by Dr. Kevin Dean, President & CEO, Tennessee Nonprofit Network
The announcement of sweeping new reciprocal tariffs by the U.S. on its major trading partners has sent shockwaves through the global economy, triggering a sharp sell-off in the stock market and igniting fears of a looming recession. The Dow Jones Industrial Average plummeted hundreds of points within hours of the announcement, reflecting investor anxiety about the potential disruption to global trade and supply chains. This sudden market downturn echoes the volatile atmosphere that gripped Wall Street at the onset of the COVID-19 pandemic, a period marked by unprecedented economic uncertainty and widespread business closures. The similarities are unsettling, as they point to a possible repeat of the economic turmoil that characterized the pandemic’s early stages.
Economists are now expressing serious concerns that these tariffs could significantly increase the likelihood of a recession, or even worse, stagflation. Stagflation, a particularly insidious economic condition, combines stagnant economic growth with high inflation, creating a perfect storm of economic hardship. Unlike a typical recession, where inflation tends to decrease as demand weakens, stagflation traps economies in a cycle of rising prices and limited growth. This phenomenon is notoriously difficult to combat, as traditional policy tools, such as interest rate adjustments, can exacerbate one problem while attempting to solve the other. The most notable period of stagflation in recent history occurred in the 1970s, triggered by the oil crisis. During this era, the U.S. and other developed nations experienced prolonged periods of high unemployment, soaring inflation, and sluggish economic growth. The consequences were severe, eroding living standards, increasing social unrest, and damaging long-term economic prospects. The specter of a repeat of this economic nightmare is now looming, as the newly imposed tariffs threaten to disrupt global trade flows, raise prices for consumers and businesses, and stifle economic activity. The potential for a similar economic crisis is causing many economic experts to be very concerned.
Understanding the Tariff Mechanism:
At its core, a tariff is a tax levied on imported goods. This tax is added to the price of the product, making it less competitive compared to domestically produced alternatives. The rationale behind tariffs is to encourage consumers to buy local, thereby boosting domestic industries and creating jobs. However, in a globalized economy, where supply chains are intricately intertwined, the effects of tariffs often extend far beyond their intended targets. And yes, American consumers pay the added costs of those tariffs. We will see the prices increase from exported goods.
When a tariff is imposed on a specific good, such as steel, the cost of importing that steel increases. This, in turn, raises the price of products that rely on steel as a primary component, including construction materials, automobiles, and machinery. If trading partners retaliate with their own tariffs on U.S. exports, the cost of American goods in foreign markets also rises, leading to decreased demand and potentially damaging export-oriented industries.
Economic Consequences and Nonprofits:
The potential for a global recession, as feared by Wall Street analysts, is a significant concern for nonprofits. Economic downturns typically lead to increased unemployment and poverty, resulting in a surge in demand for social services. Nonprofits, already operating with limited resources, would face the daunting task of meeting this heightened demand while potentially experiencing a decline in funding. Remember what happened during the Great Recession? We’re potentially watching this about to happen again.
Specific Impacts on Tennessee Nonprofits:
Tennessee, with its diverse economy and vibrant nonprofit sector, is particularly vulnerable to the ripple effects of tariffs. Here are some specific examples of how these tariffs could impact nonprofits and the communities they serve:
- Food Banks and Hunger Relief Organizations:
- Many food banks rely on imported food items, particularly produce, grains, and packaged goods, to supplement their supplies. Tariffs on these items could lead to a significant increase in food costs, straining their budgets and potentially forcing them to reduce the quantity or quality of food provided.
- Rising unemployment and poverty due to a recession could lead to a surge in demand for food assistance, further compounding the challenges faced by these organizations.
- For example, the Mid-South Food Bank in Memphis, serving a region with high poverty rates, could face a substantial increase in operating costs, impacting its ability to provide meals to those in need.
