What Happens to Real Effective Exchange Rate When ISM Manufacturing Drops Below 45?
What happens when the manufacturing sector enters deep contraction? Historical recession correlation, supply chain effects, and market reactions to collapsing factory output.
How Real Effective Exchange Rate Responds
Scenario Background
The ISM Manufacturing PMI is a diffusion index where readings above 50 signal expansion and below 50 signal contraction. Below 48.7 has historically corresponded with overall economic contraction (not just manufacturing). Below 45 signals deep manufacturing recession territory, a level that has preceded or coincided with every recession since the survey began in 1948.
Read full scenario analysis →Historical Context
ISM fell to 33.1 in December 2008 during the financial crisis, one of the lowest readings ever recorded. It hit 41.5 in April 2020 during COVID lockdowns. In the 2001 recession, it bottomed at 40.8. In every recession since 1960, ISM has fallen below 45 at some point during the downturn. The 2022-2023 manufacturing recession was unusual in that ISM spent over a year below 50 (bottoming at 46) without triggering a broad recession, because the services sector remained strong enough to offset manuf...
What to Watch For
- •New orders component falling below 45 before headline ISM, leading indicator of further deterioration
- •Employment sub-index declining, manufacturing layoffs beginning
- •Inventories rising while new orders fall, the inventory correction is starting
- •ISM Services also declining below 50,the manufacturing recession is spreading
- •Fed governors citing manufacturing weakness, policy pivot is being considered
Other Assets When ISM Manufacturing Drops Below 45
Other Scenarios Affecting Real Effective Exchange Rate
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