Where’s All The Money?
March 1, 2009 Mark Hrywna
Donors and banks are sitting on piles of cash after moves by the Federal Reserve Bank to slash interest rates and the infusion of federal bailout funds. Judging by the levels of the national money supply and direct mail performance of some nonprofits, it would appear donors might be sitting on their cash, waiting to see what happens next in the worst economic climate since the Great Depression.
From 2001 to 2004, The NonProfit Times tracked the nation’s money supply and compared it to giving via direct response. There was a direct correlation between giving and available cash. In the years following the September 11 terrorist attacks, the Federal Reserve Bank boosted the money supply and donors seemed to give when they had the cash. But now, it seems as if donors, like consumers, are holding on to their cash. Giving had been in near lock-step with the money supply and now they are going in opposite directions.
Three large national nonprofits agreed to share their direct mail revenue data for 2008: Some cautioned that direct mail might not be a good economic indicator because it depends on the number of mailings and acquisitions. Economists also suggested taking a look at measures other than M1 and M2.
The Federal Reserve tracks money in circulation and ready for use on a monthly basis. The M1 supply covers the most liquid forms of money and includes currency, travelers’ checks, demand deposits and other checkable deposits. In addition to including M1, M2 consists of savings deposits, small time deposits and retail money market mutual funds. The money supply typically rises before the holidays in December before subsiding again in March. The economic swoon during the final two quarters of 2008 seems to have sent the nation’s money supply and direct mail fundraising on divergent paths. While the feds have been boosting the money supply to motivate banks into more lending, donors appear to have pulled back on direct mail giving.
The M1 supply started 2008 with modest change compared to 2007, seeing an increase or decrease of less than half a percent during the first five months. Meanwhile, M2 was increasing each month by at least 5.5 percent compared to the same months of 2007. It wasn’t until the Federal Reserve sprang into action in late summer 2008 that the money supplies exploded.
M1 crept up a few percentage points each month until September and October when it jumped by 6 percent and 7 percent, respectively, and skyrocketed in November and December by almost 12 percent and 17 percent, respectively.
The best months for the groups in The NPT study appeared to be February and May (Catholic Relief Services and Food For the Poor) along with June (Catholic Relief Services). Mirroring the declining economy, direct mail revenue tailed off significantly for all groups in August, October and November.
The Cystic Fibrosis Foundation (CFF) saw signs of optimism for 2008, with a 26-percent boost in direct mail revenue for January, as compared to the same month in 2007.
The optimism was short-lived. While February and March dropped off only slightly, about 2 percent each, April started a three-month stretch of double-digit declines: 17 percent, 25 percent and 10 percent. The slump made July look like a winner (only off 3 percent from July 2007) before the numbers followed the declining economy.
“We had reason for optimism through May and June, but the downturn really started in August,” said Bruce Joyner, vice president of direct marketing at Bethesda, Md.-based CFF.
A silver lining might be that while the number of gifts received had declined 5 percent from 2008 to 2007, the average gift grew by 3 percent. Overall, direct mail revenue was off by about 13 percent last year; fortunately for CFF it only makes up about 8 percent of overall income. The bulk of revenue comes from special events and walks.
December is typically the month most influenced by seasonality at CFF, Joyner said, but even that was down 22 percent compared to 2007. Renewal and acquisition rates were fairly typical during 2008, however, “more alarming is the rate of decline of percentages from July through December than in the first part of the year,” he said.
CFF’s fundraising is “pretty evenly dispersed,” Joyner said. Mailing patterns haven’t changed much with acquisition mailings, typically about two million pieces, in each month but December. “We’re trying our best to mail a little smarter, our contact strategy being a little tighter, and trying to mail less pieces yet make the same amount of revenue,” Joyner said. “You really have to do that to continue to bring in new donors,” he said of maintaining acquisition levels.
Most nonprofit direct mail programs, if not all, depend on donors older than 55, said Joyner, which he attributed to some of the direct mail drop-off. “We’re thinking that if they’re on a fixed income, they’ve seen a decline this year,” he said, though CFF has not adjusted 2009 revenue forecasts as a result.
The story of 2008 was pretty good at Baltimore, Md.-based Catholic Relief Services (CRS) — until the fourth quarter. Any double-digit jumps or drops would normally raise an eyebrow for Jean Simmons, director of annual giving. There were eight months during 2008 that had such peaks and valleys, with an even split between positive and negative as compared to the same months in 2007.
Response rates were “a little scary,” Simmons said, but revenue tracked pretty well overall while CRS aimed to improve its year-end e-philanthropy efforts to make up any gaps. “Everyone’s pulling out all the stops,” she said.
The declines near year’s end were “something we typically don’t see,” Simmons said, with the fourth quarter down more than 15 percent compared to Q4 2007. October and November were “holding strong,” she said, but not quite what they had been the previous year, down 9 and 21 percent, respectively. CRS lowered its goal by 7 percent for Fiscal Year 2009, according to Simmons.
