Turbulence

Coping with economic uncertainty.

Bryan C. Taylor | posted 12/04/2009

Is there anything of which one can say, "Look! This is something new"? It was here already, long ago; it was here before our time.—Ecclesiastes 1:10

What has been will be again, and so it is with the Great Recession. America has had banking crises and recessions before, and we will undoubtedly experience such times again. Yet this recession has proved very challenging for individuals, corporations, and ministries. A housing crisis coupled with a global banking meltdown has led to massive deleveraging on the part of the U.S. consumer. The entire global economy has felt the fallout.

Skyrocketing unemployment rates throughout the second half of 2008 and into mid-2009 affected donors not only in dwindling portfolios but also in the loss of tangible personal income. As portfolio volatility increased and markets declined, wealthy donors grew more cautious and significantly limited commitments. Continued economic decline and a weakening job market negatively impacted systematic giving to missionaries and ministries.

Higher education institutions saw significant declines in their endowments, annual fund giving, and student enrollment. Universities and seminaries have struggled to assist students and retain faculty despite major hits in funding. For example, Harvard University, which relies on its endowment for over one-third of its annual operating budget, has frozen faculty salaries and limited expansion plans.

Although markets have rebounded significantly, many economists believe the recovery will be slow. Further, the deleveraging of the American consumer will likely compound the problem. The U.S. consumer accounts for about 70 percent of the GDP; therefore, the consumer's rebound weighs heavily on both U.S. and global economic expansion.

However, not all is gloom and doom. A few positive indicators: The U.S. and other developed economies are seeing rapid improvement in their manufacturing sectors, and the rate of unemployment is slowing, likely to peak in late 2009 or early 2010. Fiscal stimulus on the part of developed and developing nations seems to have averted a global financial sector meltdown. The picture remains cloudy, but then again, it often does in the late stages of a recession.

While it appears likely that the recession officially ended late in the second quarter of 2009, a number of hurdles remain. Many economists believe the recovery may take the form of the letter w, with a second leg down in 2010. While we believe a sustainable recovery is under way, it's wise to stay conservative when planning for 2010 and beyond.

Proactive ministries view this tough economic environment as an opportunity to analyze budgets, initiate cost cutting, and reduce unnecessary capital expenditures. Many have taken the opportunity to evaluate key ministry initiatives to ensure that ministry momentum is not lost and primary objectives receive the funding necessary for success. In recent years, nonprofits have grown accustomed to quick rebounds in charitable giving after periods of instability or economic weakness. An immediate bounce to pre-recession levels seems quite unlikely. Subdued growth from a lower base level seems more reasonable.

In light of the significant fiscal stimulus, inflation remains a major concern. While a collapse in the dollar seems unlikely, there is significant risk that the Federal Reserve may fail to remove liquidity from the economy in a timely fashion. This could lead to significant inflationary effects and a declining dollar. For ministries with significant exposure to foreign currencies, hedging may help insulate future transactions from dollar volatility and provide management with a more concrete set of planning objectives. Recent market volatility has led many ministries to respond in a reactive rather than proactive fashion in their investment portfolios. Ministries that rely on invested funds should use this opportunity to review both their spending policy and asset allocation model to make sure they are properly positioned to mitigate the potential impact of inflation.

Consolidation, a fact of life in the secular world, is rarely considered among charities, even in times of extreme duress. While ministries acknowledge that such times require a renewed faith in the Lord's provision, they rarely consider the ultimate questions surrounding purpose and partnership. Consolidation can reduce cost, improve efficiency, and get results. Effective stewardship requires that we address these issues as we seek to fulfill our ministry objectives. While we are not called to know the future, we are called to wisely steward the tasks we have been given.

Bryan C. Taylor is CEO and CIO of Cornerstone Management (CornerstoneMgt.net). Taylor, a presidential scholar with 15 years of investment consulting experience, holds the Chartered Financial Analyst designation. He is a popular speaker on investment management and the economy.