“The next 12 months has all the makings of a solid year for law firms,” says Eric Wangler, President of the North America Division of BigHand. “Everyone is hoping that the pandemic will be largely behind us. Maybe that’s wishful thinking, but regardless, there is an assumption that demand will stay steady or rise.”
The sunny forecast for the legal community reflects the favorable environment for business at large. “We are in the midst of an early economic recovery after the body blow of COVID-19,” says Bernard Yaros Jr., Assistant Director and Economist at Moody’s Analytics. “Though growth will decelerate in 2022 due to fading effects from business reopenings and past fiscal stimulus, the economy will remain robust.”
The numbers tell the tale. Moody’s Analytics expects real GDP (gross domestic product) to grow at a healthy 4.3% in 2022. While that is a bit less aggressive than the 5.8% of the past 12 months, it remains decidedly better than the 3.4% pandemic-fueled decline of 2020. (GDP, the total of the nation’s goods and services, is the most commonly accepted measure of economic growth. “Real” GDP adjusts for inflation.)
“Headwinds, of course, are inevitable. And 2022 will have its own troubling mix: The peekaboo pandemic. Labor shortages. Crippled supply chains. China tariffs. Nascent inflation. An unsettled consumer. And now the emergence of the omicron variant. Yet economists do not expect negatives to prevail.”
Law firms benefit when their corporate clients do well. Here, the news is good: Moody’s expects corporate profits to increase by some 4% in 2022. While that figure might seem unremarkable in isolation, it represents a hefty advance over difficult 2021 comparisons, when profits spiked 36%. Clearly, businesses are glad to bid adieu to the pandemic-battered 2020, when their profits declined 3%.
Headwinds, of course, are inevitable. And 2022 will have its own troubling mix: The peekaboo pandemic. Labor shortages. Crippled supply chains. China tariffs. Nascent inflation. An unsettled consumer. And now the emergence of the Omicron variant. Yet economists do not expect negatives to prevail.
“Labor and goods shortages will ease as the domestic and global economies increasingly learn how to live in a new pandemic normal.”
While the general economic picture is sunny, growth deceleration from the above headwinds should cause law firms to make some operational changes to bolster earnings. “Overhead expenses are likely to rise to more normal levels as law firms return to the office,” notes Wangler. “And as lawyers start working face to face and travel again, related costs are likely to go up. Direct costs such as attorney expenses will also be higher because of the hyper-competitive market for talent.”
For their part, corporate clients will be looking to pare their own expenses in reaction to profit margins that are under the same downward pressure. “Clients will take a harder look at who is doing what work and at what cost, and law firms will have to react to that by asking if they have the right mix,” says Wangler. “That that goes from both the support and attorney sides.”
THE YEAR AHEAD
As law firms enter the early months of 2022, economists suggest watching a number of leading indicators for an idea of how the year as a whole will go. The first is the state of consumer confidence. How does the public feel about the nation’s progress in beating the pandemic? And will rising fuel prices put a damper on spirits and spark fears of inflation?
A second indicator is the currency’s purchasing power. “Inflation will be the key financial statistic to follow early in the year,” says Yaros.
Moody’s Analytics calls for the core PCE price index to moderate to 2.2% in the fourth quarter of 2022 as the effects of past fiscal stimulus fade away. (The core PCE price index excludes energy and food prices and is the Federal Reserve’s preferred measure of inflation.) Businesses should watch for any higher levels of persistent inflation that might cause the Fed to increase interest rates — a move Moody’s does not anticipate before 2023.
Finally, a nonfinancial force may be more important than anything else. “The damage done by the delta variant has taught us that the pandemic is still alive and has the potential to disrupt economic activity,” says Scott Hoyt, Senior Director of Consumer Economics for Moody’s Analytics. “Early in 2022 the leading data will be about COVID-19. What are the trends in vaccination rates? Infections? Hospitalizations? Deaths?”
Favorable answers bode well for a robust 2022.