It sounds paradoxical, but at least one economist argues that the profits boom of the 1990s was caused in part by a historic collapse in the growth of business sales. According to James Paulsen, chief investment officer of Norwest Investment Management Inc., the lack of good top-line growth forced managers to undertake the restructurings that boosted productivity and held down inventory and compensation costs. The result: strong earnings.

Paulsen points out that since 1990, sales have grown at an average annual rate of just over 5%, the slowest pace of the post-World War II era. Nevertheless, profits have boomed by more than 10% annually, the strongest decade since the war. In the 1960s, by contrast, annual sales grew at a rate of almost 7%, while profits rose at less than a 6% annual rate.

But Paulsen frets that today's optimistic atmosphere is not sustainable. He notes that real gross domestic product has grown at just 2.3% annually this decade, far below the 3.6% postwar average. Even job growth has averaged a modest 1.7% a year. "The persistent decline in top-line sales growth simultaneously explains record-setting profit and stock market performance combined with disquieting indicators of economic weakness," Paulsen says.

His biggest fear: true deflation, as prices collapse in the face of continued weak demand. To Paulsen, continued price weakness suggests that bond yields are far too high. He sees the long treasury bond settling in at as low as 4%, compared with today's 6%. But he notes that despite the fundamental weakness of sales, stock prices should continue to rise as interest rates fall.

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