In the past few weeks a number of our firm's clients have asked me what our firm thinks about the economic outlook for the United States in 2011.
I have to be less than optimistic about 2011. As Paul Krugman pointed out in his column in yesterday's New York Times, the U.S. economy is still at "the bottom of the hole." We cannot mistake short-term upsurges as sustained recovery. Proclamations that "the Recession is over" are mostly political hyperbole. Fundamental structural weaknesses persist in the U.S. economy and there is no sign at any level of government or in the financial sector that they will be addressed soon.
I am most concerned about unemployment. We have witnessed the Florida county where our firm is headquartered plummet from being one of the most prosperous and economically robust areas in the country to being a poster child for hard times. Unemployment has gone from less than 5% in 2007 to over 12% now, while per capita income has dropped by more than 5%. Many of the jobs that have been lost have been in the construction and services sectors, and many of those jobs are probably gone forever as they have been triggered by business failures. This experience is being duplicated, to greater or lesser extent, almost everywhere in the United States.
These numbers might not appear alarming in some economies outside the United States, where 10% to 15% unemployment might be more common. Three factors make these numbers a concern for the long-term prospects of the U.S. economy:
What concerns me the most is that we might be witnessing the final economic dismantling of a large part of the American middle class, which has always been the great engine of economic recovery in the United States.
In short, don't look for a sustained recovery in the U.S. in 2011 and maybe not even in 2012. As Krugman points out, the U.S. economy is now so deep in the hole that it would require a sustained annual growth in GDP of 2.5% to start to reduce unemployment significantly and being to climb out; and even the most optimistic forecasts are nowhere near that threshold. Moreover, this would need to be sustained growth, at least at that level, over many months, not just one quarter.
What does this mean for U.S. law firms? We see several likely scenarios, which might vary according to a firm's client base and practice specialties:
I hope that I am wrong, and that 2011 will be a good year for law firms in the United States. Even if the short-term results for some firms appear promising, American law firms should avoid the temptation to assume that "Happy Days Are Here Again." 2011 will be a year to celebrate short-term successes, to be sure, but also a time to investigate and strengthen the basic business foundations of the law firm.
Read more on the Walker Clark Worldview Blog.