Twenty-twenty will always be known as the year that COVID put the world on pause. The impact of COVID persisted through 2021 and beyond and has forever changed how we think, act, and do business. To curb the impact of the pandemic, the federal and state governments dedicated significant funding to help keep the country going. As a result, unemployment payments were enhanced, taxpayers received multiple stimulus checks, and businesses and nonprofits received a myriad of subsidies, which included PPP loans (and related forgiveness), Employee Retention Tax Credits, HHS funding, Daycare Subsidy Funding, Healthcare Worker Bonuses, Shattered Venue funding, FEMA funding, and more. The shutdown caused by the pandemic created supply shortages in consumer goods, technology equipment, PPE, and more. People realized they could work from anywhere, creating a mass exodus from urban and high-cost/taxed areas (such as New York City and State). In addition, many Boomers who were nearing retirement packed it in to avoid a complete change in the technology landscape they found themselves in. This created a shortage of staff and a rise in the cost of labor. All of this has culminated in an economic downturn brought about by a tightening labor market, rising interest rates and inflation, a pullback in the stock market, and a surplus of cash dumped into the market by governmental agencies.
Don’t expect 2023 to get any better… as all indications are that we are headed for a recession during 2023 that is anticipated to hold on into 2024. As 2022 moved on, we saw an easement on supply chains, followed by a softening of the housing market (as interest rates crept up), and at the end of the year, we started to see lay-offs that will hopefully start to loosen the labor markets. This will all take some time to work its way out but expect inflation to stabilize by the middle to end of 2023 at around 3 or 4%. Expect interest rates to continue to rise during the first half of 2023 until inflation comes under control… we could be looking at anywhere between a .5% and 1.5% in rate hikes before we are all done. Expect unemployment to continue to rise to a level of around 5%… with certain pockets continuing to be scarce even as the labor market continues to soften (accountants, teachers, healthcare professionals, etc.).
At this point, don’t expect a large influx of additional governmental subsidies in 2023. This will result in cash shortages and should drive up interest rates being paid to investors and thus make fixed-rate investments more attractive. This will have a negative impact on the stock market, so expect a drop in the market during at least the first half of 2023.
So, what does this mean to the nonprofit sector:
- Expect an increase in the demand for human services, with unemployment on the rise. With the downturn in the economy, discretionary spending is expected to be down, which could impact private school enrollment and attendance at arts and cultural events.
- With the downturn in the market, anticipate further rationing of funds by private foundations and decreases in contributions during 2023. Overall, fundraising is expected to be down in 2023.
- Federal, state, and local governments pushed out significant funds between 2020 and 2022. Don’t expect a whole lot of additional support in the current year. Expect government funding to stabilize and maybe even decline as governmental agencies look to balance budgets in an inflationary market.
- Organizations should see a loosening of the labor market, which should allow them to attract staff in what has been a challenging talent acquisition period. Having said that, organizations will need to continue to find a way to keep staff connected so that when the economy improves, they don’t leave for higher pay.
- In budgeting, organizations should utilize 5% to 8% increases across the board, with slightly higher increases in areas where the labor market remains tight… healthcare, insurance, financial services, etc.
- Expect a continued push in the Green Transition as the focus moves back to some of the key initiatives that were put on hold when COVID claimed the spotlight.
- People will continue to have mixed feelings regarding in-person events… so expect attendance to stay around 2022 levels. Hybrid events will continue to be necessary for the foreseeable future.
Organizations will need to be more creative and strategic in 2023. Strong leadership, risk management, careful budgeting and monitoring, information flow, and proper planning are going to be essential in 2023. Also, expect to see increased levels of collaboration and mergers in 2023. Twenty-twenty-three will be a challenging year for the sector as the economy tries to right itself… but there will still be an opportunity for those organizations that can navigate the tough waters ahead.
Kenneth R. Cerini, CPA, CFP, FABFA
Ken is the Managing Partner of Cerini & Associates, LLP and is the executive responsible for the administration of our not-for-profit and educational provider practice groups. In addition to his extensive audit experience, Ken has been directly involved in providing consulting services for nonprofits and educational facilities of all sizes throughout New York State in such areas as cost reporting, financial analysis, Medicaid compliance, government audit representation, rate maximization, board training, budgeting and forecasting, and more.