In January, the Thomson Reuters Institute titled its annual review of the US legal market “Peak prosperity and the fault lines below.” Its forecast was blunt. After one of the strongest years for legal demand since the financial crisis, growth would drop away steeply in 2026, with the middle of the year slipping into contraction. [1]
The first-quarter figures, published on May 13, refused to cooperate. Billable hours rose 2.7% year over year, roughly three times the industry’s long-run average. M&A hours climbed 4.4% and litigation 2.9%. Am Law 100 firms raised their worked rates by an average of 9.8%, and the largest among them by more than 12%. [2] Whatever cliff the forecasters had drawn, the timesheets showed no sign of it.
Yet the Law Firm Financial Index, which folds these inputs into a single reading of market health, came in at 55, its exact average since 2006. A quarter with near-record demand and near-record pricing had produced a perfectly ordinary result. The strain the January report anticipated was real. It had simply turned up somewhere other than the demand line.
Most of the gains went into the cost of doing the work. Direct expenses, chiefly what firms pay their lawyers, rose 8.1%. Overhead rose 8.3%, with technology and knowledge management among the fastest-growing lines. Productivity, meanwhile, slipped 0.4%. Firms are employing more lawyers and more software to bill slightly fewer hours per head, and Thomson Reuters described the industry’s AI story so far as “additive rather than substitutive.” [2] The tools are being paid for. They have not yet replaced anything.
The rest of the gains are still sitting with clients. Wells Fargo’s Legal Specialty Group, surveying more than 100 Am Law 200 firms, found revenue up 13.1% in the first quarter on standard rates up 11.4%. [3] Inventory, the work firms have done and not yet been paid for, grew faster than revenue, by 19% at the Am Law 50, and the collection cycle stretched by six and a half days. Owen Burman of Wells Fargo traced much of the backlog to the deals of the moment: AI companies preparing to go public, data centers, infrastructure. “There’s a lot of work that hasn’t been collected on yet,” he said. [4]
Slow collections in a busy transactional market are not alarming in themselves. Large deals take time to close, and longer to pay. But they change the arithmetic of hiring. A managing partner deciding in June whether to add an associate is paying that salary from cash that is arriving later than it used to.
The segments are drawing different conclusions from the same pressure. The Am Law 100 has pulled back on recruitment spending and slowed headcount growth, leaning on price. The Second Hundred is doing the opposite, spending more on recruiting and adding capacity. Midsize firms are caught between the two, with the slowest rate growth of any segment at 5.3% and the fastest growth in client-delivery costs, a combination Thomson Reuters called “a textbook margin compression dynamic.” [2][5]
The longer-term pressure is building inside corporate legal departments.
Gartner found in December that only 20% of matters sent to outside counsel stay within budget, and that the average legal department spends $162,000 a year on duplicated work. [6] On May 26 it went further, predicting that corporate legal technology budgets will double by 2028 as platforms such as Harvey, Legora and CoCounsel spread. Weston Wicks, a senior director analyst in Gartner’s legal and compliance practice, listed the early benefits as productivity, compliance and “reduced reliance on external counsel.” [7]
Ambition and readiness are different things, though. Gartner’s research on legal departments found that fewer than a quarter are digitally ready, that only 34% of legal technology implementations finish on schedule, and that only about half of lawyers fully use the tools they already have. [8] The budgets will double well before the capability does, which gives law firms time, though not much of it. General counsel are not about to stop instructing firms: Thomson Reuters’ March survey found 36% expecting to increase outside counsel spend over the next year, against 20% planning to cut it. [9] But the money that reaches firms will arrive with more questions attached, and the routine work that has long paid for associate training is the first thing clients are learning to keep.
Canada’s market has a different shape. Bennett Jones counted US$62.3 billion of Canadian M&A across 730 transactions in the first quarter, down from US$86.6 billion the quarter before, with the ten largest deals accounting for nearly 70% of the value. Energy, mining and utilities led, helped by a gold price that topped US$5,500 an ounce in January and has fed a run of billion-dollar takeovers of Canadian producers. [10] In a market like that, a resources team in Calgary can have its busiest spring in years while a general corporate group down the road waits for its clients to move.
