Stress Test Analysis
For this edition of The Philanthropy Outlook, the report presents a stress test for 2020 and 2021, using characteristics similar to the Great Recession of 2007-2009 to see how charitable giving would change compared with The Philanthropy Outlook’s results.
This stress test analysis does not suggest that any potential new recession would be equivalent in severity and length to that of the Great Recession, rather, this analysis, which is modeled in part on the conditions used for the severely adverse scenario of the Dodd-Frank Act Stress Test (DFAST) for banks, serves a similar role as that of the DFAST—to ensure that organizations could continue to function under severely adverse conditions.23 Just as the results of the DFAST test help banks to self-regulate and identify and address potential risks, this stress test analysis is intended to help nonprofits and fundraisers in a similar way.
Such a measure is helpful because the Great Recession also demonstrated that the charitable sector is susceptible to the effects of economic downturns. In 2008, the S&P 500 declined 40.8% over 2007, while GDP decreased 2.0% and another 1.4% the following year (all in real terms).24 The unemployment rate soared to 9.5% in June 2009 (up from 5.0% in late 2007).25 At the same time, total charitable giving declined 7.2% in 2008 and 8.0% in 2009 in inflation-adjusted dollars.26 Giving by bequests, foundations, and corporations saw a decline in giving in either 2008 or 2009, but giving by individuals was hit hardest, with a decline of 11.7% in 2008 and 5.7% in 2009 in inflation-adjusted dollars.
Given the enormous impact of the Great Recession on charitable giving, it makes sense for nonprofits and fundraisers to stress test their organizations and look for ways to manage any potential risk. Under recession conditions similar in scale to the 2007-2009 recession that would hypothetically begin in late 2019 and intensify through 2020, total giving would be 10.6% lower than The Philanthropy Outlook’s current projection for growth in total giving in 2020.27 All sources of giving would see declines for 2020 and 2021 compared with the current projections. It is key to remember that this scenario presents a comparison between the current projections, in which growth is expected to be strong.
Giving landscape after the Great Recession
As fundraisers and nonprofits consider how they may guide their organizations to be able to withstand the hypothetical conditions described in the stress test, it is key to consider the ways that the Great Recession has had a significant and lasting effect on charitable giving patterns.
Overall, the percentage of households participating in charitable giving has declined by 13% from 2000 to 2016, according to data from the Philanthropy Panel Study (PPS), a module within the University of Michigan’s Panel Study of Income Dynamics.28 By comparison, the share of households donating to charity from 2000 to 2008 held relatively steady. In addition, the study found that American households gave a smaller percentage of their income to charity after the Great Recession compared with before.
Significantly, the Great Recession did not impact every segment of society at even rates. Some groups were hit especially hard: notably, men held 78% of the jobs that were lost in the Great Recession, and unemployment rates for men soared to 8.9% (compared with 7.2% for women) in the first quarter of 2009.29 In addition, the Great Recession hit at a time when people born in the 1980s (generally considered older Millennials) were first entering the workforce. The difficult job market and wage stagnation experienced by this demographic group has had long-term effects: a recent study found that the wealth level for this group is 34% lower than it would have been had the Great Recession not occurred.30
Accordingly, an analysis of the PPS data found that the charitable giving patterns for both of the aforementioned demographic groups were negatively impacted by the Great Recession: single men were 8.1% less likely to give after the Recession (compared with a 5.1% decline for single women).31 Millennials were roughly 4% less likely to give after the recession than before and are not giving at rates comparable to the rates of other generations at the same point in their lives.
While demographic-specific factors may play a role, another study suggests that the Great Recession may have had a long-term negative impact on giving behavior more generally.32 The study found that the fall in charitable giving in the PPS after the recession could not be entirely explained by controlling for a number of different variables, including shocks to income and wealth. One of the study’s authors suggested that households may be more cautious about how to spend discretionary income in the wake of the Great Recession, which may in turn lead to less charitable giving.33
Lessons learned from the Great Recession
It is also valuable for nonprofits and fundraisers to identify areas of the giving landscape that have proven to be relatively resilient in the years during and after the Great Recession.
Foundation and corporation giving
An analysis of the Million Dollar List, a database of gifts of $1 million or more, found that foundations actually gave more gifts of $1 million or more during the recession.34 It is possible that foundations are more responsive to the market, and therefore rebounded more quickly than other sources the market improved after the Great Recession, or that foundations responded to increased societal need as a result of economic conditions. The same analysis found that giving by corporations at the level of $1 million or more closely followed the business cycle rather than broader economic trends.
Resilient giving patterns
Though individuals were significantly impacted by the Great Recession, some bright spots emerged. Nonprofits and fundraisers may consider strengthening their efforts in the following areas to mitigate risk and ensure resiliency in the face of a potential recession:
• A recent longitudinal study of donor-advised fund granting patterns found that payout rates (defined as the ratio of total grant dollars awarded to assets), as well as flow rate (defined as the ratio of total grant dollars awarded to total contributions received by donor-advised funds in a given year), actually increased during the Great Recession.35 These findings suggest that donors with donor-advised funds may be uniquely situated to continue giving during a potential recession.
• Donors and grantmakers appear to have responded to increased need during the Great Recession: giving to human services from all sources of giving actually increased in inflation-adjusted terms in both 2008 and 2009, and giving to food banks in 40 cities increased 31.9% from 2008 to 2009.36 Nonprofits and fundraisers might consider the importance of making a case for the need that their organization fills, and may also consider the role that media coverage has in making donors aware of increased need during an economic downturn.