Law firms posted encouraging financial performance in the first quarter of 2025, but analysts at the Thomson Reuters Institute are warning of a potentially rocky path ahead. In a report released Monday, the firm said that while rate hikes and modest demand gains drove Q1 growth, rising expenses and weakening productivity could signal more serious headwinds later this year.

“Law firms pushed the envelope again on billing rates,” the report noted, with worked rates rising by an average of 7.3% across the industry. Even more notably, realization rates improved slightly over last year, with clients accepting the higher pricing more readily. Collected realization exceeded 90%, up from just under 90% in Q1 2024, according to The American Lawyer.

However, the positive momentum came with caveats. Productivity declined by 2.4% across firms, and direct expenses rose by 7.6%, outpacing even the aggressive rate increases. Demand grew only 0.5%, and analysts noted that the uptick may be more reflective of short-term reactions to shifting trade and regulatory policies than sustained client needs.

“When you’ve got a slower pace of demand growth, coupled with larger expenses, that’s going to put a drag on the index number,” said Bill Josten, strategic content manager for the Thomson Reuters Institute. The Law Firm Financial Index (LFFI) dropped 13 points for the quarter.

Drawing parallels to the prelude to the 2008 Global Financial Crisis, the report warned that surges in legal demand amid economic uncertainty could precede broader downturns. “2007 was a prosperous year for law firms,” the report stated, “but it was also the last strong year before the collapse.”

Practice area performance varied in Q1. M&A saw the largest demand increase at 2.6%, but analysts said it still fell short of expectations and remains nearly 12% below 2021 levels. Real estate rose 1.7%, corporate 0.5%, and litigation 0.4%. Meanwhile, demand for tax (-0.4%), IP (-2.2%), and bankruptcy (-3.3%) declined year-over-year.

Despite these warning signs, analysts noted that law firms may still have pricing power heading into Q2. “If economic conditions are stable, I don’t see rates slowing,” said Isaac Brooks, manager of industry data analytics at Thomson Reuters. He noted that legal spending as a percentage of corporate revenue may be shrinking, meaning clients are still seeing value in legal services.

Josten concluded on a cautious note: “Positive indicators may actually be indicative of longer-term troubles that firm leaders would do well to start preparing for. Prepare for the worst, but hope the worst is relatively short-lived.”