West Midland manufacturing has produced its best output results for a decade, despite cutting its workforce by almost a fifth since 2002.
The Engineering Employers Federation (EEF) said that the region's manufacturing firms reported a 22 per cent increase in production in the second quarter of 2006, but this had been tainted by the loss of 5,000 more jobs.
"This takes the total job loss in the region over a four-year period to 85,000," said Bob Hale, chairman of RSM Robson Rhodes' National Manufacturing and Technology Group.
"Now just 360,000 remain and that doesn't take into account the recent announce-ment of the Peugeot closure which obviously is going to have an impact," he added.
Despite the poor employment figures, the region saw better results than last year in every category of EEF's business trends survey, which is carried out in conjunction with RSM Robson Rhodes.
"There is clearly more heartache to come from the automotive sector and yet, despite all the bad news surrounding Peugeot, we still having a thriving West Midlands car industry with Nissan, Toyota, Honda, Land Rover and Jaguar all showing significant growth," said Mr Hale.
"At the same time our aerospace industry continues to thrive, as does the region's construction sector which is going from strength to strength.
"The West Midland electronics and high-tech industries have recovered from the 'hiccups' of three or four years ago and are now also expanding and developing," he added.
Most encouraging was the apparent recovery of sales to the UK market, EEF said.
For the first time since late 2004 more West Midland companies reported an increase in domestic orders than a decrease. This is at odds with the rest of the UK, where companies are less certain about the domestic market.
Export orders in the region also remain strong, and continue to exceed expectations.
This was the same for prices, but once again margins, cashflow and profitability threaten to hamper any recovery in the economy, as they failed to make the anticipated upturn.
This suggests that manufacturing continues to remain under intense pressure from escalating costs, especially high energy prices, EEF said.
As a result, forecasts going into the third quarter were less clear.
Many companies are predicting considerable improvement in terms of cashflow, profitability and margins, while orders and output are expected to fall significantly.
Ian Smith, chief executive of EEF West Midlands, said: "One downside appears to be the continuing severe pressure on margins with only a slight outlook for improvement in the next three months.
"In particular rising energy costs have had a great effect on profitability. Companies have had to raise prices in order to balance their books, placing future employment and investment at risk.
"Companies also seem less optimistic about the next quarter which may be a result of recent negative headlines following the announcements by Heinz and Peugeot.
Across the UK the survey showed all sectors reporting widespread growth for the first time in almost two years, although there were wide variations in the pace, with the higher value sectors such as electronics and electrical equipment seeing the strongest levels.
"The European economy has become far healthier and our manufacturing base is increasingly exploiting the opportunities presented by the low-cost economies both in terms of the markets and utilising cheaper labour," Mr Hale said.
However, he called on the Bank of England to consider a reduction in interest rates when the MPC meets this Thursday.
Mr Hale said: "The continuing increase in commodity prices and energy costs, coupled with the inability to pass on the full extent of these cost increases, means that margins continue to remain under pressure.
"Therefore, help on interest rates and the provision of investment incentives would provide a welcome boost to the sector."