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Tuesday, May 21, 2024

Leader Board: Forecasting Charitable Giving

We know well the critical importance of charitable giving to our university.

Over the years, the transformation of Chapman University from a small liberal arts college to a vibrant and highly­­ ranked university of national stature would not have happened were it not for the generosity and vision of our donors.

We’re not alone. Most of the nonprofit organizations that form the lifeblood of who and what we are as a county are also vitally dependent on the charitable giving of their donor bases.

The magnitude and importance of charitable giving can be better understood by analyzing the annual Giving USA Report, which reports annual giving levels to nonprofit organizations and foundations devoted to religion, education, human services, health, arts, culture, and humanities.

Total giving to these organizations has risen from $21 billion in 1970 to $485 billion in the latest reporting year of 2021. That represents a 2,300% rise over the entire 51-year period or an annual average percentage increase of 6.3% per year (see Chart 1).

Although Chart 1 may make it appear as if charitable giving steadily increases over time, in reality, it’s highly erratic.

As shown in Chart 2, annual percentage changes in giving have swung widely from increases of more than 16% in 1986 and 1997 to declines of 4% during the tail end of the Great Recession in 2009 and 2010.

The steep drop in charitable contributions during the Great Recession is by no means an anomaly. Every recession since 1969 led to declines in the annual percentage changes in giving.

But two other factors besides recessions were found to significantly impact giving levels.

The single most important factor is the annual change in the S&P 500. And since Giving USA reports donor support in nominal rather than real dollars, the rate of inflation is another critically important explanatory variable.

We also found that a current year’s giving is determined not by current changes in the explanatory variables but by lagged values of those values.

Namely, changes in real GDP, prices, and the stock market in a prior year explain changes in giving the following year.

Specifically, our research findings suggest that a 1.0% increase in real GDP in a particular year leads to a roughly 0.7% increase in giving during the following year.

A 1.0% increase in the CPI leads to a 0.8% change in giving the following year. And a 1.0% increase in the S&P 500 leads to 0.15% rise in giving the following year.

Total giving in 2021 of $485 billion represented an increase of only 2.8%, the smallest increase in charitable giving since the Great Recession. Given our research findings, that’s not surprising since giving in 2021 was negatively affected by the COVID recession of 2020.

We still don’t have charitable giving data from Giving USA for 2022, but our forecasting model suggests it was a gangbuster year.

The 5.7% increase in real GDP in 2021 (Yes, that’s the bull’s eye real GDP forecast we made at our December 2020 forecast) is the highest growth for any year since 1984.

In addition, there was a 27% surge in the S&P 500 that also occurred in 2021. All this bodes well for charitable giving in 2022. So well, in fact, that our model forecasts giving in 2022 increased by almost 12%. If that increase actually comes to pass, it would be the sharpest increase since 1986.

The stars, however, are not so perfectly aligned for giving in 2023. That’s mainly due to last year’s 20% drop in the S&P 500. In spite of that, our model forecasts giving will increase by about 5% this year (see Chart 3).

Unfortunately, most of that 5% increase is due to the sharp uptick in inflation. In fact, we see no real increase in charitable giving after adjusting for inflation.

Bottom line—Nonprofits should not expect a repeat of the strong year we are forecasting for last year. Just as inflation wipes out wage gains, the insidious effects of inflation hurt nonprofits as much or even more than for-profit organizations.

So to all those generous Orange County donors out there who happen to be reading this Leader Board, please consider boosting your contributions to help pay that inflationary “tax.”

Those booster shots will help keep the lifeblood of our nonprofits flowing.

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