The monthly purchasing managers' index, produced for The Royal Bank of Scotland, also showed that business activity and new orders continued to contract in August, but more slowly than in recent months.

Experts said the report revealed some positive findings. Robert Blotvogel, the RBS economist, said: "August's business activity index pointed to an ongoing improvement in the region's business climate relative to the trough recorded in June. However, despite the improvement, activity was still contracting, as were new order books and employment levels. Rather positive were the readings on the inflation barometer – both input cost and output price inflation are now some way below their June peaks."

The PMI is based on a survey of regional companies operating in both manufacturing and service sectors and is regarded as a good indicator for tracing growth momentum.

The employment index indicated declining employment across Yorkshire and Humber. Around 18 per cent of companies surveyed said that staffing levels had fallen since July, with less than two per cent noting an expansion. The rate of job cuts was at its worst since June 2002 due to declining work loads linked to a weakening economy.

August's data showed a fourth successive month-on-month decline in activity levels at private sector companies, with respondents generally attributing the decline to falling volumes of new orders. The rate of decline was described as "marginal", however.

Levels of incoming business fell for the fifth successive month, said the report. Market conditions remain subdued, with uncertainties in the global economic output continuing to mount. New order volumes contracted at a slower rate than in the previous month, but new work continued to fall at a steeper pace than the UK average.

In the level of business outstanding – work not yet commenced or completed – there was a sixth successive month of backlog clearance. Nearly a third of respondents said inventories had contracted in August. Those taking part in the survey said the latest fall in outstanding business reflected declining new order volumes.

Average input costs continued to rise steeply at a similar rate to the rest of the UK. Nearly half – 46 per cent – of respondents reported an increase in input costs, with many citing higher raw material and energy prices. "Companies in both the manufacturing and service sectors recorded strong inflationary pressures in August," said the report.

The average prices charged for goods and services rose at the slowest rate since March. Anecdotal evidence suggested that firms' pricing power was constrained by competitive pressures and weak demand.

Purchasing managers' indexes track variables such as output, new orders, employment and prices and are the first economic indicators of each month. Data is collected using identical methods of different countries so comparisons can be made. On behalf of RBS, Markit Economics distributes questionnaires which are completed in the latter half of each month.

n The chief executive of another bank thinks unemployment levels are unlikely to hit the heights of the early 1990s.

Andy Hornby, of HBOS, said in a weekend interview: "Over the next 18 months we'll see considerable slowdown in GDP, and we're also looking at a period of strong house price deflation – stronger than the early 1990s.

"But I don't believe unemployment levels will be as high as they were as the early 1990s and that is going to be a very important underpin in terms of people's ability to pay their mortgages."

He told the BBC that the credit crunch would probably last until early 2010.

"My personal view, for what it's worth, is that it will take 18 months to play through the system." Any revival would be intimately linked with a recovery in the United States housing market. Excessive and high-risk lending there precipitated the credit crunch.