The latest New Zealand Manufacturers and Exporters Association (NZME) survey of business conditions in December showed a 9.02 per cent increase in domestic sales almost made up for a 10.76 per cent drop in export sales.
Chief executive Dieter Adam said despite net confidence falling to 18, down from 24 in November, manufacturing had been a "relatively good space" for the last 12 months.
The current performance, change and forecast indexes were all over 100 in December, indicating expansion.
"The forecast index, which indicates investment, sales, profit and staffing expectations, stayed high at 107.33, coming off the back of the most positive result recorded since 2004 in November, so there remains a fair chunk of optimism for the future."
"We find manufacturers are saying they have a bit of breathing room to employ more staff, but also to be able to invest. That's the critical thing because to survive in the medium to long term, manufacturers need to automate more, and to update their machinery."
Adam noted that last week's Overseas Merchandise Trade release by Statistics New Zealand showed even brighter results for exporters.
"For example, export values for electrical machinery and equipment manufacturing improved 9 per cent on the previous month and 11.5 per cent year on year, while logs, wood, and wood article manufacturing increased 25.1per cent on last month and 13.8per cent year on year."
The really big influences on manufacturing were the uncertain global economy and the value of the dollar, he said, and uncertainty in world markets tended to push down the New Zealand dollar which benefited exporters.
"Having said that, the underlying causes of the global uncertainty is not good news for exporters because people tend to hold back on purchasing our goods overseas."
Adam said exporters would love the US dollar to be closer to 60 cents but the really big problem was the relatively high value of the Australian dollar.
"Forty per cent of our manufactured exports go to Australia and anything over 90 (cents) is really eating into our competitiveness. When it was 85 (cents) people were a lot happier. "
However, the strength of the domestic economy was helping make up for the loss of export sales. It was a little surprising that the drop in dairy prices, and the consequent effect on the rural economy, had not had a bigger impact on manufacturing.
In some instances sales of products, such as hoses used to wash down dairy sheds, dropped quite quickly when farmers "shut their pockets."
If farming losses continued into the next milking season, Adam said, the consequences could be much more serious because farmers didn't have any cash reserves left.