ISM Insights: Reading the Signs of a Potential Supply Shock Recession

AUTHOR | Selene Sundahl, Chihyu (Linda) Liu

Executive Summary

Tom Derry, CEO of the Institute for Supply Management (ISM), presented a data-driven perspective on the U.S. economy, drawing heavily on ISM's unique real-time indicators derived from its monthly Report On Business®. Analyzing key metrics—GDP, inventories, inflation, and lead times—Derry highlighted several concerning and paradoxical trends. While ISM's own estimate suggested slight positive GDP growth (+0.8% annualized) as of late March, other indicators and Derry's analysis point towards the distinct possibility that the U.S. may already be in the early stages of a supply shock-induced recession. Unusual inventory build-ups, persistent inflation posing a dilemma for the Fed, and lengthening lead times despite weak demand collectively paint a picture of an economy potentially grappling with constrained production capacity rather than just faltering demand.

Gauging the Economy: GDP and Real-Time Indicators

Leveraging ISM's long history of data collection (since 1938 for manufacturing, 1998 for services), Derry emphasized the strong correlation between ISM's composite indexes and core macroeconomic metrics like GDP. He explained that knowing the relative contributions of manufacturing (~12%) and services (~88%) to the U.S. economy allows for real-time GDP growth estimates. As of the last week of March, ISM calculated an implied annualized GDP growth rate of +0.8%. While positive, this contrasts sharply with other forecasts, such as the Atlanta Fed's model predicting a contraction of -2.8% for the first quarter. Derry noted that while official recession confirmation from the National Bureau of Economic Research wouldn't come until Q3, he personally believes the U.S. is likely already entering one.

Building Resilience: From Inventory Buffers to Strategic Flexibility

During the pandemic, companies bulked up inventories, diversified suppliers, and built buffer capacities to withstand future shocks. Yet, this resilience came at a cost. In recent years, many companies have shifted back to leaner inventory strategies to manage carrying costs and free up working capital.

But in today’s uncertain economic climate, that shift may be risky. Lean inventories, while efficient in stable times, can quickly become a liability when volatility strikes. In fact, supply shocks—like sudden shortages of critical components, energy spikes, or port disruptions—can ripple across industries, stalling production and dampening consumer confidence. Prolonged or repeated shocks can trigger broader economic slowdowns and even recessions, especially if they suppress output while inflation remains high.

This environment sets the stage for a classic bullwhip effect: when demand signals become distorted due to panic buying, delayed reactions, or inaccurate forecasts, upstream suppliers may over- or under-react, leading to stockouts or excesses. As companies reduce inventories to stay lean during this period of uncertainty, even small demand fluctuations can cause major swings in production and procurement upstream—amplifying risk and reducing supply chain agility.

The question now is: can this pendulum swing toward lean operations continue, or are we setting ourselves up for the next big shock?

With demand forecasting still volatile and global disruptions increasingly common, supply chain leaders must decide how much resilience they can afford—and what that resilience looks like in 2025. Is it inventory? Supplier diversification? Digital visibility? The answer will vary by company, but what’s clear is that resilience must go beyond a buzzword. It has to be strategic, intentional, and aligned with long-term risk appetite.

Lengthening Lead Times Amidst Weak Demand

Another paradoxical signal comes from supplier delivery times. The ISM index moving above 50 indicates lengthening lead times. Typically, Derry explained, this is associated with strong aggregate demand straining supply. However, current demand is weak. He offered several potential explanations: specific disruptions like China's germanium export restrictions affecting electronics, the recent import surge potentially tapping out available near-term supply, or increasing financial fragility among smaller suppliers less equipped to handle downturns. He solicited insights from the audience, acknowledging the puzzling nature of this trend.

Recession Watch: Is a Supply Shock Underway?

Connecting these observations, Derry argued that current conditions align closely with a supply shock-induced recession. Defining a supply shock as an event impacting the economy's capacity to produce (like the 1973 oil embargo), he noted the key characteristics are falling output and rising prices – precisely what seems to be occurring now (potential GDP contraction alongside high inflation). He referenced the anomalous period during the pandemic where lead times decreased while prices increased due to supply disruptions, contrasting it with typical demand-driven cycles. He observed that manufacturing employment is already declining as firms adjust to falling new orders and backlogs. Anecdotally, even ISM is experiencing caution from clients regarding discretionary spending like training and conference attendance.

Derry suggested the administration's current trade policy might stem from the fact that the U.S. economy is less reliant on exports (~12% of GDP) compared to other nations, perhaps leading to a belief that the U.S. can "outlast" partners in trade disputes. He sees the path forward involving either unlikely Congressional action or, more probably, the administration negotiating select bilateral deals and declaring victory. However, he stressed that the constant policy shifts create immense difficulty for businesses, concluding, "as long as we know what the rules of the game are we'll be fine... but right now the rules change constantly.

Conclusion

As graduate students attending this session as student reporters, we walked away with a far greater understanding of how seemingly subtle data points—like supplier lead times or inventory levels—can tell a much larger story about the health of an economy. Tom Derry’s breakdown of ISM’s real-time indicators helped us connect classroom concepts in analytics and forecasting with real-world economic signals that business leaders rely on to make tough decisions.

This session pushed us to look beyond surface-level data and think critically about how to interpret trends in context. For example, seeing supplier lead times lengthen in a period of weak demand challenged our expectations and showed us that supply chains do not always follow textbook logic. It reminded us that true resilience is not just about preparation—it is about the ability to read patterns, understand nuance, and adapt quickly when those patterns shift.

Hearing this level of insight directly from someone who helps shape industry-wide understanding was eye opening, and it gave us a stronger appreciation for how analytics, policy, and supply chain strategy are deeply interconnected.

Authors' Bio

Selene Sundahl, CPIM

Director of Supply Chain, Tek84 Inc.

Current MBA Candidate -Master of Business Administration – University of California San Diego Rady School of Management

Selene is the Director of Supply Chain at Tek84 Inc., where she leads procurement, planning, warehousing, and supplier management with a focus on aligning supply operations to support rapid growth and new product development. Since joining the company in 2020, she has rebuilt supplier relationships, implemented strategic inventory controls, and led cost-saving initiatives across key systems. Her collaborative approach with engineering and production ensures seamless execution from concept to delivery.

With over 13 years of experience in manufacturing, engineering, supply chain operations, and business administration. Selene has driven capital projects, waste reduction programs, and process improvements in industries ranging from medical devices to advanced security systems. She brings deep technical knowledge—from electro-mechanical assemblies to injection molding—and is known for her ability to solve complex problems, drive efficiency, and position the supply chain as a strategic business enabler.

Chihyu (Linda) Liu

Co-President at Operations and Supply Chain Club, UC San Diego

Full-time MBA candidate, UC San Diego, Rady School of Management

Linda is an MBA candidate at UCSD's Rady School of Management focusing on Supply Excellence and Innovation, currently serving as Co-President of the Operations and Supply Chain Club. She brings over five years of experience from Sunright Food Corporation, Taiwan's largest miscellaneous food manufacturer, holding roles in Product Management and as a Trading Specialist.

At Sunright, Linda demonstrated strong analytical and leadership skills, driving significant business growth by doubling the B2B client base and increasing key client revenue by 30% through data analysis and targeted digital marketing. She successfully optimized supply chain operations via strategic procurement and logistics management, achieving notable cost savings, and led cross-functional teams in launching multiple new products based on market analysis. Linda excels at leveraging data and collaboration to manage complex projects and achieve strategic objectives.