The BNZ-Business New Zealand performance in manufacturing index showed the Otago-Southland index fell to 45.3 points in May, compared with 58.5 points in May last year.
A reading below 50 indicates industry is in contraction and above 50, in expansion.
Otago-Southland Employers Association chief executive John Scandrett there was some consistency in the latest results with the April index at 47.2.
"We're continuing to see negative sentiment associated directly with earthquake-related impact factors. However, there are some positive signals now the high kiwi dollar is actually assisting those companies that have an imported raw material component in their manufacturing mix," he said.
NDU general secretary Robert Reid said he feared the effect of KiwiRail's decision to lay off staff at its Dunedin Hillside Workshops, along with the Government's unwillingness to consider local procurement of rail stock, would exacerbate the situation in the region.
KiwiRail is laying off about 40 workers after accepting a Chinese bid to build rolling stock for Auckland's rail network.
"Hundreds of thousands of New Zealanders working in manufacturing deserve a proper response from Government on policy settings that support their jobs and help share economic wealth."
New Zealand needed more than just the primary production sector to fire up if the economy was going to be resuscitated and incomes boosted, he said.
Manufacturing was the third-largest industrial employer in New Zealand and its success was critical to an economic recovery, especially one where the economic benefits of a recovery were shared.
"Excellent international commodity prices are helping farmers pay down debt, but it also means that New Zealand consumers are facing higher costs for their household staples, like meat and dairy."
In the past, if dairy or meat did well, global gains were used to subsidise the local price, Mr Reid said. Now, that would be illegal under free trade laws, meaning if international prices went up local consumers were hit.
In contrast, exporters of non-commodity manufactured goods were continuing to face tough times with the high New Zealand dollar, he said.
Mr Scandrett said there had been negative sentiment about the relative strength of the New Zealand dollar where manufacturers were also active in export markets.
"When we look closely at the May index markers, production levels and new orders appear to be holding at reasonably acceptable levels, but we have certainly seen a sudden slip across employment.
"PMI feedback strongly suggests local manufacturers are limiting hiring activity and, in fact, in some cases are actually releasing staff," he said.
Mr Reid called for government procurement arrangements that encouraged domestic industries such as textiles, wood processing and rail engineering.
Support in New Zealand was in sharp contrast to Australia, where the Government required contract tenderers to implement Australian Industry Participation Plans for projects worth more than $20 million, he said.
However, wood processing was an industry where a value-added strategy was becoming uneconomic.
The wood processing industry had lost more than 1000 jobs since 2008, including 110 with the closure of Blue Mountain Lumber, near Tapanui, in 2009, and a smaller number of redundancies at Craigpine Timber, in Winton, earlier this month.
There had been talk about the use of New Zealand timber in the rebuilding of Christchurch, Mr Reid said.
"If there are no local wood processors left to manufacture the wood required, then we may well see the ultimate irony of Christchurch being rebuilt in wood but subsidised wood from Chile and Canada rather than from New Zealand forests."
Nationally, the manufacturing index stood at 54.7, up 2.7 points from April, the highest level of activity since June last year.
Compared with previous May results, the 2011 figure was the highest recorded since 2007.
Otago-Southland was the only region to show a contracting industry. Canterbury-Westland led the way at 57.7, its highest index value since November last year.
That was mainly because of increased production and new order results. The central region recorded 57.1 and the northern region was 52.3.
