THE plight of manufacturing industry, which has been in recession since the autumn, is set to worsen with the latest Purchasing Managers' Survey showing that the sector

contracted for the second month in succession.

The strong pound has hit export order books, forcing firms to cut back in response to weakening demand.

The employment index was below 50 for the third month in a row suggesting job opportunities may deteriorate just when the Government is trying to persuade people to return to work.

The seasonally-adjusted

Purchasing Managers' Index fell back from 49.5 in April to 49.3 in May, its lowest level since mid-1996 when industry was in the midst of a destocking crisis.

However, the output index rose from 50.0 in April to 50.4.

With the exception of output all the main barometers of

manufacturing are registering readings of below 50 in the survey, which is conducted by the Chartered Institute of

Purchasing and Supply.

But with the services sector continuing to expand, the

economy is still growing, albeit at a slower pace.

The Bank of England

Monetary Policy Committee, which meets tomorrow and Thursday, is not expected to change interest rates, which have been held steady at 7.25% since November.

The committee is being strengthened this week by the arrival of Oxford economist John Vickers as chief economist of the Bank and the elevation of Mervyn King, his predecessor, to deputy governor.

Adam Cole, UK economist at HSBC Securities, said: ''Weak as industry is, so long as services remain strong the monetary

policy committee is unlikely to start cutting base rates.''

The Purchasing Managers' Survey of the service sector is due to be published tomorrow and is expected to show that it remains strong.

Although there are still some independent economists who expect a further rise in interest rates in the current cycle, more are speculating about when the first reduction will come.

However, the monetary

committee has been badly split this year, and on two occasions Eddie George, the Governor of the Bank, has had to exercise his casting vote to prevent them going up.

Now that the committee has increased from eight to nine members he is likely to be spared the embarrassment.

Export demand has been falling steadily since the start of the year as contracts with

overseas customers have increasingly not been renewed.

Over a quarter of all

respondents to the survey reported that their export order books had weakened in May.

Purchasing managers

reported that orders were being lost at home to cheaper imported products.

The order books index dropped back from 49.2 in April to 49.0 last month.

The prices paid index rose to 42.5 from 41.6 in April, probably reflecting sterling's retreat from its peak in March.

But with the index well below 50 input price inflation should continue to remain in negative territory.

Suppliers' delivery showed a further improvement in May, with the index moving up to its highest level since mid-1996.

This suggests broader inflationary pressures and supply bottlenecks eased again.

Cole said: ''The May

Purchasing Managers' Index paints a picture of ongoing weakness in manufacturing industry.

''Having officially slipped into recession in the first quarter of this year, the sector looks set to see further declines in output in the months ahead.

''This weakness is now coming through in a broader range of indicators.

''In particular, the employment balance was below 50 for the third consecutive month, suggesting manufacturers are likely to start shedding jobs.''

The narrow measure of the money supply, M0, which covers notes and coins in circulation, slowed down in May, according to figures from the Bank.

It increased by 0.3% last month, but the year-on-year rate declined from 6.8% to 6.3%.