The May index rated Otago manufacturing activity at 36.4 points, down from the April result of 40.4 points.
The May 2007 result was 61.9 and the May 2008 figure was 51.8.
A reading above 50 points indicates that manufacturing is generally expanding and below 50 that it is declining.
The seasonally-adjusted national result was 42.7 points, a six-point fall from April, he said.
Otago-Southland was the second lowest result from the five regions surveyed, with the central district result the lowest at 36.1.
However, activity by region continued to be variable.
For the Otago-Southland region, the May production output at 46.4 points was up on the previous month but there was slippage across most of the other index readings, Mr Scandrett said.
BNZ Capital senior economist Craig Ebert said the stumble in May's index result was disappointing to see, although it was not a huge surprise.
"It suggests New Zealand's industrial sector is still struggling, most likely contracting.
"Of course it's still a very mixed bag in the detail. It ultimately depends on what type of goods one is producing, and the relative domestic-export-import exposure one has. "Not everyone is finding the going tough, but most are."
One of the concerns was that just when the global activity indicators, particularly around manufacturing, appeared to be stabilising, the rising New Zealand currency was causing another layer of concern for the local industry, he said.
There were some large concerns with the dollar to consider.
The first one was that overall, on a trade-weighted basis, it was close to its long-term average.
That was unusual for this stage in the economic cycle, Mr Ebert said.
Normally, when the New Zealand economy was in recession, the currency traced a sympathetically low path to help nurse the economy back to better health.
There was a reasonable chance of the dollar trending higher over the next two years.
That was usually the way when global conditions improved and commodity prices rose, as seemed to be the case now, he said.
There was no clear signal that revenue was about to recover for New Zealand's manufacturing sector.
May's index result was not encouraging on demand, with its new orders sub-index slipping to 41.3 points.
The index was encouraging on the cost containment side with its indications of further trimming of staff numbers and the running down of inventories, Mr Ebert said.
"We'll get there, and in relatively good shape to ride the inevitable global recovery. We are just not so sure when."