Recruiters describe the same split. ZSA, Canada’s largest legal recruitment firm, reported in April that private practice had “a quieter start to the year than many expected,” with litigation dominating law firm hiring and corporate work slower than usual. The in-house market, by contrast, was “one of the busiest in-house hiring environments we have seen in recent years.” [11]
Where Canadian firms are investing, they are doing it precisely. Torys hired litigators Michael Feder and Deborah Templer from McCarthy Tétrault in May and announced a new Vancouver office, pointing to more complex disputes and the rise of class actions. [12] Legora opened a Toronto office in April, naming McMillan, Stewart McKelvey, McCarthy Tétrault and Fasken among its Canadian users. [13] At McCarthy Tétrault, Matthew Peters, the firm’s national leader of transformation, hears from lawyers almost every other day about tasks like a six-hour term sheet review finished in one. He is equally candid that the drafting work AI absorbs first is the work that used to train junior lawyers. [14]
Side by side, the two markets carry the same pressure in different places. American firms have pricing power and a collections problem. Canadian demand is real but narrow, and a growing share of the hiring energy has moved in-house.
Looking to the third quarter, I expect US demand to stay positive through the summer, carried by litigation, regulatory work and the large transactions already in motion. That would make the January forecast early rather than wrong. The pressure will keep showing up in margins and collections before it shows up in hours. The second-quarter index is the test: if productivity falls again while overhead keeps rising at 8%, firms outside the very top will slow associate hiring and lean harder on laterals with portable business.
In Canada, I expect resource and infrastructure mandates to keep specialist teams stretched, litigation to remain the steadiest source of private practice hiring, and in-house demand to keep outrunning the firms. If deal value broadens beyond the largest transactions in the second quarter, general corporate hiring should follow in the autumn. If it stays concentrated, it won’t.
On hiring, the aggregate numbers are steady rather than spectacular. US legal services employment stood at about 1.237 million in April, roughly 20,800 more jobs than a year earlier. [15] The detail beneath it is more telling.
Litigation is the common thread across both countries. It is among the fastest-growing US practices by hours, the dominant area of firm hiring in Toronto, and the reason Torys gave for going to Vancouver. Transactional demand is following the deals that are actually closing: AI, data centers and infrastructure in the US, energy and mining in Canada. On the American firm side, the Second Hundred is where capacity is being added. In Canada, in-house demand is concentrated at two to five years and eight to ten years of call, with senior legal counsel roles especially active. [11]
At the other end, cuts are appearing in places once considered safe. A&O Shearman, McDermott Will & Schulte and Paul Weiss all reduced staff in early May, with A&O Shearman’s cuts falling on business services, including its technology team. [16]
None of this describes a market in retreat. It describes one deciding, more carefully than it did a year ago, what it is willing to pay for. The people in demand are those whose work is hardest to compress: the litigator in a contested matter, the deal lawyer on a transaction that cannot fail, the in-house counsel who can tell the business what to do next. The January report asked whether the peak would hold. Four months on, it is holding for some and wearing away for others, and the line between them is being drawn practice by practice.
Sources
- Thomson Reuters Institute and Georgetown Law, 2026 Report on the State of the US Legal Market, January 2026.
- Thomson Reuters Institute, Law Firm Financial Index Q1 2026, May 13, 2026.
- ABA Journal, Wells Fargo data shows surge in BigLaw’s first-quarter revenues, April 30, 2026.
- XIRA, reporting Wells Fargo Legal Specialty Group Q1 2026 survey, April 30, 2026.
- Thomson Reuters Institute, Q1 2026 LFFI analysis: The quiet rate erosion impacting midsize law firms, May 26, 2026.
- Gartner, Survey reveals only 20% of legal matters sent to outside counsel stay within budget range, December 17, 2025.
- Gartner, Gartner predicts legal tech budgets to double by 2028 as legal AI use expands, May 26, 2026.
- Gartner, Creating the Digitally Enabled Legal Department, 2025.
- Thomson Reuters Institute, 2026 State of the Corporate Law Department Report, March 24, 2026.
- Bennett Jones, Canada’s Q1 2026 M&A Landscape, April 13, 2026.
- ZSA Legal Recruitment, Toronto Legal Hiring Trends 2026, April 7, 2026.
- Lexpert, Torys to launch new Vancouver office, attracts McCarthy Tétrault partners, May 5, 2026.
- Canadian Lawyer, Legal AI company Legora launches in Canada with Toronto office, April 16, 2026.
- Canadian Lawyer, What AI is actually doing inside McCarthy Tétrault, May 26, 2026.
- FindLaw, Legal jobs by the numbers so far in 2026, citing US Bureau of Labor Statistics, May 13, 2026.
- Legal Business, A&O Shearman, McDermott, Paul Weiss become latest major firms to cut staff, May 7, 2026.