# Methodological Overview

This edition of the Philanthropy Outlook produces forecasts for the annual growth rates and levels of individual/household, foundation, estate, and corporate giving and giving to education, health, and public society benefit for the years 2017 through 2019.^{103} The forecast for total giving is produced as the sum of the four donor components. Collectively, 27 different variables, plus lagged values for many of these variables, were incorporated into the final models for giving by donor and recipient subsectors.

In the initial stages of methodological development, all possible combinations of variables were compared, resulting in more than 100,000 regressions for individual/household giving alone. Fewer regressions were needed for the three remaining components. For each component, the best model was selected by first considering its explanatory power through 2016. Those models with the best explanatory power were then re-estimated through 2004. One-year-ahead forecasts were constructed through 2016 for these models, and the best model was selected as the one with the lowest root-mean-squared error (RMSE¬).^{104} We relied on historical data from *Giving USA: The Annual Report on Philanthropy* and available IRS data. See Figure 4 in the Guide to the Philanthropy Outlook Model for a comparison of actual versus predicted growth rates for total giving for the years 2005 to 2015 and also the section titled “Variable Definitions and Sources,” for a list of the candidate variables. We know that sometimes an event can have a delayed effect on giving. For that reason, we considered previous-year and contemporaneous values of the explanatory variables, as well as previous-year values of the dependent variables (i.e., historical giving values).

For the individual/household and corporate giving models, it is not practical to test all the variables at the same time. Instead, we adopted a three-step approach. In the first step, only the current values of the candidate variables were included in the regression. The best model within this set was referred to as the “base model.” The selection procedure was implemented over all possible combinations of the lagged variables added to the base model. The best model following this step was the “revised model.” In the third step, the selection procedure was run over all possible combinations of variables in the revised model. The result was the “final model.” The estate and foundation models were estimated in a single step, because the number of candidate variables was small enough that the previous and current values of the variables could be evaluated in one program.

The models for estimating giving to the recipient subsectors were developed using a modified version of the aforementioned individual/household and corporate giving models. In general, giving to the recipient subsectors is difficult to predict, as each of the subsectors experiences unique conditions that affect giving.

Moreover, because there are several subsectors that receive gifts from the four major donor types, the subsectors experience more variance in their giving on a year-to-year basis than do the sources of giving. To adjust for these factors, additional steps were added to the original three-step approach. When using the “base model” approach, we tested all combinations of a set of subsector-specific variables. These additional variables were derived from the different types of personal consumer expenditures, which allowed us to evaluate variables more specific to each particular subsector. The variables were then tested with the lag of all personal giving variables, and the resultant list was then tested with the lag of all subsector-specific variables. This “revised model” was then tested against all possible permutations of itself, which resulted in the “final model” for each subsector.^{3}

Tables 3 and 4 in the Guide to the Philanthropy Outlook Model describe the models for each source of giving and for giving to the recipient subsectors. Note that for each source of giving, with the exception of giving by estates, the adjusted R2s (coefficients of determination) are high. Moreover, the signs of the coefficients are generally consistent with economic theory that giving responds positively to increases in the ability to give and general economic conditions. See Table 5 in the Guide to the Philanthropy Outlook Model to reference the ratio of RMSE to the standard deviation for each giving prediction.

The forecasts of the different components were processed using the final version of each model. The forecasts covered 2017 to 2019.^{105} Implementing the forecasts entailed auxiliary models for the explanatory variables (i.e., independent variables). These auxiliary models are described in the Guide to the Philanthropy Outlook Model.