The Looming Recession

A recession is defined in classic economic terms as 2 successive quarters or more of negative GDP growth; by this definition, the economic situation of the 2001 - 2003 period would not be classified as a recession. Economists, however, have refined their view of recessionary economic trends - by these definitions, the Wall Street Journal was reporting that the economy was in recession last quarter, and continuing into this quarter.


Whether we are yet in a classic recession, which appears likely to occur in any case, it is clear the economic situation is a bit gloomy, with chances for "a hard rain that's going to fall" in the near future.


The nonprofits we talk to are concerned about the current economic state, and they should be. From preliminary research we have done, supporting research done by many other groups, the nonprofit sector's funding will be impacted by any recession. Of more concern, this recession may be even more troublesome for nonprofits than those of the past 20 years.


It appears clear that the the size of the philanthropic giving pool, as reported in Giving USA, varies between 1.7 and 2.3% of GDP. When GDP growth slows, or declines, not only does the growth in the pool of available philanthropic giving funds slow or shrink, but also, because of declining economic fortunes overall, the percentage of GDP allocated to giving also declines. So there are less funds in general available for giving, and the amount of funds individuals allocate to giving also declines.


If that were not of concern enough, Giving USA also has noted that since 1966 the percentage of GDP has maintained a minimum level of 2.0% of GDP for nearly 20 years. There may be many reasons to explain this plateau - the most obvious is that during the 1990s the U.S. enjoyed the longest period of sustained economic growth ever. This was followed by a period of sharp decline in the economy - interestingly enough, however, consumer sentiment remained high even during this period. This even though the recovery was tepid at best, and created very few new jobs in the economy - the so-called "Jobless Recovery."

Finally, individuals are seeing reason to be very conerned about the value of what are generally the single largest assets they own - the value of their homes. Some pundits have argued that consumer spending mitigated what could have been a much longer, more difficult economic downturn, and this buoyant economic spending was at its core driven by a strong housing market. We all know what is happening there . . .


So what does this mean for nonprofits?

I think nonprofits need to be prepared for the reduction in available philanthropic giving funds in the face of this economic downturn. I also think that, given the housing market, the tepid recovery from the last downturn, and the lack of jobs creation, this downturn could very well see the philanthropic giving pool drop off of the 2% of GDP plateau it has maintained for all of these years. So the philanthropic giving pool will be defined as a smaller percentage of a slowing or declining GDP figure. I also think it is important to note that the largest donors to nonprofits are probably most directly impacted by economic downturns in terms of value of available liquid assets, so going to your best few is going to be a difficult sell when they are worried about their own portfolio of assets.

I think many nonprofits will try to spend their way out of the current economic downturn if they can, allocating more resources to customer acquisitions and re-activations. Others will reduce staffing and / or mission delivery levels to wait out the economic storm. From our perspective, the former may have some effect, but at great cost - new acquisitions in good times are getting harder and harder to come by; in times of economic gloom, these methods will be even less effective, more expensive, and still deliver less Value of Direct Benefit. The latter is also a reasonable response, but the natural implication is that hard-won relationships to some degree will erode, and / or the public's confidence in the nonprofit will decline, leading to more skepticism and more hurdles to generating substantial support.

We have spent a lot of time looking at quite a few representative nonprofits, and we believe that there is a third way to weather the storm - we've found time and again that there is tremendous value locked up in the donors you already know. The problem is that there hasn't been an effective way to find and manage, out of tens or hundreds of thousands of donors, some manageable number that can backfill lost income. By effectively and efficiently broadening your visibility into your donor pyramid, picking a number of best prospects - be they "Hidden Gems" (donors underperforming compared to their peer group); at risk donors (donors who have lapsed or have reduced support for your organization); or Up and Coming donors, who are showing moderate levels of giving with high growth or consistency. By mining for these donors that previously were difficult if not impossible to efficiently mine, you can broaden your base, backfill lost support from your typical "bread and butter" development activities, and maintain or even grow during this time of economic decline.

It's all about finding and efficiently and effectively managing a larger number of relationships, broadening and deepening your pyramid to mitigate the risks we are facing today; by the same token, the same principles will help you accelerate your growth during good economic times.

Good luck weathering the storm.

Kevin