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The sector reported at 44.3 points, lower than the average of the past year of 51.9 points.
A Performance of Manufacturing Index [PMI] reading above 50 indicates that manufacturing is generally expanding; below 50 that it is declining.
Otago Southland Employers’ Association chief executive Virginia Nicholls said production levels and deliveries of raw materials were the same, while new orders and employment levels were in contraction.
"Wider comments from members include that there has been a slower start to the year due to the holiday period," Ms Nicholls said.
"Construction has been steady. Some in the machinery and equipment manufacturing are finishing large tendered projects and there is a lull until new work starts."
The proportion of positive comments in the index was sitting at 50%.
The novel coronavirus outbreak in China was being watched closely by businesses, Ms Nicholls said.
"There is no doubt that there will be ongoing disruption.
"High-end NZ food exports have been significantly impacted including the seafood industry, which has particularly affected the rock lobster industry."
Many businesses are still struggling to find skilled staff, Ms Nicholls said.
"In Southland, there continue to be concerns over the long-term viability of the Tiwai aluminium smelter and the effect this will have on the Southland community.
"There are concerns with the Review of Vocational Education (RoVE), and whether this will help to secure the skills that businesses need."