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The Skyscraper Index: Rising Towers Foreshadow Economic Downturns^[2]

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Skyscrapers, as buildings supported by enormous economic power, are often regarded by the public and by politicians as hallmarks of economic boom and social progress. Some economists, however, hold the opposite view that newly-built skyscrapers, especially those record-breaking ones, often foreshadow an imminent economic recession.

“The world’s tallest buildings have risen on the eve of market downturns.”^[4] This is a “verdict” delivered in 1999 by Andrew Lawrence, securities analyst at Deutsche Bank. On February 15, 2006, when Lehman Brothers had its global economic conference in Beijing, John Llewellyn, the investment bank’s global chief economist, mentioned to the Chinese audience his prediction based on the “skyscraper index”: “If there is any possibility of a global economic crisis, it is most likely to occur in 2007 or 2008.”^[5] 

Lehman Brothers’ chief economist rightly foresaw the economic crisis of 2007 - 2008, but never imagined that the bank, established on a firm foundation exceeding a hundred years, was to go up in smoke during that crisis. Now, are skyscrapers a blessing or a curse for the world economy? Is there indeed so close a correlation between skyscrapers and economic crises?

In 1999, Andrew Lawrence, after careful study, identified a correlation between skyscrapers and economic crises and named it “the skyscraper index.” The theory suggests that the construction of each world record-breaking skyscraper has been followed by an economic recession. Since the beginning of the 20^th century, there have occurred four global skyscraper booms, and each preceded an economic crisis or a financial turmoil.

In the 1920s when the American economy took a turn for the better and the stock market enjoyed unprecedented prosperity again, real estate development, whether for civilian use or commercial purposes, made giant strides. During that period, three record-breaking skyscrapers -- 40 Wall Street, the Chrysler Building and the Empire State Building -- were launched one after another and were completed within the three years from 1929 to 1931. That, however, was followed by the Great Depression instead of another boom. Then, after a strong, sustained boom in the 1960s, called the “Golden Age” by Americans, the construction of the World Trade Center and the Sears Tower began. These two record-breaking skyscrapers were completed in 1972 and 1974, but in their wake came global stagflation.

It follows that the correlation between skyscrapers and economic crises is too close to be explained away as a mere coincidence. So, what is it that makes an economic crisis invariably follow the building of the world’s next tallest building?

First, it is the blind self-confidence of human nature, which is manifested in a stubborn adherence to subjective opinions without an adequate comprehension of objective matters. Lawrence describes the relation he has identified between skyscrapers and economic crises as an “unhealthy 100-year correlation.”^[6] In fact, this phenomenon has existed in human society much longer than a mere hundred years. Looking into the mirror of the past, we can easily find similar occurrences in the long course of China’s history. For example, at the height of the Shang Dynasty (16^th -11^th Century B.C.), Emperor Zhou ordered to construct the magnificent Stag Tower, provoking widespread anger among the people, which led to the emperor’s self-immolation on the tower. Similarly, at the zenith of the Qing Dynasty (1616—1911), Emperor Qianlong had grandiose gardens and palaces built, resulting in the dynasty’s decline and, consequently, its humiliation by foreign powers and its loss of sovereignty.

Second, it is the profit motive. The pursuit of profit is the precondition for all business practices. Prior to an economic boom, there is usually a period of low interest rates, which constitutes a prerequisite for the periodic economic growth that culminates in boom-time conditions. In the economic boom that follows, interest rates remain low in comparison to the expectations of future earnings. Therefore, a series of transmission channels of profit, the profit-transmitting chains discussed earlier, are formed. The economic boom and the comparatively low interest rates have a direct influence on land values and capital costs. Thus, by virtue of the profit-transmitting chain formed by the three factors -- land prices, business needs and financial support, plans are conceived to build record-breaking skyscrapers.

Just as day is followed by night and summer alternates with winter, the economy follows the cycle of boom and bust. The prices of commodities are, without exception, affected by supply and demand. As the Chinese saying goes^[7], good fortune emerges out of the depths of misfortune, while prosperity begins to decline at its zenith. The low interest rates, the expanding demand and the rising cost of capital, together with the popular mindset of blind optimism, work together to create the “golden state” of euphoria that generates and fuels the demand for skyscrapers. This state, however, is far from sustainable.

Therefore, the world’s tallest building of each boom period is usually barely completed when the economy has already begun to slip into recession. As it is put into use, the economy is, in all probability, already experiencing great difficulty. This explains why an economic crisis invariably follows the construction of the world’s next tallest building, often making the rising tower a monument to the bygone boom-time.