LM Extras Dec 2, 2020

Forecast 2021: Return to Normalcy

Law firms experienced widely varying fortunes in 2020, with revenues largely dependent on the pandemic’s effect on practice areas. The coming 12 months, however, should deliver a more favorable operating environment for all. Economists anticipate a gradual but noticeable recovery fueled by a surge in corporate profits, a strong housing market and the successful rollout of vaccines.

Phillip M. Perry

“The COVID-19 recession is over, and the economy is currently in an early-cycle expansion,” says Sophia Koropeckyj, Managing Director of Industry Economics at Moody’s Analytics in West Chester, Pennsylvania. The research firm expects the nation’s gross domestic product (GDP) to increase at a 4.1% clip for 2021. That’s a welcome rebound from the previous year’s decline, expected to come in around 3.6% when figures are finally tallied. (The GDP, the total of the nation’s goods and services, is the most commonly accepted measure of economic growth.)

Joe Biden’s presidential win should support an economic rebound in three areas. “Biden has proposed significantly more fiscal stimulus, which will pack a punch in the coming year as aggregate demand is still recovering from the pandemic,” says Koropeckyj. “Second, Biden would not resume Trump’s tariff wars with China, which have acted as a tax increase for consumers. Finally, Biden will liberalize international immigration, which will boost the supply of labor and in turn the economy’s potential.”

Faster economic growth, says Moody’s, should in turn help boost corporate profits by an expected 17.1% in 2021 — a dramatic turnaround from the 13.8% decline of the past 12 months, and reason for optimism about a return to the aggressive capital expenditures so critical to an economic rebound.

SURGING SECTORS

Due to the pandemic, practice areas such as antitrust, bankruptcy, trust and estates, and other kinds of regulatory practices have done well, while litigation, commercial real estate and the transactional activities of mergers and acquisitions — except for refinancing activity — have done poorly. Those trends are expected to continue, at least for the near future. A new administration usually bodes well for regulatory practices, where there is likely to be a lot of change.

Organizations affected by the pandemic are taking a closer look at expenses. “Many of the firms we are talking with report that demand in 2020 has been down from 5% to 20%, depending on the practice area,” says Eric Wangler, President of the North America Division of BigHand. “However, they have offset that significantly with reductions in costs, especially in travel and entertainment and, unfortunately in some firms, headcount. So many firms are looking at a year that has been more profitable than they expected when the pandemic hit.”

Whatever the nature of the 2021 operating environment, law firms are bound to adjust with their characteristic resiliency.

But the road ahead looks brighter. “The trend, from what we are seeing, is that demand is creeping back,” says Wangler. “Since the latter part of 2020 things have been moving in a better direction, but still not at the normal growth these firms are used to.”

Uncertainty is being met with contingency. “Many firms are building best-case scenarios if the economy comes back quicker than planned, and worst-case scenarios for the opposite condition,” says Wangler.

NEW DEAL

As 2021 advances, law firms and their clients will be eyeing key economic indicators for clues on how the year will turn out. There are some significant positive predictions: Moody’s Analytics forecasts that new housing construction projects will surge by 16.8% in 2021, up from 2.9% in 2020. Core retail sales should bounce by 6.2%, up from the 2.1% increase expected when 2020 numbers are finally tallied.

At the same time, headwinds should start to lighten up without dwindling completely. The unemployment rate is expected to decline to 7.8% by the end of 2021, down from the 8.5% clocked in late 2020. The year’s wage increases should come to 2.5%, rebounding from the 1.3% decline in 2020 wage and salary income.

But perhaps the most reliable economic indicator will be the rate of progress toward getting the not-so-hidden elephant in the room under control: the pandemic.

“The path toward some semblance of normality hinges upon the development and widespread distribution of a vaccine,” says Koropeckyj. “We anticipate the economy will regain its stride in the second half of the year, when a vaccine or treatment is assumed to be widely available.”

Whatever the nature of the 2021 operating environment, law firms are bound to adjust with their characteristic resiliency. “Nobody could have predicted the pandemic, but law firms reacted well to it, and for a lot of the more traditional firms it has driven change positively,” says Wangler. “How they evolve and control costs going forward will be interesting to see.”