Legal Commentary

Bad Economy: A Long-Term Issue?

By Patrick J. Lamb

   In August, Gerry Riskin wrote his prediction that Doom and Gloom was in our future.  I asked Gerry if he would share the factors that informed his prediction.  He listed these:

    Currency fluctuations
    Price of oil
    Price of precious metals
    Increase and decrease in “real” jobs
    Geographic location of those jobs
    Political stability of job locations
    Foreign relations as they affect business
    Balance of Trade between countries and regions
    Housing markets (not just prices – but demand)
    Auto market (demand)
    Credit levels (or should I say “debt levels”)
    Interest rates (they are not falling, in fact, get ready…)
    The advent of the largely unregulated Hedge Fund industry
    The establishment pensions that invest in Hedge Funds
    The Domino effect – how one indicator impacts many others

In January, Gerry wrote on this topic again, Recession-Proof your Law Firm.  In that post, he drew on the comment of George Soros that we were facing "recession or worse," many would even acknowledge that we are in a recession.  The scary thing, however, was Soros" concern about the possibility of "or worse." 

The third in the Riskin trilogy is Gerry's March 17 post, asking the question "What do Bear Stearns and Enron have in common?"  The punchline in Gerry's post?   His conclusion that "this trumps my wildest speculation about how erratic the economy may become."

Even those who disagreed with Gerry in August cannot ignore the dramatic downturn in the economy that we have witnessed in the months that followed.  But here's the problem from my vantage point.  I don't see a trigger for a recovery.  The past few recessions have benefited from consumer-driven recoveries.  In December 2001, Business Week wrote:

BUT THEREIN LIES A PROBLEM for the recovery. The NBER's four key indicators highlight an important atypical pattern of this recession. The bureau noted that "continuing fast growth in productivity and sharp declines in the prices of imports, especially oil, raised purchasing power while employment was falling." This rise in household buying power--even as the three other NBER indicators fall--will continue to sustain spending in coming months.

But that won't happen this time.  Consumers are losing wealth (and their primary source of borrowing power) because of the precipitous decline in housing prices.  The high price of oil, and hence gasoline, is consuming a larger share of household income, directly and indirectly as others feel the burden of higher energy costs.  Oil prices will not decline thanks in large measure the growing demand from China and India.  Debt rates are higher than ever before, meaning less ability to borrow.  Add the weakness to the dollar to the mix (meaning we pay more for imported products). And with the Fed flooding the market with easy credit to sustain the financial system, the dollar will not soon strengthen. 

This bad news has profound ramifications for our profession, especially on the pricing front.  Our clients are the industries that are suffering through this recession.  Legal departments (especially, since they are cost centers) will face enormous pressures to cut back on expenditures.  That pressure promises to grow more, not less.  And because much of the low-hanging cost-control fruit already has been picked, more and more drastic approaches to fee control will be the order of the day. 

As always, thanks to my friend Gerry Riskin for inspiring me to think more and more deeply than I would ever do on my own.

Full post as published by In Search of Perfect Client Service on March 28, 2008 (boomark / email).