Banking Failures Add to Growing Economic Uncertainty for Nonprofits
Attempts to contain a developing regional banking crisis, add another layer to the economic uncertainty nonprofits have faced since Covid-19 began to sweep the globe three years ago.
By some accounts, the economy remains strong, with historically low levels of unemployment and relatively robust consumer spending. As nonprofits wait for the Federal Reserve to weigh in next week on the banking meltdown, either by continuing to raise rates or taking a breather, some experts believe a recession is inevitable by year’s end. Many nonprofits and grant makers are preparing for a slowdown,
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Attempts to contain a developing regional banking crisis add another layer to the economic uncertainty nonprofits have faced since Covid-19 began to sweep the globe three years ago.
By some accounts, the economy remains strong, with historically low levels of unemployment and relatively robust consumer spending. As nonprofits wait for the Federal Reserve to weigh in this week on the banking meltdown, either by continuing to raise rates or by taking a breather, some experts believe a recession is inevitable by year’s end. Many nonprofits and grant makers are preparing for a slowdown by protecting their bank assets, safeguarding their investments, or trying to keep workers from fleeing to more lucrative opportunities.
“Uncertainty is the enemy of investment in the capitalistic sector, but it’s also the enemy of investment in the philanthropic sector,” says Patrick Rooney, professor of economics and philanthropic studies at the Lilly Family School of Philanthropy at Indiana University.
Spooked by the market’s headline-grabbing volatility, grant makers and donors might withhold their support, says Rooney, even as many nonprofits grapple with spiking demand for their services and dwindling government aid. Plus, he said, a resilient labor market and lingering inflation mean that wages remain high, and some nonprofits are struggling to keep up with rising costs.
Here’s a closer look at some of the economic data experts say nonprofit officials should be watching.
Inflation continued to show signs of easing last month, registering a 6.1 percent annual growth rate in February 2023, the smallest 12-month increase in prices since September 2021.
Still, prices remains well above normal, with rising housing costs accounting for more than 60 percent of inflation after stripping out volatile food and energy prices.
Lower inflation rates are a sign that the Federal Reserve’s attempt to provide a soft landing from runaway growth — and prices — is working, says Rooney.
Yet with the collapse of Silicon Valley Bank and Signature Bank, the Federal Reserve might slow its campaign against inflation to prevent further banking havoc, Rooney said.
The stock market has swung up and down in recent days over fears that the banking crisis might spread into the wider economy and continued uncertainty about what the Federal Reserve will do next. One benchmark equities index, the S&P 500, experienced a 2.6 percent decline in February, its worst loss of the year so far.
Investors’ pessimism followed predictions from many economic observers that the Federal Reserve might significantly increase interest rates in response to higher-than-expected inflation in January. But the banking crisis has fueled speculation that the Fed will take a time out on new hikes when it meets next week.
The moody stock market this month may depress foundation grant making over the long term, Rooney says.
“Most foundations pay out 5 percent of their asset base, and a lot of that asset base is tied up in stocks,” says Rooney. “That does have an impact on how much foundations pay out.”
The national unemployment rate ticked up slightly to 3.6 percent in February, but the labor market remains extremely strong by historical standards.
Though unemployment is gradually rising, many nonprofits are still struggling to attract and retain enough workers to function properly, says Paul Schervish, professor of sociology at the Boston College Center on Wealth and Philanthropy. The upshot, he says, is that some small nonprofits might need to close or merge to stay afloat.
“Just as there’s this clearing out of corporations and even banks at times, we might see a clearing out of nonprofits in the near future,” says Schervish, who noted that smaller nonprofits have been hit especially hard by rising wages and challenges attracting talent.
“We’re going to hear more about the difficulty for nonprofits to survive,” he says.
Americans are sending mixed signals at the cash register. Consumer confidence inched higher by 3.2 percent in February 2023 from the previous month, as measured by the University of Michigan Index of Consumer Sentiment. It was the third consecutive month of growth, indicating higher levels of optimism in the economy. Still, confidence remains well under the historical average and has yet to recover to its 2021 level, when inflation began taking hold of the economy.
In a sign of Americans’ wariness over the economy, another indicator of consumer confidence released by the Conference Board contradicted the University of Michigan’s survey in February. It showed a decline in consumers’ outlook, pegged to fears about the economy’s direction in the next six months.
While consumer confidence cannot always predict consumers’ spending habits — or their penchant for donating — growing uncertainty can make raising money difficult for fundraisers and grant makers alike, says Schervish.
“Uncertain times have been with us for a while, so it’s just harder to run a budget right now,” he says. “Philanthropy on the supply side, and fundraising on the demand side, have suffered from that uncertainty.”