Are we headed to a recession? The question has real implications for nonprofits. An economic slowdown, a sustained bear market on Wall Street and rising unemployment could create problems for nonprofits that are already struggling with rising costs.
But how much of a problem could it be?
Recessions do hurt nonprofits. Nonprofit Quarterly looked at the years 2007-2010, which included the Great Recession. It found that inflation-adjusted revenue for most nonprofits dropped by 1.6%. That’s not bad. More concerning is the number of nonprofits that halted operations. An average of 10% of nonprofits were closing every year before the 2008 recession. During the recession, 13.5% closed per year. After the recession, the percentage dropped down to 8.2%.
One crucial factor is that revenue from other activities than fundraising tends to drop most in a recession. For example, an arts organization may not see a change in gifts, but ticket sales for their performances may drop in a recession.
The nonprofit world is feeling the pinch now. It is possible we are already seeing the impact. The stock market has been down since the end of last year and we are seeing reductions in fundraising revenue. The new Blackbaud Institute Index shows charitable giving is down by 2.2% for the second quarter of 2022 compared to the same period last year. Human Services nonprofits appear to be hardest hit. Their revenue is down by 5.6%. It’s important to note that giving for the past 12 months is still ahead of the preceding year by 8.5% because of the strong end-of-year fundraising.
If this is as bad as it gets, nonprofits should be OK. Landmark research from the University of Chicago indicates that stock market changes have more impact on nonprofits than recessions. And, while financial experts are urging people to be cautious, we may have seen the worst of this market drop.
The best news is that, looking at a 40-year period, the researchers found that when the stock market drops a lot, nonprofit revenue drops a little. When the market rises again, revenue goes up more than it went down. In a nutshell, fundraising gains in an upmarket beat fundraising losses in a down market by a three-to-one margin.
Inflation is the biggest problem. Prior to last year, our inflation rate barely climbed above two percent for a 10-year span. A lot of people working in the nonprofit sector haven’t seen how inflation can eat into revenue. With inflation above eight percent, nonprofits are being hit from two directions. The people they serve need them more than ever and they need to increase funding as much as the inflation rate just to stay even. Fundraising staff wind up working harder, but feel like they are losing ground.
Recessions can also cause longer-term, systemic problems. One of the biggest trends in nonprofits is that more funding is coming from wealthy donors and mid-level donors are dropping. Donations by households earning at least $200,000 a year now make up two-thirds of all individual contributions. A paper by three Texas A&M professors found that the total number of donors started falling after the 2008 recession. The wealthy may continue to be a much larger percentage of the giving pool, but other donors appeared to pull back with the recession and, once they got out of the habit of giving, they didn’t return.
But Recessions Do End. The average recession lasts 11 months. This one may be different, especially since employment and consumer spending are still strong.
We are in for a bumpy ride and nonprofits need to be ready, but history shows that recessions don’t last as long, and they don’t do the damage that many fear.