LOOK out! The manufacturing boom in the south appears to be faltering, with the first "storm signals" in a decade.

The Confederation of British Industry's latest quarterly survey - watched like hawks by business leaders across the region - reveals that smaller manufacturers are beginning to feel the pinch as trading conditions toughen.

Costs are rising more sharply then they have done in the past ten years, with output, orders and employment all falling.

The feedback from small and medium-sized enterprises (SMEs) in the manufacturing sector, which are often the first to feel the chill wind of an economic downturn, also shows a deterioration in optimism about the general business situation and about export prospects.

There are hundreds of manufacturers in Hampshire, employing tens of thousands of people.

The sector, worth £17.7 billion in the south-east, is the third biggest in the region after property at nearly £43 billion and wholesale and retail trade at nearly £19 billion.

According to the Office of National Statistics, the average amount of economic output for each person involved in manufacturing in Southampton is nearly £38,300, while areas under county council control generate about £32,500.

Hugh Morgan Williams, chairman of the CBI's SME Council, said: "Smaller manufacturers are facing extremely challenging trading conditions.

"Unit costs rising at their fastest for a decade means that margins continue to be under serious pressure.

"Confidence is low with domestic and export orders falling. SMEs are employing fewer people and staff levels are expected to fall further over the next three months."

These storm signals send a sharp message to both the government and the Bank of England Monetary Policy Committee that further deterioration is probable unless corrective action is taken."

The survey shows 20 per cent of firms saw orders rise over the past three months but 39 per cent saw them fall.

Over the next three months SMEs overall expect orders to remain broadly unchanged.

However, this masks a contrast between small firms predicting a fall and medium-sized firms expecting a rise.

Investment in buildings and plant and machinery continues to be reined back, although spending on innovation, training and retraining is forecast to remain broadly flat over the year ahead, said the CBI.