The Hildebrandt Peer Monitor Economic Index (PMI) rose for the second consecutive quarter, up two points in the third quarter to a reading of 46. A PMI of 65 or greater indicates strong law firm market performance.
Although demand and worked rate growth remain weak, there are increasing signs of demand stabilizing in key practice areas, such as litigation.
PMI is a composite index of law firm market performance using real-time data drawn from major law firms in the United States and key international markets.
Demand, as measured by billable hours, is now flat for the first nine months of 2009 compared with the last nine months of 2008, and continues to improve off of the lows seen earlier this year.
Bankruptcy remained the strongest practice area. Litigation continued to gain strength and is now up 1.8 percent year-to-date.
Transactional practice areas, including corporate, mergers and acquisitions, capital markets, and real estate were substantially lower, but the rate of decline is moderating and expected to improve if the overall economy continues to recover.
Among major markets, Chicago showed positive demand growth (up 2.4 percent year-to-date). New York City, San Francisco and Washington, D.C., were flat. Several European markets, including London, had improving demand patterns in the third quarter.
Rate growth, which measures rates for worked hours, continued to be weak, up only 4.1 percent from a year earlier, which is at the low end of recent historical ranges. In addition, collected rates are under pressure, effectively flat to slightly down, reflecting billing write-downs and difficulty in collecting against inventory.
The success of law firms in achieving cost containment continues to accelerate. Direct expenses were down 4 percent from a year ago, a result of headcount reductions and adjustments to compensation structures. Overhead expenses were down 2.5 percent in the third quarter.
"While demand trends are starting to turn in a more positive direction, the focus continues to be on cost controls as firms try to manage against still-weak demand and pricing," said Mark Medice, program director of Hildebrandt Peer Monitor. "Reductions in headcount and overhead expenses are contributing to profitability while firms wait for better news on top-line growth. Litigation is beginning to show some improvement in demand, and continued strengthening in the general economy should help some of the transactional practices."
"While the recession may have technically ended, it remains an open question as to if and when we will see a return to previous levels of activity in the law firm market," said Lisa Smith, vice president, Hildebrandt. "In addition, pricing pressures from clients are continuing as they seek to reduce the cost of legal services. As a result, more firms are becoming proactive and innovative in exploring new approaches to pricing and to more cost-effective approaches to the delivery of legal services."
For more information about the PMI and to review the latest PMI report, visit http://peermonitor.thomson.com.