Nonprofits enter 2023 with cooling inflation and still-strong labor market

Nonprofits faced an uncertain economic outlook at the start of the year as a strong labor market and cooling inflation failed to quell recession fears and calm a volatile stock market.

Here’s a closer look at some of the economic data experts nonprofits should be watching.

Unemployment

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In recent months, nonprofits have hired enough employees to restore the jobs they cut during the Covid crisis, according to a new report from George Mason University’s Nonprofit Employment Data Project.

In December 2022, the national unemployment rate stood at 3.5 percent, matching its lowest level since 1969. A strong labor market remains resilient despite a series of recent interest rate hikes by the Federal Reserve, which aim to quell inflation but could slow economic growth.

As a result, employees can be picky about their prospective employers, and many nonprofits have offered new policies and benefits to attract talent in recent months, says Trace Weeks, managing director of strategy and consulting at Nonprofit HR, which provides advice to human resources and services for non-profit organizations.

“People have more options,” Weeks says. “But they choose to stay with organizations that focus on them as people, not just on them as products.”

In addition to offering flexible work schedules and other perks to attract new talent, nonprofits are also stepping up their efforts to retain employees, Weeks says. Many organizations have long held employee exit interviews. Many now also offer retention interviews, which aim to understand how to retain employees.

“Instead of just having a turnover strategy, they have a retention strategy,” she says.

One sign that hiring challenges may soon ease: Some older workers have chosen to delay retirement amid continued economic uncertainty, Weeks said.

She says many nonprofit workers fear the volatility of the economy could threaten their retirement so much that they can’t afford to leave. “We just don’t know what’s going on or what’s coming,” Weeks says. “With the economic downturns that we’ve seen over the last couple of years, people are really hanging on to see what happens,” she says.

Still, the pressure is so intense that some nonprofits are looking to loans to help them provide higher wages to workers coping with rising prices, says Paul Turner, director of lending at the Nonprofit Finance Fund. which provides loans to non-profit organizations.

Nonprofits, he says, “are trying to keep pay as high as they can in an effort to retain their employees, but they’re struggling to offer competitive compensation.”

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Stock Exchange

The stock market has been volatile in recent months as a result of the Federal Reserve’s efforts to control inflation by raising the cost of borrowing. One benchmark stock index, the S&P 500, ended the month down 5.9% in December 2022.

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Ups and downs in the stock market and other investments have destabilized foundation endowments. A new report released last week found that assets collapsed by nearly 20 percent last year after rising about 3 percent on average in recent years. The steep decline, combined with slow growth in previous years, means grantmakers will have to decide whether they want to dig into their endowment to continue giving as strongly as it did during the Covid crisis and its aftershocks .

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Inflation

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Inflation began to ease slightly, registering 6.5 percent in December 2022, down from 7.1 percent the previous month. But higher borrowing costs and ongoing supply chain issues have made real estate projects more expensive for nonprofits.

Organizations seeking loans — say, to buy real estate for a new headquarters or finance the rehabilitation of an old food bank — have been particularly hard hit by rising borrowing costs, says Turner of the Nonprofit Finance Fund.

“There are huge costs when an organization has these aspirations to acquire a property for the first time or even when it comes to renovations,” says Turner.

“Material costs have gone up and contractor time is more expensive – they’ve had to adjust their budgets and planning for that,” says Turner.

He noted that the impact of the tight lending market tends to fall hardest on organizations led by people of color.

More than 80 percent of these nonprofits cite long-term financial sustainability as a top need for their organization, compared to 69 percent of white-led nonprofits, according to the Nonprofit Finance Fund’s latest State of the Nonprofit Sector survey . The study also found that nonprofits led by people of color were less likely to receive unrestricted funds, corporate donations, investment income, and sales revenue than white-led nonprofits.

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Consumer Sentiments

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One bright spot for the US economy at the start of the year is rising consumer confidence after a year marked by growing uncertainty about inflation and the economy. Consumer confidence rose 5.1 percent in December from the previous month, as measured by the University of Michigan’s Consumer Sentiment Index.

A rise in consumer confidence may also help explain nonprofits’ success in attracting donations despite economic uncertainty during the year-end giving season.

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