Food For the Poor (FFP) had two months of double-digit increases (February and May) last year. In the second half of the year, however, there were four months of double-digit decreases, punctuated by a 20-percent drop in August, 15 percent in October and 14 percent in November before a turnaround in December.
That was not an uncommon story for charities last year. The Target Analytics Index of National Fundraising Performance indicated a median decline of 1.1 percent from the first three quarters of 2007 compared to the first three quarters of last year. From the first half of 2007 to the same period in 2008, revenue dropped 2.4 percent.
The Target Index reports on direct marketing giving only. Direct mail is the dominant revenue source for most organizations but Web, telemarketing, canvassing, and other gifts considered to be direct marketing are also included.
While nonprofits might not be getting as many checks in the mail from donors, it might be a better time to hit up major donors for bequests rather than a big outright gift since they’re reluctant to part with their money in the current environment. “Since a donor doesn’t have to part with the asset today, they’re less affected in their decision-making by what is happening financially now,” said Phyllis Freedman, founder of SmartGiving, a Washington, D.C.-based consulting firm.
Likewise, she said, charitable gift annuities might be attractive in this market as well, and so the money supply levels might not have the same impact on planned giving in general.
National cash flow The money supply reached levels not seen in years, with remarkable jumps during 2008. From 2005 through 2007, the M2 supply has month-over-month increases of anywhere from 4.5 percent to more than 5.5 percent. During 2008, month-over-month increases exceeded 6 percent, surpassing 7 percent in October and November. Even when seasonally adjusted, M2 increased by 9.5 percent in December after eclipsing 1 percent in just three months of 2008.
Tucker Adams, president of the Adams Group, a regional economics consulting firm in Colorado Springs, Colo., said the Federal Reserve has taken the complete opposite strategy that it did during the 1930s. At that time, the Fed was fairly new and faced with its first big test, she said, adding that it didn’t make much of an effort to do anything. The money supply fell about 30 percent, a third of banks failed, and the economy imploded. “Now they’ve taken absolutely the other action,” Adams said, with the Fed loaning at discount windows, creating new money and cutting interest rates.
The money supply is increasing because the Federal Reserve is pouring liquidity into the economy, according to Adams, including cutting the prime rate, the interest banks charge each other for overnight transactions, to 0.25 percent. “Everything else that may have applied in other years is just out the window,” she said. “This time what’s happening is, although money is out there, it just sits because the banks are not lending,” Adams said, creating enormous potential for future inflation.
There should be gradual increases in the money supply over time, Adams said, because the economy grows bigger, with more people and more goods and services. “You expect to see steady growth,” she said.
A bank must hold only a small percentage of its deposits, loaning the rest over and over again. “The original infusion of base money is multiplied several times, this time it’s just not happening,” Adams said, with banks “either building up capital or using it to purchase other institutions.”
Excess reserves that normally run between $1 billion and $2 billion recently were near $500 billion, said Rudy Penner, Institute Fellow at The Urban Institute in Washington, D.C. The process multiplies until the amount of M1 and M2 created is several times the increase in reserves. Under normal conditions, Penner said he would be fearful of a huge inflationary impact, adding, “I’m nervous about it now, but we are in uncharted watersÉit’s simply a totally unprecedented situation in the United States.”
According to Adams, “There’s been a huge infusion of base money and nothing much happening. My guess is we’re not seeing the same relationship between the two (M1 and M2) because normal things are not happening. The concern is, further down the road, in two to three years, all this base money will be out there, banks do start lending, consumers borrowing the supply will explode, and the inflation potential is enormous,” she said.
Prior to late 2008, there was only one month during the past five years when M1 supply eclipsed $1,400 billion (December 2004, $1,401.3 billion). In 2008, M1 cracked $1,400 billion in July and dipped below it in August before surpassing it each month since, nearly reaching nearly $1,600 billion by year’s end.
During 2008, M1 levels declined in January and February before spiking by 2.5 percent in March. The measure was up and down slightly until September when it jumped again, this time by 3.1 percent, and again in October by 2 percent.
Comparing similar months from 2007 and 2008, there wasn’t much significant change up or down until the summer. June 2008 was up by 1.5 percent compared to the previous year, followed by more increases in July (2.5 percent) and August (1.7 percent). But that was nothing compared to the fall. In September, M1 levels leaped 6 percent over September 2007 and by 7.6 percent in October.
Even when the M1 totals are seasonally adjusted, the Federal Reserve’s statistics show a leap in September 2008. The supply was up or down within roughly 1 percent during most other months of 2008, but the total spiked by almost 4.3 percent, about $60 billion, in September. M1 didn’t rise by more than $20 billion in any other month last year. NPT