The mixed evidence on the health of the economy means that the Chancellor, Kenneth Clarke, is not expected to change interest rates after his meeting tomorrow with Eddie George, governor of the Bank of England.
The decline in manufacturing activity last month was the sharpest since September 1992, according to the Chartered Institute of Purchasing and Supply. Its activity index showed the fourth fall in a row in May.
''Business conditions have steadily deteriorated since the start of the year,'' said Peter Thomson, director general of the CIPS. The survey suggested that unsold stocks of goods were the main reason for pessimism.
Output, orders and employment were all down compared with the previous month, although the consumer goods industries increased their level of production. Jobs were cut by 17 per cent of the firms surveyed.
In a further sign of industrial weakness, the Engineering Employers' Federation reported that pay settlements had fallen back in the three months to April. They were down to 3.3 per cent on average, having held steady at 3.5 per cent for the previous nine months.
There were 21 pay freezes reported during the three months - 15 of them in April - out of a total of 269 deals. Most settlements remained in the range of 3-4 per cent.
David Yeandle, head of employment affairs at the EEF said: ''We are pleased to see employers and employees are responding prudently to tougher trading conditions and the decreasing rate of inflation.''
However, figures showed growth of the narrow money supply measure, M0, picking up to 6.2 per cent in May from 5.6 per cent in April. Cash in circulation, by far the biggest component of M0, grew by 6.1 per cent in the 12 months to May.
''Along with other consumer indicators, underlying narrow money growth is accelerating,'' said Adam Cole, an economist at brokers James Capel.
Mr Clarke and Mr George are expected to agree to leave base rates unchanged this month. But there is a difference of opinion in the City about what will happen later this year.
Some believe the Chancellor will cut the cost of borrowing again. A report from his panel of ''wise persons'' due to be published on Friday will show that most of them think there is plenty of spare capacity in the economy and therefore little immediate inflationary danger.
However, in its latest Inflation Report, the Bank of England warned there was a danger of inflation running above its 2.5 per cent target by 1998 if base rates did not rise in the meantime.
Most City analysts reckon higher consumer demand will help manufacturers work off their overhang of stock before long. In addition, key continental European export markets are expected to recover later this year.
''There is a danger of overdoing the doom and gloom on manufacturing,'' said Robert Barrie, an economist at BZW.
Official figures for manufacturing output will soon be revised up to take account of better estimates of exports last year. Last week the Office for National Statistics published higher figures for export growth as a result of a new method for calculating export prices.