment. It was the only segment to witness demand growth (up 1.9%) and also displayed the greatest relative productivity performance.
In terms of billing rates, worked rates for the entire market improved slightly to 3.4% in Q3, continuing the low rate growth trend that has prevailed over the past two years. However, realization rates fell, reaching an historic low of 83.9%.
Law firm productivity declined by 2.5% in the face of increases in headcount. Although the rise in headcount of 1.7% was the smallest quarterly rise observed in 2012, headcount overall is up 2.3% for the year to date, compared with the 1.4% increase observed for the full year 2011.
Cost pressures soften, but still rise
Firms’ cost growth moderated slightly, with direct expenses rising 3.5% and overhead expenses up 3.4% in Q3. This represented a slowing in the rate of expense growth for the second successive quarter. However, Peer Monitor noted that the slowing of expense increases did not occur fast enough to fully compensate for revenue declines, which will be impacting margins.
These data point to demand for legal services continuing to remain largely flat, an ongoing trend which has been observed from August 2011. Furthermore, as realization rates and client pricing pressures remain high, substantial increases in billing rates are not expected in the short term. As a result, achieving revenue growth remains particularly challenging for many law firms, and current strategies are likely to be focused on expanding strong practice groups, seeking additional business from existing clients and growing market share. While capacity and costs remain higher than revenue gains, pressure on firms’ overall profitability will continue.
For more information on the PMI and how Peer Monitor can help your firm successfully manage through today’s economy, please contact Mark Medice at +1 412-203-2155 (email@example.com) or visit peermonitor.thomsonreuters.com.
Posted by Tricia Pelton