- Affordable Housing and Habitat for Humanity:
- Construction materials, such as steel, lumber, and concrete, are often subject to tariffs. Increased costs of these materials could significantly inflate the expenses of building affordable housing, making it more challenging for organizations like Habitat for Humanity to provide homes to low-income families.
- In cities like Nashville, where affordable housing is already a pressing issue, these tariffs could exacerbate the problem, delaying or preventing the construction of much-needed homes.
- Rising interest rates, which often accompany periods of economic uncertainty, would also increase the cost of mortgages, making affordable housing even more unattainable.
- Healthcare and Medical Services:
- Many nonprofits provide essential healthcare services to vulnerable populations, including those with chronic illnesses or disabilities. Tariffs on medical supplies, such as pharmaceuticals, medical devices, and personal protective equipment, could lead to increased healthcare costs, making it more difficult for these organizations to provide affordable care.
- Rural communities in Tennessee, which often rely on nonprofits for healthcare services, could be particularly affected by these cost increases.
- Nonprofits that provide mental health services will also see an increase in clients, due to the stress and anxiety that economic downturns create.
- Social Services and Poverty Alleviation:
- Nonprofits that provide social services, such as job training, childcare, and elderly care, could face increased demand as unemployment rises and families struggle to make ends meet.
- Reduced charitable donations due to economic uncertainty could further strain the resources of these organizations, making it more difficult for them to provide essential services. Moreover, investments held by foundations, which often serve as a crucial source of funding for nonprofits, are likely to take a hit in a volatile market, potentially leading to a significant reduction in grant-making and overall giving.
- The increased amount of people in need of help will create a strain on the current workforce of these nonprofits, and they may be unable to hire more help due to budget issues.
- Environmental Nonprofits:
- Increased costs of materials used in environmental projects, such as those related to renewable energy or conservation efforts, could hinder their progress.
- Economic downturns can lead to reduced funding for environmental initiatives, as governments and individuals prioritize immediate economic needs.
- Economic hardship can also lead to less environmentally friendly decisions by individuals and corporations, as they may prioritize cost over sustainability.
- Arts and Culture Nonprofits:
- Economic downturns often lead to reduced funding for arts and culture organizations, as individuals and corporations cut back on discretionary spending.
- These organizations may also experience a decline in ticket sales and attendance, further straining their budgets.
- For example, a symphony orchestra in Knoxville or an art museum in Chattanooga could face significant financial challenges.
The Impact on Charitable Giving:
The fear of a “devastating” blow to retirement savings, as mentioned by experts, is particularly concerning for nonprofits. Older adults are often a significant source of charitable donations, and any decline in their financial security could lead to a decrease in philanthropic activity.
Furthermore, economic uncertainty can lead to a general decline in charitable giving, as individuals and corporations become more cautious with their finances. This could create a significant funding gap for nonprofits, making it even more challenging for them to provide essential services.
The Need for Preparedness and Advocacy:
In the face of these potential challenges, nonprofits in Tennessee must take proactive steps to prepare for the impact of tariffs and economic uncertainty. This includes:
- Diversifying funding sources: Nonprofits should explore a variety of funding options, including grants, individual donations, and earned income, to reduce their reliance on any single source.
- Building strong partnerships: Collaborating with other nonprofits, businesses, and government agencies can help organizations leverage resources and expertise.
- Advocating for policy changes: Nonprofits should engage in advocacy efforts to raise awareness of the potential impact of tariffs and to advocate for policies that support their work.
- Contingency planning: Creating plans for reduced funding, and increased need for services, will help nonprofits to navigate upcoming challenges.
- Community awareness: Educating the communities they serve about the impacts that tariffs can have, will help to increase support for the non profits, and the people they serve.
Nonprofits in Tennessee can strengthen their resilience and continue to provide essential services to their communities, even in the face of economic challenges. However, the long-term impact of these tariffs remains uncertain, and ongoing monitoring and adaptation will be crucial.