The latest Illawarra business survey has shown signs for guarded optimism, according to IRIS research executive director Simon Pomfret.
The survey of business sentiment for the December quarter looked at trading conditions, profitability and employment.
While the sentiment was in "negative territory" - below the average for this quarter - things had gradually been moving towards positive ground over the past three quarters, Mr Pomfret said.
A net 3.7 per cent of businesses reported slower retail trade, a 3.3 percentage point improvement on the previous quarter.
Decreased profitability was experienced by a net 11.9 per cent of businesses, compared with 22.2 per cent the previous quarter.
Employment levels showed a slight improvement, with a net 9.3 per cent of firms reporting reduced staffing levels, an improvement of 1 percentage point from the previous quarter.
"In terms of the graph and the trend we've at least got more businesses than last time indicating that they were trading better, performing better," Mr Pomfret said.
"However, we're still in that negative weak territory so you've still got an economy that is contracting."
Overall, Mr Pomfret said while the figures did show conditions were still tough for the local economy, there were glimmers of hope.
"It gives us a little bit more optimism than if we saw a quarter with a similar figure than we got in September," he said.
"If you look at the graphs over the last 12 months, we're at least heading forward, in a positive direction, even though there are more businesses out there who say they are doing it tough than those who say they are doing quite well."
Mr Pomfret said contraction was slowing.
However, at least two more quarters showing similar improvement would be required before he could say the region was on the road to recovery.
The survey was conducted shortly before Christmas and Mr Pomfret said the expected signs of sales spikes didn't occur.
"December is normally an upturn quarter in terms of seasonal events, with Christmas trading," he said. "We didn't see that coming through when we did the survey a couple of weeks before Christmas for the retail sector.
"If you averaged the December quarters over the 15 years we've been doing these surveys, this would be certainly below the average for a December quarter, so it shows how things are still tough out there."
Mr Pomfret said concerns over what was happening internationally, the flow-on effects from redundancies at BlueScope, the high Australian dollar and the flat residential building industry were "key factors" affecting the region.
"But on the upside there is a fair bit of commercial activity going on," he said.
"We've got cranes in the sky which we haven't seen for quite some time."