A high Australian dollar and reduced mining activity have produced a further contraction in the manufacturing sector, an industry study finds.

The Australian Industry Group Australian performance of manufacturing index (PMI) fell 1.2 points to 44.1 in September - with readings below 50 showing contraction.

The report showed a concerning trend for weakness in new manufacturing orders - which fell for the seventh consecutive month, down 4.8 points to 44.3.

Only two sub-sectors showed an increase in activity for September - textiles clothing and footwear, and paper printing and publishing.

There was contraction in three sub-sectors which had shown expansion during August - food and beverages, wood products and furniture, and miscellaneous manufacturers.

Australian Industry Group chief executive Innes Willox said he expected the weak trend to continue.

"The softer conditions for manufacturers recorded in September looks like continuing in the months ahead with a sharper decline in the forward-looking new orders sub-index," he said.

"Suppliers to the mining sector, which have generally been a source of encouraging news in recent years, reported sharp falls in new orders as the mining sector responds to reduced prices and an increased likelihood of reductions in demand.

"The ongoing strength of the Australian dollar, together with further rises in wages and input costs and a continuation of reported falls in selling prices, exacerbated the squeeze on margins that has been evident for some time."

Mr Willox said that given the current benign inflationary environment, there was no reason for the Reserve Bank of Australia (RBA) to keep rates on hold.

The RBA meets tomorrow, and the market is expecting the cash rate to be cut from its current 3.5 per cent position.

AAP