The manufacturing sector continues to grow, but at a nominal pace as it confronts ongoing challenges, according to the latest quarterly Manufacturers Alliance for Productivity and Innovation (MAPI) “Survey on the Business Outlook.”

The survey’s composite index is a leading indicator for the manufacturing sector. The December 2012 composite index fell to 55 from 56 in the September 2012 survey. Despite the decline—its 10th straight since reaching a record high of 81 in June 2010—the index remains above the threshold of 50, the dividing line that separates contraction and expansion. The drop of only 1% may portend some stabilization, and is below the fairly significant 5% drop in the September survey, the largest over the 10-quarter decline.

“Movements in the individual indexes were mixed, but most of the forward looking indexes showed some, if marginal, improvement,” said Donald A. Norman, Ph.D., MAPI senior economist and survey coordinator. “The rapid slowdown in the growth of manufacturing production that began in March 2012 appears to have bottomed out and the outlook is for slow expansion over the next three to six months.”

The composite business outlook index is a weighted sum of the prospective U.S. shipments, backlog orders, inventory, and profit margin Indexes. The composite index reflects the views of 55 senior financial executives representing a broad range of manufacturing industries.

The survey also includes 13 individual indexes that are split between current business conditions and forward looking prospects. Overall, six of those 13 indexes decreased, including four of the six current business condition indexes, while one remained flat.

The Capacity Utilization Index,which shows the percentage of firms operating above 85% of capacity, was a bright spot, climbing to 31.5% in December from 28.8% in September. It is near its long-term average of 32%.

The Current Orders Index, a comparison of expected orders in the fourth quarter of 2012 with those in the same quarter one year ago, remained at 57 from the previous survey.

The Backlog Orders Index, which compares the fourth quarter 2012 backlog of orders with that of one year earlier, fell to 45 from 53 in the September report.

The Profit Margin Index also slipped, to 59 in December from 67 in September.

Based on a comparison of inventory levels in the fourth quarter of 2012 with those in the fourth quarter of 2011, the Inventory Index dropped to 54 in December from 58 in September, a sign that manufacturers are paring inventories in response to slowing growth.

The Export Orders Index, which compares exports in the fourth quarter of 2012 with the same quarter in 2011, also saw a slight decline, to 49 in the current survey from 53 in the previous report.

Five of the seven forward looking indexes showed improvement.

The Prospective U.S. Shipments Index, which reflects expectations for first quarter 2013 shipments compared with the first quarter of 2012, climbed to 63 in December from 60 in September. The Prospective Non-U.S. Shipments Index, whichmeasures expectations for shipments abroad by foreign affiliates of U.S. firms for the same time frame, rose to 57 in the current report from 56 in the September survey.

The Annual Orders Index, based on a comparison of expected orders for all of 2013 with orders in 2012, improved to 78 in December from 75 in September.

The U.S. Investment Index is based on executives’ expectations regarding domestic capital investment for 2013 compared to 2012. The index was 56 in December, a marginal increase from 54 in the September survey. The Non-U.S. Investment Index, based on projections regarding capital expenditures abroad in 2013 compared to 2012, fell to 59 in the current report from 60 in September.

The Research and Development Spending Index surveys participants regarding R&D spending in 2013 compared to 2012. The index was 69 in the December report compared with 68 in September.

The Interest Rate Expectations Index decreased to 51 from 56, yet still indicates that a majority believe that longer-term interest rates will rise by the end of the first quarter of 2013.